SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------------------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1998 Commission File Number 0-15040
------------------- -------
PennRock Financial Services Corp.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2400021
------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1060 Main St.
Blue Ball, Pennsylvania 17506
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(Address of principal executive offices) (Zip code)
(717) 354-4541
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Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Class Outstanding at November 9, 1998
------------------------------ --------------------------------
Common Stock ($2.50 par value) 6,038,810 Shares
<PAGE> 1
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
--------------------------------------------------
FORM 10-Q
---------
For the Quarter Ended September 30, 1998
Contents
--------
PART I. FINANCIAL INFORMATION
- -----------------------------
Item 1. Financial Statements
Consolidated balance sheets - September 30, 1998,
December 31, 1997 and September 30, 1997.
Consolidated statements of income _ Three months and nine months ended
September 30, 1998 and 1997.
Consolidated statements of comprehensive income _ Three months and
nine months ended September 30, 1998 and 1997.
Consolidated statements of cash flows - Nine months ended
September 30, 1998 and 1997.
Notes to consolidated financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II. OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
- ----------
<PAGE> 2
Part I
For the Quarter Ended September 30, 1998
Item 1. Financial Statements
<TABLE>
<CAPTION>
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31, September 30,
(Amounts in thousands) 1998 1997 1997
------------ ----------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 17,037 $ 21,075 $ 18,101
Short-term investments 551 1,054 35,316
Mortgages held for sale 2,028 1,036
Securities available for sale 260,140 224,408 170,760
Loans:
Loans, net of unearned income 399,192 382,359 357,660
Allowance for loan losses (4,413) (4,247) (4,177)
--------- --------- ---------
Net loans 394,779 378,112 353,483
Bank premises and equipment 12,878 12,654 11,563
Accrued interest receivable 5,175 3,794 3,318
Net assets of discontinued subsidiary 24,981
Other assets 7,359 6,956 7,095
--------- --------- ---------
Total assets $699,947 $649,089 $624,617
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 74,178 $ 77,106 $ 68,276
Interest bearing 415,154 415,689 400,510
--------- --------- ---------
Total deposits 489,341 492,795 468,786
Short-term borrowings 42,762 12,832 12,349
Long-term debt 90,700 77,000 77,000
Accrued interest payable 2,927 3,158 3,094
Other liabilities 6,588 2,037 4,541
--------- --------- ---------
Total liabilities 632,318 587,822 565,770
Stockholders' Equity:
Common stock, par value $2.50 per share;
authorized - 20,000,000 shares;
issued - 6,077,299 of which 38,865,
10,639 and 24,059 shares are held
as treasury stock, respectively 15,193 15,193 15,193
Surplus 11,158 11,118 11,107
Unrealized gains (losses) on
securities available for sale,
Accumulated other comprehensive
income, net of tax 3,591 1,457 501
Retained earnings 38,641 33,704 32,411
Less treasury stock, at cost (954) (205) (365)
--------- --------- ---------
Total stockholders' equity 67,629 61,267 58,847
--------- --------- ---------
Total liabilities and
stockholders' equity $699,947 $649,089 $624,617
========= ========= =========
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Nine Months Ended
(Amounts in thousands) September 30, September 30,
-------------------- ---------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $8,853 $8,267 $26,238 $23,678
Securities:
Taxable 2,124 1,677 6,683 5,824
Tax-exempt 1,645 720 4,445 2,713
Mortgages held for sale 16 (1) 85 13
Other 36 1,024 122 1,329
------- ------- ------- -------
Total interest income 12,674 11,687 37,573 33,557
Interest expense:
Deposits 4,539 4,612 13,513 12,942
Short-term borrowings 575 76 1,837 1,238
Long-term debt 1,300 938 3,608 812
------- ------- ------- -------
Total interest expense 6,414 5,626 18,958 15,930
------- ------- ------- -------
Net interest income 6,260 6,061 18,615 17,627
Provision for loan losses 311 92 673 166
------- ------- ------- -------
Net interest income after
provision for loan losses 5,949 5,969 17,942 17,461
Other income:
Service charges on deposit
accounts 375 361 1,087 1,041
Other service charges and fees 66 15 195 51
Fiduciary activities 230 193 693 598
Security gains, net 283 665 931 1,212
Mortgage banking 176 77 514 352
Other 141 438 413 683
------- ------- ------- -------
Total other income 1,271 1,749 3,833 3,937
------- ------- ------- -------
Net interest and other income 7,220 7,718 21,775 21,398
------- ------- ------- -------
Other expenses:
Salaries and benefits 2,512 2,396 7,301 6,820
Occupancy, net 336 316 936 970
Equipment expenses 316 276 948 867
Computer software expenses 157 523 491 1,379
Other 925 845 2,902 2,393
------- ------- ------- -------
Total other expense 4,246 4,356 12,578 12,429
------- ------- ------- -------
Income from continuing operations
before income taxes 2,974 3,362 9,197 8,969
Income taxes 661 354 1,896 1,735
------- ------- ------- -------
Income from continuing
operations 2,313 3,008 7,301 7,234
Discontinued operations:
Loss from operations of
discontinued subsidiary,
(less income taxes of
$193 and $394 respectively (374) (765)
Estimated loss on disposal
of subsidiary including
provision for operating
losses during phaseout period
(less income taxes of $407) (790) (790)
------- ------- ------- -------
Net Income $2,313 $1,844 $7,301 $5,679
======= ======= ======= =======
Earnings per share:
From continuing operations $ .38 $ .50 $ 1.20 $ 1.19
From discontinue operations .00 (.19) .00 (.26)
------- ------- ------- -------
From net earnings $ .38 $ .31 $ 1.20 $ .93
======= ======= ======= =======
Weighted average shares
outstanding 6,067,128 6,060,276 6,067,128 6,060,276
========= ========= ========= =========
</TABLE>
Basic earnings per share and diluted earnings per share are the same for
all periods presented.
<PAGE> 4
<TABLE>
<CAPTION>
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended Nine Months Ended
(Amounts in thousands) September 30, September 30,
------------------ -------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income $2,313 $1,844 $7,301 $5,679
Other comprehensive income,
net of tax:
Unrealized gains on securities
available for sale:
Gain arising during the
period, net of tax 2,585 1,237 2,749 2,116
Reclassification adjustment
for gains included in net
income, net of tax (187) (439) (615) (800)
------- ------- ------- -------
Other comprehensive income (loss) 2,398 798 2,134 1,316
------- ------- ------- -------
Comprehensive income $4,711 $2,642 $9,435 $6,995
======= ======= ======= =======
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended
September 30,
(Amounts in thousands) -----------------------
1998 1997
--------- ---------
<S> <C> <C>
Net cash provided by operating activities
from continuing operation $ 9,379 $ 7,445
Net cash used in discontinued operations (18,689)
-------- --------
Net cash provided by (used in) operations 9,379 (11,244)
Investing activities:
Proceeds from sales of securities available
for sale 71,578 102,792
Purchases of securities available for sale (158,781) (97,236)
Maturities of securities available for sale 56,091 13,099
Net increase in loans (17,341) (38,344)
Purchases of premises and equipment (1,102) (1,981)
Proceeds from sales of premises and equipment 7
-------- --------
Net cash used in investing activities (49,548) (21,670)
Financing activities:
Net increase (decrease) in non-interest
bearing deposits (2,919) 2,738
Net increase (decrease) in interest
bearing deposits (534) 14,581
Net increase (decrease) in short-term
borrowings 29,930 (9,757)
Increase in long-term debt 13,700 63,000
Issuance of treasury stock 901 975
Acquisition of treasury stock (1,610) (674)
Cash dividends (2,363) (2,181)
-------- --------
Net cash provided by financing activities 37,105 68,682
-------- --------
Increase (decrease) in cash and cash
equivalents (3,064) 35,768
Cash and cash equivalents,
beginning of year 22,129 17,649
-------- --------
Cash and cash equivalents, end of period $19,065 $53,417
======== ========
</TABLE>
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 1998
NOTE 1. ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts of
PennRock Financial Services Corp. and its subsidiaries. All material
intercompany balances and transactions have been eliminated in consolidation.
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) is a wholly owned subsidiary of PennRock which
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 (ARMCO) was formed in 1996 to originate and
sell first mortgage loans of various types. Operations of ARMCO were
terminated during 1997.
The information contained in the financial statements is unaudited. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation of the results of
interim periods have been made. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. Operating results for the nine
months ended September 30, 1998 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1998.
The accounting policies of PennRock Financial Services Corp. and
Subsidiaries, as applied in the consolidated interim financial statements
presented, are substantially the same as those followed on an annual basis as
presented in the 1997 Annual Report to shareholders except that, as of
January 1, 1998, PennRock adopted the Financial Accounting Standards Board's
Statement No. 130 ("SFAS 130"), "Reporting Comprehensive Income", SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information" and
SFAS 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits-an amendment of FASB Statements No. 87, 88, and 106" as discussed in
Note 3. For further information on PennRock's accounting policies, refer to
the consolidated financial statements and footnotes thereto included in
PennRock's annual report on Form 10-K for the year ended December 31, 1997.
<PAGE> 7
NOTE 2. COMMITMENTS AND CONTINGENT LIABILITIES
The financial statements do not reflect various commitments and contingent
liabilities, such as commitments to extend credit, letters of credit,
guarantees, and liability for assets held in Trust, which arise in the normal
course of business. Commitments under outstanding letters of credit amounted
to $9.7 million and commitments to extend credit totaled $90.9 million at
September 30, 1998. Management does not anticipate any significant loss as a
result of these transactions.
NOTE 3. NEW ACCOUNTING STANDARDS
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income."
Comprehensive income, as defined by SFAS 130, is the change in equity of a
business enterprise during a reporting period from transactions and other
events and circumstances from non-owner sources. In addition to an
enterprise's net income, change in equity components under comprehensive
income reporting would also include such items as the net change in
unrealized gain or loss on available-for-sale securities.
In September 1997, Statement of Financial Accounting Standards No. 131 (SFAS
131), "Disclosures about Segments of an Enterprise and Related Information,"
was issued. SFAS 131 requires the reporting of selected segmented
information in quarterly and annual reports. Information from operating
segments is derived from methods used by the Company's management to allocate
resources and measure performance. The Company is required to disclose
profit/loss, revenues and assets for each segment identified, including
reconciliations of these items to consolidated totals. The Company is also
required to disclose the basis for identifying the segments and the types of
products and services within each segment. SFAS 131 is effective for the
Company for the year ended December 31, 1998, and quarterly beginning in
1999, including the restatement of prior periods reported consistent with
this pronouncement, if practical. The Company does not anticipate any
material impact from the implementation of SFAS No. 131.
In February 1998, Statement of Financial Accounting Standards No. 132 ("SFAS
132"), "Employers' Disclosures about Pensions and Other Postretirement
Benefits-an amendment of FASB Statements No. 87, 88, and 106," was issued.
SFAS 132 revises employers' disclosures about pension and other post-
retirement benefit plans. It standardizes the disclosure requirements for
pensions and other post-retirement benefits and requires additional
information on changes in the benefit obligations and fair values of plan
assets in the Company's 1998 year-end financial statements. SFAS 132 also
eliminates certain disclosures which were required by SFAS 87, "Employers'
Accounting for Pensions," SFAS 88, "Employers' Accounting for Settlement and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits,"
and SFAS 106, "Employers' Accounting for Postretirement Benefits Other than
Pensions." SFAS 132 was effective for the Company on January 1, 1998. The
Company did not experience any material impact from the implementation of
SFAS No. 132.
<PAGE> 8
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and for
Hedging Activities," was issued. This statement requires companies to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. SFAS No. 133
requires that changes in fair value of a derivative be recognized currently
in earnings unless specific hedge accounting criteria are met. This statement
is effective for fiscal years beginning after June 15, 1999. The Company is
evaluating the impact, if any, this statement may have on its future
consolidated financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This section presents management's discussion and analysis of the financial
condition and results of operations of PennRock Financial Services Corp.
(PennRock or the Company) and subsidiaries, Blue Ball National Bank (the
Bank) and its mortgage subsidiary, Atlantic Regional Mortgage Corporation.
The operations of ARMCO were terminated in 1997 and the assets were
liquidated by the end of 1997. In accordance with the provisions of APB 30,
the operating results of ARMCO have been segregated from continuing
operations and reported separately as discontinued operations in the
consolidated statements of income for 1997. This discussion should be read
in conjunction with the financial statements which appear elsewhere in this
report.
YEAR 2000 READINESS
The Company, like all companies that utilize computer technology is facing
significant challenges associated with the inability of computer systems to
recognize the year 2000. Many existing computer programs and systems use
only two digits to identify the calendar year in the date field. These
programs and systems were designed and developed without considering the
impact on the upcoming change in the century and, as a result, would read the
year 00 as 1900 rather than 2000. This could result in a system failure or
miscalculations causing disruptions of operations including the inability to
process transactions or engage in normal business activities. Software, data
processing hardware, and other equipment both within and outside the
Company's direct control are likely to be affected. In addition, under
certain circumstances, failure to adequately address the year 2000 issue
could adversely affect the viability of the Company's suppliers and creditors
and the creditworthiness of its borrowers. Therefore, if not adequately
addressed, the Year 2000 Problem could result in a significant adverse impact
on the Company's products, services and competitive condition.
In July, 1997, management formed a Year 2000 Project Committee (the
Committee) to establish and implement a Year 2000 Plan (the Plan) to mitigate
exposure to the Year 2000 issues. Goals of the Plan included identifying
risks, testing software, hardware and equipment used by the Company for Year
2000 readiness, establishing contingency plans for non-compliant systems,
vendors and other service providers, implementing changes to achieve Year
2000 readiness and verifying that systems are Year 2000 compliant. The
Committee reports to the Board of Directors on a monthly basis.
The Committee designed the Plan to comply with the requirements and deadlines
established by the Comptroller of the Currency (the OCC). The OCC has
performed Year 2000 examinations of the Plan and the Committee's progress in
<PAGE> 9
implementing the plan. However, federal regulations prevent the disclosure
of the results of such examinations nor do they represent approval or
certification of individual plans or Year 2000 compliance.
The following is a description of the Plans phases, degree of completion and
deadlines:
<TABLE>
<CAPTION>
Date
Percentage Completed or
Complete Deadline
----------- ------------
<S> <C> <C>
Awareness phase:
Establish Year 2000 Project Committee and September,
establish Year 2000 Plan. 100% 1997
Assessment phase:
Identify all software, hardware, environmental
and other systems, vendors and major business
customers that could potentially be impacted by
the Year 2000 problem.
Establish priorities, time frames and resource
requirements. September,
Establish contingency plans. 100% 1998
Renovation phase:
Complete all necessary software, hardware or
systems upgrades or replacements.
Monitor vendor and outside service provider December,
progress toward Year 2000 readiness. 85% 1998
Validation phase:
Test all hardware and software and interfaces
between systems and to outside service March,
providers. 50% 1999
Implementation phase:
Have all systems tested for Year 2000 readiness
or activate appropriate contingency plans for June,
failed systems and processes. 50% 1999
</TABLE>
The Committee has met all of its goals to date and believes that it will
continue to meet the goals of the Plan.
Because of the exposure to the operations of the Company from the failure of
large customers negatively impacted by the 2000 problem, the Company also
implemented a plan to assess the readiness of the Company's largest business
loan and deposit customers. A questionnaire was prepared and completed for
existing large business customers. To date, almost all large existing
business customer have been contacted. For all new business customers, loan
documents were amended to include a statement of Year 2000 compliance by the
<PAGE> 10
business customer. A portion of the Company's allowance for loan losses was
allocated to the potential failure of one or more loan customers.
Because the Company does not write any of the software used in any of its
high or medium priority processes, and because almost all vendors of software
and hardware used by the Company have provided Year 2000 compliant upgrades,
the costs that have been or are expected to be incurred to achieve Year 2000
readiness have not been significant. To date, the Company has incurred
approximately $125,000 in costs to upgrade existing systems and estimates
that it will spend another $20,000 to achieve compliance.
Although some testing is possible, the Company must primarily rely on the
representations of outside vendors, service providers and major customers as
to their Year 2000 compliance. The effect on the Company from failure of
these or from governmental agencies such as banking regulators or the Federal
Reserve cannot be determined with any assurance. The Committee has developed
contingency plans for substituting vendors and some outside service providers
who are not able the achieve Year 2000 readiness, in some cases, no
alternative exist such as providers of electric or telecommunications
services. Also, the Company is not able to predict the effects of public
reaction on its own operations, the financial markets or the world-wide
economy. Because of this uncertainty and the reliance on statements from
third parties, the Company cannot be assured that the results of its Year
2000 Plan can be achieved. Management believes, however, that it will
accomplish its own goals and that the Company will be able to continue
providing financial services to its customers into the next century.
FORWARD LOOKING STATEMENTS
In our this report, we have included certain forward looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products and similar matters. The
Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward looking statements. In order to comply with the terms of the safe
harbor, we must inform you that a variety of factors could cause the
Company's actual results and experiences to differ materially from the
anticipated results or other expectations expressed in these forward looking
statements. Our ability to predict the results or the effect of future plans
and strategies is inherently uncertain. Factors that could affect future
results include changes in market interest rates, local and national economic
trends and conditions, competition for products and services, changes in
customer preferences, legislative and regulatory changes, delinquency rates
on loans, changes in accounting principles, policies or guidelines, or the
failure of major customers, vendors or suppliers. You should consider these
factors in evaluating any forward looking statements and not place undue
reliance on such statements. We are not obligated to publicly update any
forward looking statements we may make in this report to reflect the impact
of subsequent events.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Total assets of PennRock increased $50.9 million or 7.8% since the end of
1997 and by $75.3 million or 12.1% over September 30, 1997. The increases in
assets were reflected in increases in securities available for sale and loans
outstanding.
<PAGE> 11
Net income for the current quarter was $2.3 million or $.38 per share
compared with $1.8 million or $.31 per share for the third quarter of 1997,
an increase of $469,000 or 25.4%. Income from continuing operations for the
quarter decreased $388,000 or 11.6% from the third quarter of 1997. A loss
from discontinued operations of $1.2 million or $.19 per share was recorded
in the third quarter of 1997.
Net interest income increased $199,000 from the third quarter of 1997 due to
volume increases despite tighter margins, while other income excluding
security gains decreased $96,000 and other expenses decreased $110,000.
Dividends declared for the quarter totaled $787,000 or $.13 per share. This
represented 34.0% of net income. Dividends declared during the third quarter
of last year were $728,000 or $.12 per share.
Net income for the first nine months of 1998 was $7.3 million or $1.20 per
share compared with $5.7 million or $.93 per share for the first nine months
of 1997, an increase of $1.6 million or 28.6%. A loss from discontinued
operations of $1.6 million or $.26 per share was recognized for the first
nine months of 1997. Income from continuing operations increased $67,000 or
.9% from the first nine months of 1997.
Dividends declared for the first nine months of 1998 totaled $2.4 million or
$.39 per share compared with $2.2 million or $.36 per share paid for the same
period in 1997. This represented 32.4% of net income in 1998 and 38.4% in
1997.
NET INTEREST INCOME
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. The amount of net
interest income is affected by changes in interest rates, volumes and the mix
of earning assets and paying liabilities. For analytical purposes, net
interest income is adjusted to a taxable equivalent basis. This adjustment
allows for a more accurate comparison among taxable and tax-exempt assets by
increasing tax-exempt income by an amount equivalent to the federal income
tax which would have been paid if this income were taxable at the statutory
rate of 34%.
Table 1 presents net interest income on a fully taxable equivalent basis for
the third quarter and first nine months of 1998 and 1997. For the third
quarter of 1998, net interest income on a fully taxable equivalent basis
totaled $7.1 million, an increase of $1.1 million or 19.1% from $5.9 million
earned for the same period of 1997. For the first nine months of 1998, net
interest income on a fully taxable equivalent basis totaled $20.8 million, an
increase of $2.5 million or 13.5% from $18.4 million earned for the first
nine months of 1997.
<PAGE> 12
<TABLE>
<CAPTION>
TABLE 1 - NET INTEREST INCOME
Three Months Ended Nine Months Ended
(Amounts in thousands) September 30, September 30,
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total interest income $12,674 $11,197 $37,573 $32,811
Total interest expense 6,413 5,626 18,958 15,910
------- ------- -------- --------
Net interest income 6,261 5,571 18,615 16,901
Tax equivalent adjustment 817 373 2,223 1,456
------- ------- -------- --------
Net interest income
(fully taxable equivalent) $ 7,078 $ 5,944 $20,838 $18,357
======= ======= ======== ========
</TABLE>
Table 2 presents the average balances, taxable equivalent interest income and
expense and rates for PennRock's assets and liabilities for the three and
nine months ended September 30, 1998 and 1997. For the third quarter and
first nine months of 1998, net interest income increased due to increases in
volumes while the interest spread and margin decreased over the comparable
period last year (the net interest margin for the third quarter 1998 was
higher than the margin for the third quarter 1997 due the contribution from
higher volumes of non-interest bearing demand deposits to the margin). In
both table 1 and table 2, earning assets and paying liabilities and the
related interest income and expense of ARMCO have been omitted from 1997
since the operating results for ARMCO were reclassified as discontinued
operations.
<PAGE> 13
<TABLE>
<CAPTION>
TABLE 2 - AVERAGE BALANCES, RATES, AND INTEREST INCOME AND EXPENSE
Three Months Ended September 30,
(Amounts in thousands) -------------------------------------------------
1998 1997
----------------------- ---------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
-------- -------- ------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Short-term investments $ 2,312 $ 36 6.18% $ 41,339 $ 534 5.12%
Mortgages held for sale 698 16 9.09% 40 1 5.95%
Securities available for sale 248,329 4,526 7.23% 154,404 2,728 7.01%
Loans:
Mortgage 225,511 5,015 8.82% 200,516 4,677 9.25%
Commercial 98,738 2,294 9.22% 94,897 2,222 9.29%
Consumer 70,755 1,605 9.00% 61,061 1,408 9.15%
-------- ------- -------- -------
Total loans 395,004 8,914 8.95% 356,474 8,307 9.25%
-------- ------- -------- -------
Total earning assets 646,343 13,491 8.28% 552,257 11,570 8.31%
Other assets 43,103 ------- 66,271 -------
-------- --------
$689,446 $618,528
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing deposits:
Demand $ 89,726 709 3.13% $ 70,077 451 2.55%
Savings 56,198 314 2.22% 59,318 332 2.22%
Time 262,504 3,516 5.31% 279,234 3,829 5.44%
-------- ------- -------- -------
Total interest bearing deposits 408,428 4,539 4.41% 408,629 4,612 4.48%
Short-term borrowings 41,501 575 5.50% 11,717 76 2.57%
Long-term debt 90,700 1,299 5.68% 64,283 938 5.79%
-------- ------- -------- -------
540,629 6,413 4.71% 484,629 5,626 4.61%
Non-interest bearing deposits 75,011 ------- 67,408 -------
Other liabilities 8,717 8,914
Stockholders' equity 65,089 57,577
-------- -------
Total liabilities and stockholders'
equity $689,446 $618,528
======== ========
Net interest income $ 7,078 $ 5,944
======= =======
Interest rate spread 3.57% 3.71%
====== ======
Net interest margin 4.34% 4.27%
====== ======
<PAGE> 14
<CAPTION>
Nine Months Ended September 30,
(Amounts in thousands) ----------------------------------------------------
1998 1997
----------------------- ---------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
-------- -------- ------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets
Short-term investments $ 2,578 $ 122 6.33% $ 5,195 $ 583 5.13%
Mortgages held for sale 1,377 85 8.25% 301 13 5.77%
Securities available for sale 243,433 13,174 7.24% 186,535 9,785 7.01%
Loans:
Mortgage 223,749 14,859 8.88% 190,265 13,192 9.27%
Commercial 102,073 7,023 9.20% 92,459 6,491 9.39%
Consumer 66,952 4,534 9.05% 59,251 4,202 9.48%
-------- ------- -------- -------
Total loans 392,774 26,416 8.99% 341,975 23,886 9.34%
-------- ------- -------- -------
Total earning assets 640,162 39,796 8.31% 544,006 34,267 8.42%
Other assets 40,331 ------- 50,814 -------
-------- --------
$680,493 $594,820
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing deposits:
Demand $ 79,817 1,721 2.88% $ 70,789 1,321 2.49%
Savings 56,960 945 2.22% 59,212 982 2.22%
Time 269,760 10,847 5.38% 264,173 10,639 5.38%
-------- ------- -------- -------
Total interest bearing deposits 406,537 13,513 4.44% 394,174 12,942 4.39%
Short-term borrowings 44,596 1,837 5.51% 31,395 1,238 5.27%
Long-term debt 84,777 3,608 5.69% 41,293 1,730 5.60%
-------- ------- -------- -------
535,910 18,958 4.73% 466,862 15,910 4.56%
Non-interest bearing deposits 72,713 ------- 64,167 -------
Other liabilities 8,330 8,309
Stockholders' equity 63,540 55,482
-------- --------
Total liabilities and stockholders'
equity $680,493 $594,820
======== ========
Net interest income $20,838 $18,357
======= =======
Interest rate spread 3.58% 3.87%
====== ======
Net interest margin 4.35% 4.51%
====== ======
</TABLE>
<PAGE> 15
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses charged to earnings was $311,000 for the third
quarter of 1998 compared with $92,000 for the third quarter of last year. The
provision for the first nine months of 1998 was $673,000 compared with
$166,000 for 1997. The provision is based on management's estimate of the
amount needed to maintain an adequate allowance for loan losses. Although
Table 4 shows that the level of non-performing assets is low and relatively
stable over the past year, the ratio of the allowance to non-performing loans
has declined for the past several years. With expectations of a slowing
economy and the increased risk of exposure to potential future losses,
management elected to increase the provision in 1998. Further, the provision
taken in 1998 approximates the net charge-offs realized for the first nine
months of 1998. The adequacy of the allowance will continue to be examined
in light of past loan loss experience, current economic conditions, volume of
non-performing and delinquent loans and other relevant factors. 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 expense and decreased by
net charge-offs. Table 3 reflects an analysis of the allowance for loan
losses for the third quarter and first nine months of 1998 and 1997.
<TABLE>
<CAPTION>
TABLE 3 - ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
Three Months Ended Nine Months Ended
(Amounts in thousands) September 30, September 30,
------------------- ------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Balance, beginning of period $4,420 $4,124 $4,247 $4,049
Provision charged to operating expense 311 92 673 166
Total loans charged off (330) (51) (590) (199)
Total recoveries 12 12 83 161
------- ------- ------- -------
Net charge-offs (318) (39) (507) (38)
------- ------- ------- -------
Balance, end of period $4,413 $4,177 $4,413 $4,177
======= ======= ======= =======
Total loans:
Average $396,383 $356,473 $394,601 $341,974
Period-end 400,221 357,660 400,221 357,660
Ratios:
Net charge-offs to
average loans (annualized) .32% .04% .20% .01%
Allowance for loan losses to
period-end loans 1.10% 1.17% 1.10% 1.17%
</TABLE>
<PAGE> 16
NON-PERFORMING ASSETS
Table 4 reflects PennRock's non-performing assets at September 30, 1998,
December 31, 1997 and September 30, 1997. PennRock'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. Other real estate owned represents property acquired through
foreclosure.
<TABLE>
<CAPTION>
TABLE 4 - NON-PERFORMING ASSETS
September 30, December 31, September 30,
(Amounts in thousands) 1998 1997 1997
---------- --------- -----------
<S> <C> <C> <C>
Non-accrual loans $ 478 $ 288 $304
Loans accruing but 90 days past due
as to principal or interest 1,345 1,853 640
---------- --------- ----------
Total non-performing loans 1,823 2,141 944
Other real estate owned 65
--------- --------- ---------
Total non-performing assets $1,823 $2,206 $944
========= ========= =========
Ratios:
Non-accrual loans to total loans 0.46% 0.56% 0.26%
Non-accrual loans to total loans and
other real estate owned 0.46% 0.58% 0.26%
Allowance for loan losses to
non-performing loans 242.07% 198.37% 442.48%
</TABLE>
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 in investment and
business opportunities as they occur, and the funding of PennRock's own
operations. Liquidity is provided by maturities and sales of investment
securities, loan payments and maturities and liquidating money market
investments such as federal funds sold. Liquidity is also provided by short-
term lines of credit with various correspondents and fixed and variable rate
advances from the Federal Home Loan Bank of Pittsburgh and other
correspondent banks. However, PennRock's primary source of liquidity lies in
PennRock's ability to renew, replace and expand its base of core deposits
(consisting of demand, NOW, money market, savings, and time deposits of less
than $100,000).
<PAGE> 17
Total deposits decreased $3.5 million or .7% since year end and increased
$20.6 million or 4.4% from last year. Total borrowed funds increased $43.6
million since year end and by $44.1 million from last year. Table 5 reflects
the changes in the major classifications of deposits and borrowings by
comparing the balances at the end of the third quarter of 1998 with year-end
and the third quarter of 1997.
<TABLE>
<CAPTION>
TABLE 5 - DEPOSITS AND BORROWINGS BY MAJOR CLASSIFICATION
(Amounts in thousands)
September 30, December 31, September 30,
1998 1997 1997
------------- ------------ -------------
<S> <C> <C> <C>
Non-interest bearing $ 74,187 $ 77,106 $ 68,276
NOW accounts 34,468 39,061 35,387
Money market deposit accounts 58,123 35,080 32,986
Savings accounts 58,135 57,557 58,689
Time deposits under $100,000 236,021 250,364 240,277
--------- --------- ---------
Total core deposits 458,934 459,168 435,615
Time deposits of $100,000 or more 30,407 33,627 33,171
--------- --------- ---------
Total deposits 489,341 492,795 468,786
Short-term borrowings 42,762 12,832 12,349
Long-term debt 90,700 77,000 77,000
--------- --------- ---------
Total deposits and borrowings $622,803 $582,627 $558,135
========= ========= =========
</TABLE>
CAPITAL RESOURCES:
Total stockholders' equity increased $8.8 million or 14.9% from September 30,
1997 and $6.4 million or 10.4% since year-end 1997. Stockholders' equity is
impacted by changes in the unrealized market gains and losses of the
securities available for sale portfolio, net of deferred taxes and is shown
on the consolidated balance sheets as a component of stockholders' equity as
accumulated other comprehensive income, net of tax. This portfolio had net
unrealized gains in each of the periods ending September 30, 1998, December
31, 1997 and September 30, 1997.
On June 9, 1998, the Company announced that the Board of Directors had
authorized the purchase of up to 200,000 shares of its outstanding common
stock. The shares are to be used for general corporate purposes including
employee benefit and executive compensation plans or for the dividend
reinvestment plan. This is an extension of an open market repurchase program
which was originally announced in 1995 and renewed in 1997. Since the
program was adopted PennRock has repurchased 233,704 shares of which 38,865
shares were held as treasury shares as of September 30, 1998.
<PAGE> 18
Table 6 shows PennRock's capital resources at September 30, 1998 and at
December 31 and September 30, 1997. PennRock and its subsidiary bank exceed
all minimum capital guidelines.
<TABLE>
<CAPTION>
TABLE 6 - CAPITAL RESOURCES
September 30, December 31, September 30,
1998 1997 1997
------------- ------------ -------------
<S> <C> <C> <C>
Leverage ratio:
Total capital to total assets 9.79% 9.94% 10.00%
Tier 1 capital to total assets 9.15% 9.27% 9.33%
Risk-based capital ratios:
Tier 1 capital to risk weighted
assets 14.31% 13.26% 14.19%
Total capital to risk weighted
assets 15.31% 14.22% 15.22%<PAGE>
</TABLE>
<PAGE> 19
PART II. OTHER INFORMATION
---------------------------
For the Quarter ended September 30, 1998
Item 1. Legal Proceedings
Various legal actions or proceedings are pending involving PennRock or its
subsidiaries. Management believes that the aggregate liability or loss, if
any, will not be material.
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule regarding unaudited interim financial
information of PennRock for the quarter ended September 30, 1998.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three months ended
September 30, 1998.
<PAGE> 20
SIGNATURES
Pursuant to the requirements 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)
Date: November 13, 1998 By: /s/Melvin Pankuch
- ----------------------- -----------------------------------------------
Melvin Pankuch
Executive Vice President and
Chief Executive Officer
Date: November 13, 1998 By: /s/George B. Crisp
- ------------------------ -----------------------------------------------
George B. Crisp
Vice President and Treasurer
(Principal Financial and Accounting Officer)
<PAGE> 21
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 17,037
<INT-BEARING-DEPOSITS> 551
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 260,140
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 401,220
<ALLOWANCE> 4,413
<TOTAL-ASSETS> 699,947
<DEPOSITS> 489,341
<SHORT-TERM> 42,762
<LIABILITIES-OTHER> 9,515
<LONG-TERM> 90,700
0
0
<COMMON> 15,193
<OTHER-SE> 56,471
<TOTAL-LIABILITIES-AND-EQUITY> 699,947
<INTEREST-LOAN> 26,238
<INTEREST-INVEST> 11,128
<INTEREST-OTHER> 207
<INTEREST-TOTAL> 37,573
<INTEREST-DEPOSIT> 13,513
<INTEREST-EXPENSE> 18,958
<INTEREST-INCOME-NET> 18,615
<LOAN-LOSSES> 673
<SECURITIES-GAINS> 931
<EXPENSE-OTHER> 12,578
<INCOME-PRETAX> 9,197
<INCOME-PRE-EXTRAORDINARY> 9,197
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,301
<EPS-PRIMARY> 1.20
<EPS-DILUTED> 1.20
<YIELD-ACTUAL> 8.42
<LOANS-NON> 478
<LOANS-PAST> 1,345
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 11,211
<ALLOWANCE-OPEN> 4,247
<CHARGE-OFFS> 590
<RECOVERIES> 83
<ALLOWANCE-CLOSE> 4,413
<ALLOWANCE-DOMESTIC> 4,413
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 483
</TABLE>
