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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-15040
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PENNROCK FINANCIAL SERVICES CORP.
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(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2400021
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(State or other jurisdiction (IRS Employer Identification Number)
of incorporation or organization)
1060 Main Street
Blue Ball, Pennsylvania 17506
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (717) 354-4541
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Securities registered pursuant to Section 12(b) of the Act:
None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $2.50 per share
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter periods that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X]
The aggregate market value of the shares of Common Stock of the Registrant held
by non-affiliates of the Registrant as of February 27, 1998 was approximately
$147,294,815.
As of February 27, 1998, there were 6,074,013 shares of Common Stock, Par Value
$2.50 Per Share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
The Registrant's definitive Proxy Statement to be used in connection with the
Annual Stockholders Meeting to be held April 28, 1998, is incorporated by
reference in partial response to Part III of this report.
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PENNROCK FINANCIAL SERVICES CORP.
TABLE OF CONTENTS
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PAGE
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PART I
Item 1. Business . . . . . . . .. . . . . . . . . . . . . . . . . . 2
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 6
Item 4. Submission of Matters to a Vote of Security Holders . . . . 6
Item 4A. Executive Officers of the Registrant . . . . . . . . . . . . 7
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . 8
Item 6. Selected Financial Data . . . . . . . . . . . . . . . .. . . 9
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . 10
Item 7A. Quantitative and Qualitative Disclosures about Market Risk . 24
Item 8. Financial Statements and Supplementary Data . . . . . . . . 27
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures . . . . . . . . . . 52
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . 52
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . 52
Item 12. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . . . . 52
Item 13. Certain Relationships and Related Transactions . . . . . . . 52
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . 53
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . 54
</TABLE>
FORWARD LOOKING STATEMENTS
In our Annual Report, we may include 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,
and changes in accounting principles, policies or guidelines. 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 Annual Report to
reflect the impact of subsequent events.
PENNROCK FINANCIAL SERVICES CORP.
PART I
ITEM 1. BUSINESS
PENNROCK FINANCIAL SERVICES CORP.
PennRock Financial Services Corp. ("PennRock", the "Company" or the
"Registrant") is a Pennsylvania business corporation organized on March 5,
1986. It became a bank holding company when it acquired all of the common
stock of Blue Ball National Bank (the "Bank") on August 1, 1986.
PennRock is a financial holding company that operates through its bank
subsidiary to deliver financial and related services to its customers.
PennRock's primary function is to direct the policies and coordinate the
financial resources of its bank subsidiary as well as provide various advisory
services. PennRock primarily obtains the cash necessary to pay dividends to
stockholders from the dividends paid to it by its subsidiary bank.
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PennRock is a registered bank holding company under the Bank Holding Company
Act of 1956, as amended. It is also subject to regulation by the Federal
Reserve Board and by the Pennsylvania Department of Banking.
BLUE BALL NATIONAL BANK
Blue Ball National Bank began operations in 1906. The Bank 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 13 full service
branches in Lancaster, Berks and Chester Counties in southeastern and
south-central Pennsylvania. 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
mortgage and 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 are offered in a wide variety of types including
fixed and adjustable-rate loans. The Bank's underwriting guidelines conform to
Fannie Mae (formerly the Federal National Mortgage Association) and Federal
Home Loan Mortgage Corporation ("FHLMC") guidelines. The Bank sells most of
the conforming fixed-rate residential mortgage loans it originates to either
Fannie Mae or FHLMC in the secondary market but retains the servicing. The
Bank's business is not considered seasonal.
ATLANTIC REGIONAL MORTGAGE CORPORATION
Atlantic Regional Mortgage Corporation ("ARMCO") is a Pennsylvania mortgage
banking company formed as a wholly owned subsidiary of the Bank on February 29,
1996. ARMCO was organized as a full service mortgage banking company to
originate and sell residential mortgage loans. On September 30, 1997, ARMCO's
Board of Directors adopted a formal liquidation plan that called for operations
of ARMCO to be finalized by December 31, 1997. The operating results of ARMCO
are being accounted for in accordance with the provisions of Accounting
Principles Board Opinion No. 30 ("APB 30"), "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," as
a discontinued operation. Accordingly, ARMCO's operating results (including
shut-down and liquidation costs), net of applicable income tax benefits, have
been segregated from continuing operations and reported separately as
discontinued operations in the Consolidated Statements of Income for 1997 and
1996.
EMPLOYEES
PennRock has no employees. The Bank employed 208 full-time and 58 part-time
employees at the end of 1997. There were no ARMCO employees at the end of
December 31, 1997.
COMPETITION
PennRock originates most of its loans to, and accepts most of its deposits
from, residents and businesses located in southeastern and south-central
Pennsylvania, primarily Lancaster, Berks and Chester Counties. The financial
services industry in PennRock's service area continues to be extremely
competitive, both among commercial banks and other financial service providers
such as consumer finance companies, thrifts, investment companies, mutual funds
and credit unions. Mortgage banking firms, insurance companies, brokerage
companies, financial affiliates of commercial companies, and government
agencies also provide competition for loans and other financial services. Some
of these competitors are considerably larger and have more resources than
PennRock. However, the Company has made a significant investment in
technological resources that will allow us to offer a wide variety of products
and services and to enable us to compete with any size financial institution.
Among the most important factors influencing the Company's ability to compete
successfully for new loans and deposits are interest rates, quality of service
and convenience of office locations. We have attempted to differentiate
ourselves from other competitors by emphasizing the local and personalized
nature of our services. In an effort to make our community offices more
convenient to our existing and potential customers, the Company has, on
average, added one new office per year over the past ten years.
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PennRock is not dependent upon a single customer or a small number of
customers, the loss of which would have a materially adverse effect upon
PennRock or its subsidiaries.
SUPERVISION AND REGULATION
General
PennRock 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, PennRock'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 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.
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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 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 that 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 1998, without prior regulatory approval,
aggregate dividends of approximately $8.7 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, 1997, 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 1998 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
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 FDIC sets the FICO assessment rate every six
months. The FICO assessment for the Bank (and all commercial banks) for the
year 1998 is expected to be $.0126 for each $100 of deposits.
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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.
FOREIGN OPERATIONS
PennRock does not depend on foreign sources for funds, nor does PennRock make
foreign loans.
The required Statistical Information for Item 1 can be found in Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" of this Annual Report.
ITEM 2. PROPERTIES
PENNROCK FINANCIAL SERVICES CORP.
PennRock's headquarters are located at the main office of Blue Ball National
Bank located at 1060 Main Street, Blue Ball, Pennsylvania. PennRock owns no
real estate.
BLUE BALL NATIONAL BANK
The principal executive office and main banking office is located in Blue Ball,
Pennsylvania. An operations center, also located in Blue Ball, Pennsylvania,
accommodates the Bank's data processing, accounting, human resource, and loan
and deposit operations departments. These and the Bank's 12 community offices
are owned free and clear of any indebtedness. The land on which two of the
branch offices are located is leased. The net book value of the Bank's
premises and equipment as of December 31, 1997 is $12.7 million.
During 1997, the Bank sold its Spring City Office located in Spring City,
Chester County, Pennsylvania to Harleysville National Bank and Trust Company.
This office was originally purchased in 1995 along with two other offices from
PNC Bank.
Also during 1997, we completed construction of a Berks County regional office
located in Spring Township. This regional office reflects management's
commitment to growth in Berks County. A temporary community office operating
at the site closed concurrently with the opening of the regional office.
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the solicitation
of proxies or otherwise, during the fourth quarter of 1997.
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ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions of all of the executive officers of PennRock as
of February 27, 1998, are listed below, along with the positions with PennRock
and the Bank held by each of them during the past five years. Officers are
elected annually by the Board of Directors.
<TABLE>
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POSITION AND EXPERIENCE
NAME AGE DURING PAST 5 YEARS
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<S> <C> <C>
Norman Hahn 61 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 63 PennRock Financial Services Corp.:
President (April 1989 to date)
Robert K. Weaver 49 PennRock Financial Services Corp.:
Secretary (March 1986 to date)
Blue Ball National Bank:
Secretary (1977 to date)
Melvin Pankuch 58 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 50 PennRock Financial Services Corp.:
Vice President and Treasurer (April 1989 to date)
Blue Ball National Bank:
Senior Vice President - Operations (July 1993 to date)
Chief Financial Officer (July 1987 to date)
Joseph C. Spada 47 Blue Ball National Bank:
Senior Vice President - Banking Sales/Service (July 1993 to date)
Michael H. Peuler 47 Blue Ball National Bank:
Senior Vice President - Trust Services (April 1995 to date)
Vice President - Trust Services (June 1993 to April 1995)
</TABLE>
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PENNROCK FINANCIAL SERVICES CORP.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The price of PennRock's common stock ranged from $15 1/2 to $20 1/2 in 1997 and
from $15 3/4 to $21 1/4 in 1996. The book value per share was $10.10 as of
December 31, 1997 and $8.90 as of December 31, 1996. The prices listed below
represent the high, low and quarter ending prices for stock trades reported
during the quarter.
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Quarter Per Share
High Low End Dividend
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1997
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First quarter $17 $15 1/2 $17 $.12
Second quarter 19 1/2 16 19 .12
Third quarter 20 1/4 17 20 .12
Fourth quarter 20 1/2 18 3/4 19 1/4 .13
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>
The Company maintains a Dividend Reinvestment Plan for eligible shareholders
who elect to participate in the Plan. A copy of the Prospectus for this Plan
may be obtained by writing to:
Glenn H. Weaver, President
PennRock Financial Services Corp.
P.O. Box 580
Blue Ball, PA 17506
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
In thousands, except per share data
1997 1996 1995 1994 1993
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<S> <C> <C> <C> <C> <C>
FOR THE YEAR:
Interest income $45,618 $40,599 $38,404 $30,092 $30,738
Interest expense 21,878 18,916 19,393 12,782 12,482
Net interest income 23,740 21,683 19,011 17,310 18,256
Provision for loan losses 258 600 360 352 958
Non-interest income 5,105 3,863 3,199 3,388 2,791
Non-interest expense 16,665 14,725 13,520 12,242 11,809
Income from continuing operations,
net of tax 9,315 7,608 6,182 5,840 6,380
Loss from discontinued operations,
net of tax (1) (1,555) (801)
Net income 7,760 6,807 6,182 5,840 6,380
Per share:
Income from continuing operations,
net of tax 1.54 1.25 1.02 .98 1.08
Loss from discontinued operations,
net of tax (1) (.26) (.13)
Net income 1.28 1.12 1.02 .98 1.08
Cash dividends .49 .45 .41 .38 .35
Book value as of year-end 10.10 8.90 8.52 6.64 6.83
Market value as of year-end 19.44 16.13 16.63 24.31 16.07
AS OF YEAR-END:
Securities 224,408 186,026 196,029 207,982 179,997
Loans 382,359 319,354 298,025 239,928 208,382
Earning assets 604,610 508,265 497,366 449,227 399,374
Total assets 649,089 547,603 532,082 480,092 422,002
Deposits 492,795 451,467 417,929 342,433 341,632
Short-term borrowings 12,832 22,106 47,476 82,077 28,732
Long-term debt 77,000 14,000 9,000 10,500 6,500
Stockholders' equity 61,267 53,729 51,674 39,903 40,521
Full time equivalent employees 238 277 217 183 181
Number of shares outstanding 6,066,660 6,037,419 6,062,412 6,006,040 5,936,519
SELECTED RATIOS:
Return on average assets:
From continuing operations 1.54% 1.40% 1.21% 1.32% 1.55%
From net income 1.28 1.25 1.21 1.32 1.55
Return on average equity:
From continuing operations 16.47 14.67 13.41 13.95 16.74
From net income 13.72 13.12 13.41 13.95 16.74
Efficiency ratio 56.59 57.60 60.45 61.70 54.07
Net interest margin (tax equivalent) 4.48 4.48 4.09 4.29 4.85
Total capital to average assets 10.46 10.62 10.46 11.20 10.70
Total capital to risk-weighted asset 14.22 16.08 16.97 17.45 17.88
Price to earnings 15.19 14.40 16.30 24.89 14.91
Market to book value 1.92 1.81 1.95 3.66 2.35
Allowance for loan losses to loans 1.11 1.26 1.23 1.45 1.66
Non-performing loans to loans .56 .35 .41 .44 1.15
Dividend payout ratio 38.29 39.99 40.12 39.52 32.24
</TABLE>
(1) See Note 2 of the Notes to Consolidated Financial Statements.
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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"), its subsidiary,
Blue Ball National Bank (the "Bank"), and the Bank's subsidiary, 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 that might not otherwise be readily apparent.
RESULTS OF OPERATIONS
OVERVIEW
ARMCO was organized as a full service mortgage banking company on February 29,
1996 to originate and sell residential mortgage loans. By the end of 1996,
ARMCO had grown to five offices covering parts of Pennsylvania, Maryland,
Washington DC and northern Virginia. In 1997, ARMCO continued to grow, adding
five new offices and expanding its market area to include central and southern
Virginia and parts of North and South Carolina. However, despite its growth,
ARMCO was never able to generate sufficient volumes of mortgage originations to
cover its fixed costs.
In its first year of operations, ARMCO recorded a loss, net of tax, of $801,000
or $.13 per share. After ARMCO had recorded losses for each of the first eight
months of 1997, management made the decision, in September 1997, to attempt to
sell or, failing that, to close ARMCO. On September 30, 1997, after
negotiations with several prospective purchasers ended, ARMCO's Board of
Directors adopted a formal liquidation plan that called for operations of ARMCO
to be finalized by December 31, 1997. For the year ended December 31, 1997,
ARMCO realized a net loss, including shutdown and liquidation costs, of $1.6
million or $.26 per share. 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 statements of income for
1996 and 1997. As a result, certain income and expense items previously
reported for 1996 have been restated to reflect the reclassification of ARMCO
operations. We expect no material future impact on earnings due to the closure
of ARMCO in 1997.
PennRock Financial Services Corp. recorded income from continuing operations of
$9.3 million or $1.54 per share in 1997, an increase of 22.4% from income from
continuing operations of $7.6 million or $1.25 per share recorded in 1996.
Net income was $7.8 million or $1.28 per share in 1997, $6.8 million or $1.12
per share in 1996 and $6.2 million or $1.02 per share in 1995. There were no
discontinued operations in 1995.
Return on average total assets from continuing operations was 1.54% in 1997 and
1.40% in 1996. Return on average assets from net income was 1.28% in 1997
compared with 1.25% in 1996 and 1.21% in 1995. Return on average equity from
continuing operations was 16.47% in 1997 and 14.67% in 1996. Return on average
equity was 13.72% in 1997 compared with 13.12% in 1996 and 13.41% in 1995.
Average earning assets increased $44.0 million or 8.6% during 1997, while
average interest bearing liabilities grew $49.4 million or 11.6%. The average
yield on earning assets increased from 8.18% in 1996 to 8.43% in 1997, while
the average yield on paying liabilities increased from 4.44% in 1996 to 4.60%
in 1997. PennRock's net interest income on a fully taxable equivalent basis
increased $2.0 million or 8.7% during 1997 and $3.1 million or 15.4% in 1996.
The net interest margin remained at 4.48% for both 1997 and 1996 and was 4.09%
in 1995.
The provision for loan losses decreased from $600,000 in 1996 to $258,000 in
1997. The provision for loan losses was $360,000 in 1995.
10
<PAGE>
Non-interest income excluding securities gains increased $921,000 or 34.2% in
1997 compared with a $139,000 or 5.5% increase in 1996. Fees earned from
fiduciary activities increased by more than $100,000 in 1996 and 1997. Other
service charges and fees grew $177,000 in 1996 and $194,000 in 1997. Other
income increased $102,000 in 1996 and $515,000 in 1997. The large increase in
other income for 1997 is partially attributable to a gain realized on the sale
of deposits at our Spring City Office.
Non-interest expenses increased $1.9 million or 13.2% in 1997 over 1996.
Contributing to this increase were costs associated with a computer hardware
and banking application software conversion including the write-off of the
remaining book value of the prior application software. Non-interest expenses
in 1996 increased $1.2 million over 1995 due to increases in personnel,
equipment and occupancy costs related to the opening of three new community
offices.
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 PennRock. 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 1997, 1996, and 1995.
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
PennRock's assets and liabilities.
11
<PAGE>
TABLE 1 - AVERAGE BALANCES, RATES AND INTEREST INCOME AND EXPENSE SUMMARY
(Taxable equivalent basis)
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------- ----------------------- ------------------------------ -------
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 $ 17,025 $ 953 5.60% $ 693 $ 40 5.77% $ 723 $ 26 3.60%
Mortgages held for sale 944 64 6.78 2,057 126 6.13 2,234 217 9.71
Securities available for sale:
U.S. Treasury and agency 118,551 7,478 6.31 147,616 8,914 6.04 172,081 10,287 5.98
State and municipal 57,382 5,038 8.78 40,828 3,567 8.74 15,330 1,523 9.93
Other 13,068 804 6.15 7,066 414 5.86 5,425 289 5.33
---------- --------- ----------- -------- --------- ---------
Total securities available
for sale 189,001 13,320 7.05 195,510 12,895 6.60 192,836 12,099 6.27
Investment securities:
U.S. Treasury and agency 1,148 86 7.49
State and municipal 12,158 1,025 8.43
--------- ----------
Total investment securities 13,306 1,111 8.35
Loans: (1)
Mortgage 194,428 17,975 9.25 173,063 15,660 9.05 152,549 13,939 9.14
Commercial 92,974 8,707 9.36 86,067 8,020 9.32 77,301 7,317 9.47
Consumer (2) 60,060 5,693 9.48 53,043 5,034 9.49 46,110 4,497 9.75
---------- --------- ----------- -------- --------- ---------
Total loans 347,462 32,375 9.32 312,173 28,714 9.20 275,960 25,755 9.33
---------- --------- ----------- -------- --------- ---------
Total earning assets 554,432 46,712 8.43 510,433 41,775 8.18 485,059 39,208 8.08
--------- -------- ---------
Other assets 35,343 31,598 27,283
Net assets of discontinued
subsidiary 15,836 1,968
---------- ----------- ---------
Total assets $605,611 7.71% $543,999 7.68% $512,342 7.65%
---------- --------- ----------- ------- --------- -------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest bearing deposits:
Demand $ 70,513 1,774 2.52% $ 71,533 1,769 2.47% $ 65,118 1,880 2.89%
Savings 58,823 1,304 2.22 60,833 1,342 2.21 62,836 1,655 2.63
Time 269,029 14,554 5.41 236,822 12,673 5.35 222,211 12,251 5.51
---------- --------- ----------- -------- --------- ---------
Total interest bearing
deposits 398,365 17,632 4.43 369,188 15,784 4.28 350,165 15,786 4.51
Short-term borrowings 26,601 1,390 5.23 49,611 2,709 5.46 48,947 3,015 6.16
Long-term debt 50,293 2,836 5.64 7,085 409 5.77 9,238 592 6.41
---------- --------- ----------- -------- --------- ---------
Total interest bearing
liabilities 475,259 21,858 4.60 425,884 18,902 4.44 408,350 19,393 4.75
--------- -------- ---------
Non-interest bearing
demand deposits 65,631 58,394 51,449
Other liabilities 8,159 7,842 6,433
Stockholders' equity 56,562 51,879 46,110
---------- ----------- ---------
Total liabilities and
stockholders' equity $605,611 3.61% $543,999 3.47% $512,342 3.79%
---------- --------- ----------- ------- --------- -------
Net interest income $24,854 $22,873 $19,815
--------- -------- ---------
Interest rate spread 3.83% 3.74% 3.33%
Effect of non-interest
bearing funds .65 .74 .76
--------- ------- -------
Net interest margin 4.48% 4.48% 4.09%
--------- ------- -------
</TABLE>
(1) Interest income on loans includes fees of $984,000 in 1997, $775,000 in
1996 and $944,000 in 1995. Average loan balances exclude non-accrual
loans.
(2) Consumer loans outstanding net of unearned income.
12
<PAGE>
The net average assets of ARMCO for 1996 and 1997 have been reported as "Net
assets of discontinued subsidiary." Interest income and expense relative to
these balances have been eliminated from Table 1 and throughout this
discussion.
Table 2 presents the net interest income on a fully taxable equivalent basis
for the years ended December 31, 1997, 1996 and 1995.
TABLE 2 - NET INTEREST INCOME (1)
<TABLE>
<CAPTION>
In thousands
1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
Total interest income $44,944 $40,528 $38,404
Total interest expense 21,858 18,902 19,393
---------- --------- ---------
Net interest income 23,086 21,626 19,011
Tax equivalent adjustment 1,768 1,247 804
---------- --------- ---------
Net interest income (fully taxable equivalent) $24,854 $22,873 $19,815
---------- --------- ---------
</TABLE>
(1) Excludes interest income and interest expense relative to discontinued
subsidiary.
Net interest income on a fully taxable equivalent basis was $24.9 million in
1997, an increase of $2.0 million or 8.7% from the $22.9 million earned in
1996. Taxable equivalent net interest income in 1996 increased $3.1 million or
15.4% from $19.8 million in 1995.
Changes in interest rates as well as changes in average balances (or volumes)
of earning assets and paying liabilities have an impact on the amount of net
interest income earned and the net interest margins realized by the Company
from year-to-year. By isolating the effect that changes in rates have on net
interest income from the effect of changes in volume, we can analyze the degree
that each influences the change in net interest income and net interest
margins. Table 3 analyzes the changes in the volume and rate components of net
interest income. During 1997, net interest income increased $800,000 due to
changes in volume and increased $1.2 million due to changes in interest rates.
In 1996, net interest income increased by $1.8 million due to changes in volume
and increased by $1.2 million due to changes in interest rates.
TABLE 3 - VOLUME AND RATE ANALYSIS OF CHANGES IN INTEREST INCOME
<TABLE>
<CAPTION>
In thousands
Year Ended December 31,
----------------------------------------------------------------------
1997 Over 1996 1996 over 1995
-------------------------------- -----------------------------------
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 $ 943 ($ 30) $ 913 ($ 1) $ 15 $ 14
Mortgages held for sale (68) 6 (62) (17) (74) (91)
Securities (430) 855 425 (680) 365 (315)
Loans 3,246 415 3,661 3,379 (420) 2,959
-------- -------- --------- --------- --------- ----------
Total interest income 3,691 1,246 4,937 2,681 (114) 2,567
-------- -------- --------- --------- --------- ----------
Interest paid on:
Interest bearing demand deposits (25) 30 5 185 (296) (111)
Savings deposits (44) 6 (38) (53) (260) (313)
Time deposits 1,722 159 1,881 805 (383) 422
Short-term borrowings (1,256) (63) (1,319) 41 (347) (306)
Long-term debt 2,494 (67) 2,427 (138) (45) (183)
-------- -------- --------- --------- --------- ----------
Total interest expense 2,891 65 2,956 840 (1,331) (491)
-------- -------- --------- --------- --------- ----------
Net interest income $ 800 $1,181 $1,981 $1,841 $1,217 $3,058
-------- -------- --------- --------- --------- ----------
</TABLE>
Another method of analyzing the change in net interest income is to examine the
changes between 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
13
<PAGE>
interest margin takes into account the benefit derived from assets funded by
interest free sources such as non-interest bearing demand deposits and capital.
TABLE 4 - INTEREST RATE SPREAD AND NET INTEREST MARGIN ON EARNING ASSETS
(Taxable equivalent basis)
<TABLE>
<CAPTION>
In thousands
1997 1996 1995
---------------------- --------------------- ----------------------
Average Average Average
Balances Rate Balances Rate Balances Rate
----------- ------- ---------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Earning assets $554,432 8.43% $510,433 8.18% $485,059 8.08%
----------- ---------- ----------
Interest bearing liabilities $475,259 4.60% $425,884 4.44% $408,350 4.75%
------- ------- --------
Interest rate spread 3.83% 3.74% 3.33%
Interest free sources used
to fund earning assets 79,173 .65% 84,549 .74% 76,709 .76%
----------- ------- ---------- ------- ---------- --------
Total sources of funds $554,432 $510,433 $485,059
----------- ---------- ----------
Net interest margin 4.48% 4.48% 4.09%
------- ------- --------
</TABLE>
The following discussion analyzes changes in the Company's spreads and margins
in terms of basis points. A basis point is a unit of measure for interest
rates equal to .01%. One hundred basis points equals 1%.
Interest rate spreads increased 9 basis points during 1997. Earning asset
yields increased 25 basis points and funding costs increased 16 basis points.
Although interest rate spreads increased, the net interest margin remained at
4.48% in 1997. Loan yields increased 12 basis points in 1997. Changes in loan
yields are closely related to changes in the prime rate. In the first quarter
of 1997, prime increased 25 basis points to 8.50% and has remained unchanged
since then. Yields on securities increased 45 basis points primarily due to a
larger investment in higher yielding tax-free municipal bonds and smaller
investment in lower yielding mortgage-backed securities including
collateralized mortgage obligations ("CMO's"). Rates on interest bearing
deposits increased in all deposit categories. Rates on short-term borrowings
and long-term debt declined in 1997.
Interest rate spreads increased 41 basis points in 1996 while the net interest
margin increased 39 basis points. Earning asset yields increased 10 basis
points while funding costs decreased 31 basis points. Loan yields declined 13
basis points partially due to a 25 basis point decrease in the prime rate early
in 1996. Security yields increased 20 basis points. Rates on all deposits and
borrowed fund categories declined in 1996.
PROVISION FOR LOAN LOSSES
The amount of provision for loan losses that was charged against earnings was
$258,000 in 1997 compared with $600,000 in 1996 and $360,000 in 1995. The
amount of the provision is based, among other factors, on the amount of net
credit losses that totaled $140,000 in 1997, $212,000 in 1996 and $181,000 in
1995. We review the adequacy of the allowance 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 1995 and 1996
and declined to .04% in 1997. Net charge-offs totaled 3.30% of the allowance
for loan losses compared with 5.24% in 1996 and 4.94% in 1995. Non-performing
loans (loans on which we have stopped accruing interest and loans 90 days or
more past due which we continue to accrue interest) increased from $1.1 million
at the end of 1996 to $2.1 million at the end of 1997. Non-performing loans
represented .56% of total loans as of December 31, 1997 and .35% at the end of
1996.
NON-INTEREST INCOME
Total non-interest income grew $1.2 million or 32.2% in 1997 with gains in
nearly all categories. Non-interest income increased $664,000 or 20.8% in
1996. Excluding net security gains, non-interest income increased $921,000 or
34.2% in 1997 compared with a $139,000 or 5.4% increase in 1996. Table 5
indicates changes in the major categories of non-interest income.
14
<PAGE>
TABLE 5 - NON-INTEREST INCOME
<TABLE>
<CAPTION>
In thousands
1997/1996 1996/1995
----------------------------------- ---------------------------------------
Increase Increase
(Decrease) (Decrease)
------------------- --------------------
1997 Amount % 1996 Amount % 1995
-------- -------- ------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Service charges on deposit
accounts $1,337 $ 195 17.1% $1,142 $ 128 12.6% $1,014
Other service charges and fees 95 (2) (2.1) 97 49 102.1 48
Fiduciary activities 804 104 14.9 700 111 18.8 589
Net realized gains on sales of
available for sale securities 1,493 321 27.4 1,172 525 81.1 647
Mortgage banking 491 109 28.5 382 (250) (39.6) 632
Other 885 515 139.2 370 101 37.5 269
-------- -------- ------- --------- --------- -------- ---------
Total $5,105 $1,242 32.2% $3,863 $664 20.8% $3,199
-------- -------- ------- --------- --------- -------- ---------
</TABLE>
Net security gains totaled $1.5 million in 1997, $1.2 million in 1996 and
$647,000 in 1995. Securities gains and losses in all three years were
attributable to the sale of securities for the purpose of adding liquidity or
to control interest rate risk and reflect the Company's active management of
the investment portfolio. We continuously monitor the Company's interest rate
sensitivity position and periodically restructure the security portfolio as
conditions warrant such as expected changes in liquidity or projected movements
in future interest rates.
Fiduciary fees increased $104,000 or 14.9% in 1997 and by $111,000 or 18.8% in
1996. Assets under trust management were $165 million at the end of 1997, an
increase of $30 million or 22% over assets of $135 million at the end of 1996.
Trust assets increased $10 million or 8% in 1996.
Other non-interest income increased $515,000 in 1997 and by $101,000 in 1996.
During 1997, we sold our Spring City Office located in Spring City, Chester
County, Pennsylvania to Harleysville National Bank and Trust Company for which
we realized a premium of nearly $300,000. This office was originally purchased
in 1995 along with two other offices from PNC Bank.
NON-INTEREST EXPENSE
Total non-interest expense for 1997 increased $1.9 million or 13.2% compared
with a $1.2 million or 8.9% increase in 1996. Salaries and employee benefits
increased $789,000 or 9.7% in 1997 and $740,000 or 10.0% in 1996. Total
full-time equivalent employees increased from 217 at year-end 1995 to 232 at
the end of 1996 (excluding 45 full-time equivalent ARMCO employees) and to 238
in 1997. 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. The ratio of average
assets (in millions) per employee was $2.36 in 1995, $2.34 in 1996 and $2.55 in
1997. The average salary per employee was $28,000 in 1995 and 1996 and $31,642
in 1997.
Expenses related to occupancy, premises and equipment increased $23,000 or .9%
in 1997 and by $394,000 or 19.4% in 1996. A computer hardware and banking
application software conversion completed early in the third quarter of 1997 is
expected to reduce non-interest expenses by $800,000 per year beginning in
1998. Expenses relating to equipment, depreciation and service declined by
$48,000 in 1997 reflecting the early benefits of this conversion. In 1997, we
completed construction of our Berks regional office located in Spring Township.
In addition to a full-service community office, regional loan and trust sales
personnel will work out of this office. The large increase in occupancy,
premises and equipment expense in 1996 is the result of opening two new
community offices in 1996 and another branch late in 1995.
Computer software expense increased $807,000 or 93.7 in 1997. This increase is
the due to the cost of the computer software conversion discussed above. These
costs included the payment of a deferred license fee of $445,000 and write-off
of the remaining book value of capitalized conversion costs that totaled
$212,000.
Other non-interest expenses increased $321,000 or 9.8% in 1997 and decreased by
$50,000 or 1.5% in 1996. Increases in other non-interest expenses are the
result of normal inflationary increases or due to additional volume from growth
in numbers of accounts processed. Table 6 summarizes the changes in the major
categories of non-interest expense.
15
<PAGE>
TABLE 6 - NON-INTEREST EXPENSE
<TABLE>
<CAPTION>
In thousands
1997/1996 1996/1995
-------------------------------------- -----------------------------------
Increase Increase
(Decrease) (Decrease)
------------------ -------------------
1997 Amount % 1996 Amount % 1995
--------- -------- ------ ---------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits $ 8,961 $789 9.7% $ 8,172 $740 10.0% $7,432
Occupancy, net 1,279 71 5.9 1,208 200 19.8 1,008
Equipment, depreciation and
Service 1,166 (48) (4.0) 1,214 194 19.0 1,020
Computer software expense 1,668 807 93.7 861 121 16.4 740
Other 3,591 321 9.8 3,270 (50) (1.5) 3,320
--------- -------- ---------- -------- ---------
Total $16,665 $1,940 13.2% $14,725 $1,205 8.9% $13,520
--------- -------- ------ ---------- -------- ------- ---------
</TABLE>
PROVISION FOR INCOME TAXES
Income tax expense applicable to continuing operations totaled $2.6 million in
1997 and 1996 compared with $2.1 million in 1995. There was an income tax
benefit of $777,000 and $413,000 applicable to discontinued operations for 1997
and 1996, respectively. The statutory federal tax rate was 34% each year.
PennRock's effective tax rate applicable to continuing operations was 21.9% in
1997 compared to 25.6% in 1996 and 25.8% in 1995. 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.
PennRock accounts for income taxes on the liability method. Under the
liability method, a deferred tax asset or liability is determined based on the
enacted tax rates which will be in effect when the differences between the
financial statement carrying amounts and tax basis of existing assets and
liabilities are expected to be reported in PennRock's income tax returns. The
deferred tax provision for the year is equal to the net change in the deferred
tax asset and liability accounts from the beginning to the end of the year. The
effect on deferred taxes of a change in tax rates is recognized in income in
the period that includes the enactment date.
DISCONTINUED OPERATIONS
As discussed above, during 1997 management elected to terminate the operations
of ARMCO, a subsidiary of the Bank, after two years of operations. ARMCO
recorded a loss of $801,000 (net of an income tax benefit of $413,000) or $.13
per share in 1996 and a loss of $1.6 million (net of an income tax benefit of
$777,000) or $.26 per share. 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 statements of income for
1996 and 1997. As a result, certain income and expense items previously
reported for 1996 have been restated to reflect the reclassification of ARMCO
operations. We expect no material future impact on earnings due to the closure
of ARMCO in 1997.
FINANCIAL CONDITION
SOURCES AND USES OF FUNDS
Table 7 examines PennRock's financial condition in terms of its sources and
uses of funds. Average funding uses increased $44.0 million or 8.6% in 1997
compared with an increase of $25.4 million or 5.2% in 1996.
16
<PAGE>
TABLE 7 - SOURCES AND USES OF FUNDS
<TABLE>
<CAPTION>
In thousands
1997 1996 1995
------------------------------------ ----------------------------------- ----------
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 $ 17,025 $16,332 2356.7% $ 693 ($ 30) (4.1%) $ 723
Mortgages held for
sale 944 (1,113) (54.1) 2,057 (177) (7.9) 2,234
Securities available
for sale 189,001 (6,509) (3.3) 195,510 (10,632) (5.2) 206,142
Loans 347,462 35,289 11.3 312,173 36,213 13.1 275,960
---------- ---------- ----------- ---------- ----------
Total uses $554,432 $43,999 8.6% $510,433 $25,374 5.2% $485,059
---------- ---------- -------- ----------- ---------- ------ ----------
Funding sources:
Interest-bearing
demand deposits $ 70,513 ($ 1,020) (1.4%) $ 71,533 $ 6,415 9.9% $ 65,118
Savings deposits 58,823 (2,010) (3.3) 60,833 (2,003) (3.2) 62,836
Time deposits 269,029 32,207 13.6 236,822 14,611 6.6 222,211
Short-term borrowings 26,601 (23,010) (46.4) 49,611 664 1.4 48,947
Long-term debt 50,293 43,208 609.9 7,085 (2,153) (23.3) 9,238
Non-interest bearing
funds, net 79,173 (5,376) (6.4) 84,549 7,840 10.2 76,709
---------- ---------- ----------- ---------- ----------
Total sources $554,432 $43,999 8.6% $510,433 $25,374 5.2% $485,059
---------- ---------- -------- ----------- ---------- ------ ----------
</TABLE>
SECURITIES AND SHORT-TERM INVESTMENTS
Table 8 indicates the composition and maturity of the securities available for
sale portfolio as of December 31, 1997. Included in the portfolio are state
and municipal securities, mortgage-backed securities (including adjustable rate
mortgage-backed securities) and 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 4.7 years as of December 31, 1997 and 4.2 years
as of December 31, 1996.
TABLE 8 - ANALYSIS OF SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
In thousands
Taxable
Within 1-5 6-10 Over 10 Equivalent
One Year Years Years Years Equities Total Yield
---------- --------- ---------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and agency $ 1,075 $11,713 $ 7,199 $34,972 $ $ 54,959 7.06%
States and political subdivisions 1,694 62,042 63,736 8.37
Mortgage backed securities 2,347 23,221 2,334 27,902 7.20
Collateralized mortgage
obligations 6,521 32,484 39,005 5.79
Other securities 24,317 24,317 6.02
Equity securities 12,282 12,282
---------- --------- ---------- --------- ---------- -----------
Total (amortized cost) $31,913 $48,238 $30,420 $99,348 $12,282 $222,201 7.20%
---------- --------- ---------- --------- ---------- -----------
Total fair value $32,050 $48,076 $30,602 $100,999 $12,681 $224,408
Taxable equivalent yield 6.02% 5.98% 7.26% 8.03%
Percent of portfolio 14.28% 21.42% 13.64% 45.01% 5.65%
Average maturity 12.1 YEARS
</TABLE>
17
<PAGE>
Measured on an amortized cost basis, securities increased $34.9 million or
18.7% in 1997 and decreased $10.0 million or 5.2% during 1996. As of December
31, 1997, securities available for sale at fair value totaled $224.4 million
compared with $186.0 million at the end of 1996. During 1997, PennRock sold
$119.2 million and purchased $172.9 million in available for sale securities.
During 1996, PennRock sold $77.0 million in securities and purchased $78.4
million. In addition, $20.6 million and $10.0 million was received from
maturities of securities and principal repayments on mortgage-backed securities
in 1997 and 1996, respectively.
As of December 31, 1997, the AFS portfolio had a net unrealized gain of $2.2
million consisting of gross unrealized gains of $2.6 million and gross
unrealized losses of $437,000. The total 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 the end of 1996.
As of December 31, 1997, PennRock had $66.9 million invested in mortgage-backed
pass-through securities and CMO's compared with $101.6 million as of December
31, 1996. 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. PennRock had $27.9 million in mortgage-backed pass-through securities
as of December 31, 1997 of which $4.9 million were adjustable rate and $23.0
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. PennRock had $39.0 million in CMO securities as of December 31,
1997 compared with $67.4 million at the end of 1996. The CMO securities held
by PennRock are shorter-maturity, fixed rate bonds that have relatively low
levels of prepayment risk. In addition, none of the CMO's in the portfolio was
considered "high risk CMO's" as defined by banking regulations. All CMO's and
mortgage-backed pass-through securities were issued by Federal agencies.
During 1997 and 1996, there were no investments in securities of any single,
non-federal issues in excess of 10% of stockholders' equity.
LOANS
Table 9 presents loans outstanding, by type of loan, for the past five years.
Loans increased from year-end 1996 to year-end 1997 by $63.0 million or 19.7%,
compared with a $21.3 million or 7.2% increase from year-end 1995 to year-end
1996. Most of this growth was realized in commercial real estate loans which
grew $34.8 million or 27.4%. Also during 1997, PennRock originated and sold
$24.1 million residential in conforming residential mortgage loans. Included
in increase in real estate construction loans in 1997 are $12.5 million of real
estate construction loans purchased by the Bank from ARMCO.
TABLE 9 - LOANS OUTSTANDING, NET OF UNEARNED INCOME
<TABLE>
<CAPTION>
In thousands
December 31,
-----------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural:
Commercial, secured by real estate $161,939 $127,124 $106,675 $ 86,173 $ 58,312
Agricultural 10,087 9,533 10,268 9,729 9,113
Other 58,405 56,118 52,734 43,354 49,106
Real estate - construction 22,365 9,415 8,761 2,489 6,742
Real estate - mortgage 111,689 99,798 104,211 85,565 73,299
Consumer loans 17,874 17,366 15,376 12,618 11,810
---------- ---------- ---------- ---------- -----------
Total loans $382,359 $319,354 $298,025 $239,928 $208,382
---------- ---------- ---------- ---------- -----------
</TABLE>
18
<PAGE>
TABLE 10 - LOAN MATURITIES AND INTEREST SENSITIVITY (1)
<TABLE>
<CAPTION>
In thousands
December 31, 1997
------------------------------------------------------------
One Year One Through Over
or Less Five Years Five Years Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $ 6,482 $34,717 $189,335 $230,534
Real estate - construction 22,262 22,262
----------- ----------- ----------- -----------
Total $ 28,744 $34,717 $189,335 $252,796
----------- ----------- ----------- -----------
Loans with predetermined interest rate $ 7,323 $18,522 $ 13,960 $ 39,805
Loans with variable interest rate 21,421 16,195 175,375 212,991
----------- ----------- ----------- -----------
Total $28,744 $34,717 $189,335 $252,796
----------- ----------- ----------- -----------
</TABLE>
(1) Excludes residential mortgages and consumer loans.
NON-PERFORMING ASSETS
Table 11 shows PennRock's non-performing loans for the five years ended
December 31, 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.
TABLE 11 - NON-PERFORMING ASSETS
<TABLE>
<CAPTION>
In thousands
December 31,
---------------------------------------------------------------
1997 1996 1995 1994 1993
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Non-accrual loans $288 $ 795 $ 862 $ 624 $1,670
Loans accruing but 90 days past due as to
principal or interest 1,853 311 375 434 729
--------- -------- -------- -------- --------
Total non-performing loans 2,141 1,106 1,237 1,058 2,399
Other real estate owned 65 187 276 1,048 816
--------- -------- -------- -------- --------
Total non-performing assets $2,206 $1,293 $1,513 $2,106 $3,215
--------- -------- -------- -------- --------
Ratios:
Non-performing loans to total loans 0.56% 0.35% 0.41% 0.44% 1.15%
Non-performing assets to total loans and
other real estate owned 0.58% 0.40% 0.51% 0.87% 1.54%
Allowance for loan losses to
non-performing loans 198.37% 366.09% 295.96% 329.11% 144.27%
</TABLE>
We estimate loans that are not considered non-performing and are not past-due
but have a somewhat higher than normal risk of becoming non-performing in the
future to total $10.7 million as of December 31, 1997, compared with $7.6
million as of December 31, 1996 and $4.7 million as of December 31, 1995.
As of December 31, 1997, PennRock 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. As of December 31, 1997, PennRock did not
have any loans outstanding to any foreign entity or government.
Other real estate owned ("OREO") amounted to $65,000 as of December 31, 1997
and was included in other assets on the Consolidated Balance Sheets. As of
December 31, 1996, OREO totaled $187,000. Valuation reserves are established
for OREO properties whenever estimated current realizable values fall below the
original fair value recorded.
19
<PAGE>
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 loan
reviews conducted on a semiannual basis. Provisions for loan losses charged to
operating expense increase the allowance while net charge-offs of loans
decrease the allowance.
During 1997, the Bank purchased $12.5 million residential mortgage loans from
ARMCO on which a valuation reserve totaling $80,000 had been established. This
reserve was added to the Bank's allowance for loan losses with the purchase of
these loans.
TABLE 12 - ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
In thousands
Year Ended December 31,
-----------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, beginning of year $4,049 $3,661 $3,482 $3,461 $3,405
Provision charged to expense 258 600 360 352 958
Loans charged off:
Commercial, financial and agricultural 74 159 103 228 882
Consumer 231 132 122 233 170
----------- ---------- ---------- ---------- ----------
Total loans charged off 305 291 225 461 1,052
----------- ---------- ---------- ---------- ----------
Recoveries:
Commercial, financial and agricultural 129 49 15 95 66
Consumer 36 30 29 35 84
----------- ---------- ---------- ---------- ----------
Total recoveries 165 79 44 130 150
----------- ---------- ---------- ---------- ----------
Net charge-offs 140 212 181 331 902
----------- ---------- ---------- ---------- ----------
Transfer of valuation reserve from
discontinued subsidiary 80
---------- ---------- ---------- ---------- ----------
Balance, end of year $4,247 $4,049 $3,661 $3,482 $3,461
----------- ---------- ---------- ---------- ----------
Total loans:
Average $347,462 $312,173 $275,960 $219,034 $208,701
Year-end 382,359 319,354 298,025 239,928 208,382
Ratios:
Net charge-offs to:
Average loans 0.04% 0.07% 0.07% 0.15% 0.43%
Total loans 0.04% 0.07% 0.06% 0.14% 0.43%
Allowance for loan losses 3.30% 5.24% 4.94% 9.51% 26.06%
Provision for loan losses 54.26% 35.33% 50.28% 94.03% 94.15%
Allowance for loan losses to:
Average loans 1.22% 1.30% 1.33% 1.59% 1.66%
Loans as of year-end 1.11% 1.26% 1.23% 1.45% 1.66%
</TABLE>
The allowance for loan losses totaled $4.2 million as of December 31, 1997, an
increase of 4.9% from 1996. The allowance for loan losses as a percentage of
year-end loans was 1.11% as of December 31, 1997 and 1.26% as of December 31,
1996. The provision for loan losses exceeded net charge-offs by $118,000 in
1997, by $388,000 in 1996 and by $179,000 in 1995. The allowance for loan
losses as a percentage of non-performing loans was 198.37% as of December 31,
1997 and 366.09% as of December 31, 1996.
Total loans charged-off increased from $225,000 in 1995 to $291,000 in 1996 and
increased to $305,000 in 1997. Recoveries of loans previously charged-off
increased from $44,000 in 1995 to $79,000 in 1996 and increased to $165,000 in
1997. The ratio of net charge-offs to average loans was .07% in 1995 and 1996
and decreased to.04% in 1997.
20
<PAGE>
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 actual future
charge-offs so balances 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>
December 31,
------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------------- ------------------- ------------------- ------------------- -----------------
% 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 $2,858 60.3% $2,835 60.4% $2,713 56.9% $2,967 58.0% $2,888 55.9%
Real estate -
construction 5.8 2.9 2.9 1.0 3.2
Real estate - mortgage 60 29.2 53 31.2 118 35.0 133 35.7 84 35.2
Consumer 335 4.7 323 5.5 313 5.2 258 5.3 206 5.7
Unallocated 994 838 517 124 283
-------- -------- -------- -------- -------- ------- -------- ------- -------- --------
Total $4,247 100.0% $4,049 100.0% $3,661 100.0% $3,482 100.0% $3,461 100.0%
-------- -------- -------- -------- -------- ------- -------- ------- -------- --------
</TABLE>
As of December 31, 1997, PennRock's recorded investment in loans considered to
be impaired under Statement of Financial Accounting Standards No. 114 was
$625,000 of which $288,000 were on non-accrual status. Included in this amount
is $414,000 of impaired loans for which the related allowance is $201,000 and
$211,000 for which there is no related allowance. The average recorded
investment in impaired loans for 1997 was $692,000 and the interest recognized
for the year was $14,000.
As of December 31, 1996, PennRock's recorded investment in impaired loans was
$740,000 of which $614,000 was 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.
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 PennRock's own
operations. Liquidity is measured by PennRock's ability to convert assets to
cash at a reasonable cost or a minimum loss. Maturities and sales of
investment securities (Table 8), loan payments and maturities (Table 10), and
liquidating money market investments such as federal funds sold all provide
liquidity. In addition, PennRock is a member of the Federal Home Loan Bank of
Pittsburgh which provides a reliable source of long and short-term funds.
However, PennRock's primary source of liquidity lies in our 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 $41.3 million or 9.2% in 1997 compared with $33.5
million or 8.0% in 1996. 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.
21
<PAGE>
TABLE 14 - DEPOSITS BY MAJOR CLASSIFICATION
<TABLE>
<CAPTION>
In thousands
December 31,
-----------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Non-interest bearing deposits $ 77,106 $ 65,537 $ 57,775 $ 50,405 $ 46,685
NOW accounts 39,061 41,209 39,942 39,038 39,873
Money market deposit accounts 35,080 34,125 31,227 20,152 24,635
Savings accounts 57,557 59,977 60,852 66,247 67,661
Time deposits under $100,000 250,364 224,071 208,022 149,784 142,634
----------- ----------- ----------- ----------- -----------
Total core accounts 459,168 424,919 397,818 325,626 321,488
Time deposits of $100,000 or more 33,627 26,548 20,111 16,807 20,143
----------- ----------- ----------- ----------- -----------
Total deposits $492,795 $451,467 $417,929 $342,433 $341,631
----------- ----------- ----------- ----------- -----------
</TABLE>
TABLE 15 - MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
<TABLE>
<CAPTION>
In thousands
December 31,
-------------------------------------
1997 1996 1995
--------- --------- ----------
<S> <C> <C> <C>
Three months or less $16,857 $10,992 $ 7,774
Over three months through six months 7,226 5,433 3,724
Over six months through twelve months 6,578 5,762 4,682
Over twelve months 2,966 4,361 3,931
--------- --------- ----------
Total $33,627 $26,548 $20,111
--------- --------- ----------
</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 $21.1 million as of December 31, 1996 to $9.3 million
as of December 31, 1997. The Bank also maintains a line of credit with the
Federal Home Loan Bank of Pittsburgh. The Bank had $6.5 million in short-term
adjustable rate borrowings as of December 31, 1995 and a $2.0 million
short-term fixed-rate advance as of December 31, 1997. There were no line
advances outstanding as of December 31, 1996. 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 decreased from 6.16%
in 1995 to 5.46% in 1996 and to 5.23% in 1997. Table 16 shows PennRock's
short-term borrowings for the five years ended December 31, 1997.
TABLE 16 - SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
In thousands
December 31,
---------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Federal funds purchased and securities
sold under agreements to repurchase $9,332 $21,136 $40,579 $13,046 $19,182
Advances from Federal Home Loan Bank 2,000 6,500 67,604 8,050
U.S. Treasury tax and loan note 1,500 970 397 1,427 1,500
--------- --------- --------- --------- ---------
Total short-term borrowings $12,832 $22,106 $47,476 $82,077 $28,732
--------- --------- --------- --------- ---------
</TABLE>
CAPITAL RESOURCES
On June 24, 1997, PennRock announced that the Board of Directors had authorized
the purchase of up to 200,000 shares of the Company's outstanding common stock.
The shares are to be used for general corporate purposes including stock
dividends and stock splits, executive compensation plans or for issuance under
the dividend reinvestment plan. The Company began open market repurchases of
its outstanding common stock in 1995. In 1997, PennRock purchased 42,882
shares for $784,000 and reissued 72,123 shares for PennRock's dividend
reinvestment plan. In 1996, PennRock purchased 100,083 shares for $1.9 million
and reissued 60,782 shares. PennRock purchased 20,000 shares for $374,000 and
reissued 19,421 shares in 1995. There were 10,639 shares with a cost of
$205,000 and 39,880 shares with a cost of $740,000 held as treasury stock on
December 31, 1997 and 1996, respectively.
22
<PAGE>
Total stockholders' equity increased $7.5 million or 14.0% in 1997 compared
with an increase of $2.1 million or 4.0% in 1996. In 1997, stockholders'
equity increased by net income of $7.8 million less dividends of $3.0 million.
The change in net unrealized gains and losses on securities available for sale
increased equity by $2.3 million. The increase in 1996 was due to net income
of $6.8 million less dividends declared of $2.7 million. A net unrealized loss
on securities available for sale caused equity to decline by $1.6 million
during 1996. 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 which increased equity by $6.8 million. The
ratio of average equity to average assets was 9.34% in 1997, compared with
9.55% for 1996 and 9.00% in 1995. The ratio of average equity to average
assets net of the SFAS 115 adjustment was 9.46% in 1997, 9.76% in 1996 and
9.62% in 1995. Internal capital generation is calculated by multiplying return
on average equity by the percentage of earnings retained. Internal capital
generation amounted to 8.47% in 1997, 7.87% in 1996 and 8.03% in 1995.
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 that
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, 1997, the most recent notification from the Federal Reserve
Bank categorized PennRock as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized, PennRock
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
category. Table 17 shows PennRock's capital resources for the past three
years.
TABLE 17 - CAPITAL RESOURCES
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1997 1996 1995
-------- -------- ---------
<S> <C> <C> <C>
Leverage ratios:
Total capital to total average assets 10.46% 10.62% 10.46%
Tier 1 capital to total average assets 9.75% 9.88% 9.75%
Risk-based ratios:
Common stockholders' equity to risk
weighted assets 13.76% 14.96% 16.37%
Tier 1 capital to risk-weighted assets 13.26% 14.95% 15.81%
Total capital to risk-weighted assets 14.22% 16.08% 16.97%
</TABLE>
INTEREST RATE RISK
Information regarding interest rate risk may be found in Item 7A on pages 24
through 26 of this Annual Report under the caption "Quantitative and
Qualitative Disclosures about Market Risk."
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per
Share." This statement simplifies the standards for computing earnings per
share previously found in APB Opinion No. 15 ("APB 15"), "Earnings Per Share,"
and makes them comparable to international EPS standards. Basic EPS (formerly
primary EPS) excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock
23
<PAGE>
that then shared in the earnings of the entity. Diluted EPS is computed
similarly to fully diluted EPS pursuant to APB 15. SFAS 128 is effective for
financial statements ending after December 15, 1997, and requires restatement
of all prior period EPS data presented. Accordingly, PennRock adopted the
provisions of SFAS 128 as of December 31, 1997. There was no impact on the
presentation of per share earnings in the Consolidated Statements of Income
because basic earnings per share and diluted earnings per share are the same
for 1997, 1996 and 1995.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which requires that an enterprise report, by major components and as a single
total, the change in its net assets from transactions and economic events
during the period other than transactions with owners. Comprehensive income is
the total of net income and all other non-owner changes in equity. The
Statement is effective for years beginning after December 15, 1997 with earlier
application permitted.
In July 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." SFAS 131 introduces a new model for
segment reporting entitled the "management approach," which focuses on the
manner in which the chief decision makers organize segments within a company
for making operating decisions and assessing performance. Under the management
approach, reportable segments can be based upon its products, services,
geographic areas, major customers and legal or management structure. SFAS 131
is effective for fiscal years beginning after December 15, 1997 with earlier
application permitted. Adoption of SFAS 130 and SFAS 131 will not impact
PennRock's consolidated financial position, results of operations or cash
flows, and any effect will be limited to the form and content of its
disclosures.
YEAR 2000 COMPLIANCE
During 1997, we formed a committee with a goal of ensuring that all of the
Company's operational and financial systems will not be adversely affected by
year 2000 software problems. The committee is comprised of members from loan
and deposit operations, branch administration, trust services, security, audit
and senior management. The Board of Directors and senior management are
supporting all compliance efforts and are allocating the necessary resources to
complete the project within the timeframe established by the committee and bank
regulators. An inventory of all systems, software and outside service
providers that could be affected by the year 2000 date change has been
developed and categorized as to importance to the Company in its ability to
continue normal operations. All software used for the Company's systems is
supplied by software vendors or outside service providers. We are requiring
all software vendors and outside service providers to represent that the
products or services they provide are or will be year 2000 compliant, beginning
with those processes identified as the most critical. We are also requesting
information from them on testing procedures so that we may verify compliance.
Alternative sources will be identified for those vendors or service providers
that will not be year 2000 compliant within the timeframe established. We do
not expect the costs of evaluating and testing the Company's systems for year
2000 compliance to have a material effect on the Company's financial condition,
results of operations or liquidity.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's financial performance is impacted by, among other factors,
interest rate risk and credit risk. We manage credit risk by relying on strict
credit standards, loan review and adequate loan loss reserves. Interest rate
risk refers to PennRock'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 our ability to adjust. The Company's Asset Liability Management
Committee ("the ALCO") addresses this risk. The senior management team
comprises the ALCO. The ALCO monitors interest rate risk by modeling the
estimated changes in net value of portfolio equity ("NVPE") and net interest
income under various interest rate scenarios. The NVPE is the present value of
expected future cash flows from assets and liabilities. The ALCO attempts to
manage the various components of the Company's balance sheet to minimize the
impact of sudden and sustained changes in interest rates on NVPE and net
interest income. However, the ALCO may sometimes structure the balance sheet
to take advantage of expected interest rate movements.
The Company's exposure to interest rate risk is reviewed on a monthly basis by
the Board of Directors and the ALCO. Interest rate risk exposure is measured
using interest rate sensitivity analysis to determine the Company's change in
net interest income and NVPE in the event of hypothetical changes in interest
rates. If potential changes to NVPE and net interest income resulting from
hypothetical interest rate swings are not within the limits established by the
Board, the Board may direct management to adjust its asset and liability mix to
bring interest rate risk within Board-approved limits.
24
<PAGE>
The mismatch 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. For example, although
certain assets and liabilities may have similar maturities or periods to
repricing, they may react in different degrees to changes in market interest
rates. Some types of financial instruments are very sensitive to changes in
market rates while others may lag behind such changes. Certain assets such as
adjustable-rate loans have limits on the amount of change in interest rates in
the short-term and over the life of the loan. Further, changes in interest
rates may trigger prepayments of loans or early withdrawals of time deposits
which would likely deviate significantly from the assumptions used in
calculating changes in net interest income or NVPE. While ALCO continuously
monitors and adjusts the gap position to maximize profitability, the primary
objective is to maintain net interest income and NVPE within self-imposed
parameters for a wide range of possible changes in interest rates. The
following table presents an interest sensitivity analysis of PennRock's assets
and liabilities as of December 31, 1997.
INTEREST SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
In thousands
December 31, 1997
-----------------------------------------------------------------------------------
Interest Sensitivity Period
-----------------------------------------------------------------------------------
More Due after
than 3 More than More than 5 Years or
Less than Months to 6 Months 1 Year to Not Rate
3 Months 6 Months to 1 Year 5 Years Sensitive Total
----------- -------------- ------------ ------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Earning assets:
Short-term investments $ 1,054 $ $ $ $ $ 1,054
Weighted average interest rate 5.49% 5.49%
Mortgages held for sale 1,036 1,036
Weighted average interest rate 6.25% 6.25%
Securities available for sale 39,212 10,684 27,641 66,658 80,213 224,408
Weighted average interest rate 6.42% 6.07% 6.69% 6.62% 7.87% 7.03%
Loans 66,366 17,628 26,045 127,573 144,747 382,359
Weighted average interest rate 8.97% 8.87% 8.70% 8.11% 7.70% 8.20%
----------- ------------- ------------- ------------- ------------- -----------
Total interest earning assets $107,668 $28,312 $53,686 $194,231 $224,960 $608,857
----------- ------------- ------------- ------------- ------------- -----------
Interest bearing liabilities:
Interest bearing demand
deposits (1) $ 3,119 $ 3,119 $ 6,239 $ 12,477 $ 49,186 $ 74,140
Weighted average interest rate 3.41% 3.41% 3.41% 3.41% 2.18% 2.60%
Savings deposits (2) 719 719 1,439 2,878 51,802 57,557
Weighted average interest rate 2.22% 2.22% 2.22% 2.22% 2.22% 2.22%
Time deposits 123,225 72,480 47,117 41,050 119 283,991
Weighted average interest rate 5.40% 5.59% 5.41% 5.78% 5.20% 5.51%
Short-term borrowings 10,832 2,000 12,832
Weighted average interest rate 4.74% 6.36% 4.99%
Long-term debt 1,300 700 75,000 77,000
Weighted average interest rate 5.83% 5.37% 5.70% 5.70%
----------- ------------- ------------- ------------- ------------- -----------
Total interest bearing
liabilities $139,195 $76,318 $57,495 $131,405 $101,107 $505,520
----------- ------------- ------------- ------------- ------------- -----------
Interest sensitivity gap:
Period ($31,527) ($48,006) ($ 3,809) $62,826 $123,853
Cumulative (31,527) (79,533) (83,342) (20,516) 103,337
Interest sensitive assets to
interest sensitive liabilities
ratio:
Period 77.35% 37.10% 93.38% 147.81% 222.50%
Cumulative 77.35% 63.10% 69.47% 94.93% 120.44%
</TABLE>
(1) Assumes NOW account balances are withdrawn at 5% per year and money market
deposits account balances are withdrawn at 30% per year based on prior
experience.
(2) Assumes passbook and statement savings balances are withdrawn at 5% per
year.
25
<PAGE>
While the preceding table presented above helps provide some information about
the Company's interest sensitivity, it does not predict the trends of future
earnings. For this reason, we use financial modeling to forecast earnings
under different interest rate projections. Interest rate sensitivity analysis
is used to measure the Company's interest rate risk by computing estimated
changes in NVPE of its cash flows from assets and liabilities in the event of
assumed changes in market interest rates. This analysis assesses the risk of
loss in market rate sensitive instruments in the event of sudden and sustained
increases and decreases in market interest rates of 100 and 200 basis points.
The Company's Board of Directors has adopted an interest rate risk policy which
establishes maximum decrease in the NVPE and net interest income in the event
of a sudden and sustained increase or decrease in market interest rates of 200
basis points. The following tables present the Company's projected change in
NVPE and net interest income for 100 and 200 basis point rate shocks as of
December 31, 1997 and the Board's established limit. NVPE values and impact on
net interest income relate to the Bank only. The assets and liabilities at the
parent company level are not considered in this analysis. The exclusion of
holding company assets and liabilities does not have a significant effect on
the analysis of NVPE sensitivity.
CHANGES IN NET PORTFOLIO VALUE
<TABLE>
<CAPTION>
In thousands
Net Value of Computed Percent Board
Change in Interest Rates Portfolio Equity Change Change Limit
- ------------------------- ---------------- ------------ --------- ------------
<S> <C> <C> <C> <C>
200 basis point rise $39,765 ($16,914) (29.8%) (25.0%)
100 basis point rise 46,507 (10,172) (18.0%)
Base rate scenario 56,679
100 basis point decline 60,834 4,155 7.33%
200 basis point decline 68,263 11,584 20.44% (25.0%)
</TABLE>
CHANGES IN NET INTEREST INCOME
<TABLE>
<CAPTION>
In thousands
Net Interest Computed Percent Board
Change in Interest Rates Income Change Change Limit
- ------------------------- ------------ ------------ ----------- ----------
<S> <C> C> <C> <C>
200 basis point rise $25,429 $2,016 8.61% (10.0%)
100 basis point rise 24,846 1,433 6.12%
Base rate scenario 23,413
100 basis point decline 23,697 283 1.21%
200 basis point decline 23,196 (218) (0.93%) (10.0%)
</TABLE>
The preceding table indicates that as of December 31, 1997, in the event of a
sudden and sustained increase in prevailing market interest rates, the
Company's NVPE would be expected to decrease while its net interest income
would be expected to increase. At December 31, 1997, the Company's estimated
change in NVPE given a 200 basis point rise in interest rates was above the
target established by the Board of Directors while the estimated change in net
interest income is within target limits.
Computation of forecasted effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, loan prepayments, and deposit decay, and should not be relied upon as
indicative of actual future results. Further, the computations do not
contemplate any actions the ALCO could take to mitigate any negative effects of
changes in interest rates.
26
<PAGE>
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:
<TABLE>
<S> <C>
PennRock Financial Services Corp. and Subsidiaries
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . 27
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . 28
Consolidated Statements of Income . . . . . . . . . . . . . . . . . 29
Consolidated Statements of Stockholders' Equity . . . . . . . . . . 30
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . 31
Notes to Consolidated Financial Statements . . . . . . . . . . . . 32
</TABLE>
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, 1997 and 1996, 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, 1997.
These consolidated financial statements are the responsibility of PennRock'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 as of December 31, 1997 and
1996, and the consolidated results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1997 in
conformity with generally accepted accounting principles.
As more fully discussed in Note 2, during 1997, the Company discontinued the
operations of Blue Ball National Bank's mortgage subsidiary, Atlantic Regional
Mortgage Corporation.
/S/ SIMON LEVER & COMPANY
January 30, 1998
Lancaster, Pennsylvania
27
<PAGE>
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
In thousands
December 31,
-------------------------
ASSETS 1997 1996
----------- -----------
<S> <C> <C>
Cash and due from banks $ 21,075 $ 16,405
Short-term investments 1,054 1,244
Mortgages held for sale 1,036 5,690
Securities available for sale (at fair value) 224,408 186,026
Loans (net of unearned income of $22,000 and $50,000) 382,359 319,354
Allowance for loan losses (4,247) (4,049)
----------- -----------
Net loans 378,112 315,305
Premises and equipment 12,654 10,662
Accrued interest receivable 3,794 3,333
Other assets 6,956 8,938
----------- -----------
Total assets $649,089 $547,603
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 77,106 $ 65,537
Interest bearing 415,689 385,930
----------- -----------
Total deposits 492,795 451,467
Short-term borrowings 12,832 22,106
Long-term debt 77,000 14,000
Accrued interest payable 3,158 2,758
Other liabilities 2,037 3,543
----------- -----------
Total liabilities 587,822 493,874
Stockholders' Equity:
Common stock, par value $2.50 per share; authorized
20,000,000 shares; issued 6,077,299 shares 15,193 15,193
Surplus 11,118 11,153
Unrealized gains (losses) on securities available for
sale, net of deferred taxes 1,457 (816)
Retained earnings 33,704 28,939
Treasury stock at cost (10,639 and 39,880 shares) (205) (740)
----------- -----------
Total stockholders' equity 61,267 53,729
----------- -----------
Total liabilities and stockholders' equity $649,089 $547,603
----------- -----------
</TABLE>
See notes to consolidated financial statements.
28
<PAGE>
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
In thousands, except per share data
Year Ended December 31,
---------------------------------------
1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $32,218 $28,592 $25,755
Securities available for sale:
Taxable 8,282 9,327 10,660
Tax-exempt 3,427 2,443 1,746
Mortgages held for sale 64 126 217
Other 1,627 111 26
---------- --------- ---------
Total interest income 45,618 40,599 38,404
---------- --------- ---------
Interest expense:
Deposits 17,632 15,784 15,786
Short-term borrowings 1,390 2,709 3,015
Long-term debt 2,856 423 592
---------- --------- ---------
Total interest expense 21,878 18,916 19,393
---------- --------- ---------
Net interest income 23,740 21,683 19,011
Provision for loan losses 258 600 360
---------- --------- ---------
Net interest income after provision for loan losses 23,482 21,083 18,651
---------- --------- ---------
Non-interest income:
Service charges on deposit accounts 1,337 1,142 1,014
Other service charges and fees 95 97 48
Fiduciary activities 804 700 589
Net realized gains on sales of available for sale securities 1,493 1,172 647
Mortgage banking 491 382 632
Other 885 370 269
---------- --------- ---------
Total non-interest income 5,105 3,863 3,199
---------- --------- ---------
Non-interest expenses:
Salaries and benefits 8,961 8,172 7,432
Occupancy, net 1,279 1,208 1,008
Equipment depreciation and service 1,166 1,214 1,020
Computer software expense 1,668 861 740
Other 3,591 3,270 3,320
---------- --------- ---------
Total non-interest expense 16,665 14,725 13,520
---------- --------- ---------
Income from continuing operations before income taxes 11,922 10,221 8,330
Income taxes applicable to continuing operations 2,607 2,613 2,148
---------- --------- ---------
Income from continuing operations 9,315 7,608 6,182
Discontinued operations:
Loss from operations of discontinued subsidiary (net of
income tax benefit of $777 and $413) (1,555) (801)
---------- --------- ---------
Net income $ 7,760 $ 6,807 $ 6,182
---------- --------- ---------
Earnings per common share:
Income from continuing operations (net of tax) $1.54 $1.25 $1.02
Loss from discontinued operations (net of tax) (.26) (.13)
---------- --------- ---------
Net income $1.28 $1.12 $1.02
---------- --------- ---------
Weighted average number of shares outstanding 6,062,449 6,068,639 6,048,503
---------- --------- ---------
</TABLE>
Basic earnings per share and diluted earnings per share are the same for 1997,
1996 and 1995.
See notes to consolidated financial statements.
29
<PAGE>
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 as of January 1, 1995 $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 as of 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
($.45 per share) (2,722) (2,722)
---------------------------------------------------------------------------
Balance as of December 31, 1996 15,193 11,153 28,939 (740) (816) 53,729
Net income 7,760 7,760
Change in net unrealized gains
and losses on securities
available for sale, net of tax 2,273 2,273
Acquisition of treasury stock (784) (784)
Sale of treasury stock under
dividend reinvestment plan (35) (25) 1,319 1,259
Cash dividends declared
($.49 per share) (2,970) (2,970)
------------------------------------------------------------------------
Balance as of December 31, 1997 $15,193 $11,118 $33,704 ($ 205) $1,457 $61,267
------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
30
<PAGE>
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
In thousands
Year Ended December 31,
----------------------------------------------
1997 1996 1995
---------- ---------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Income from continuing operations: $ 9,315 $ 7,608 $ 6,182
Adjustments to reconcile income from continuing operations
to net cash provided by operating activities:
Provision for loan losses 258 600 360
Depreciation and amortization 1,065 963 861
Amortization of deposit premium 105 107 98
Premium on deposits sold (300)
Accretion and amortization of securities (379) 135 317
Deferred income taxes 104 76 18
Net realized gains on sale of available for sale securities (1,493) (1,172) (647)
Proceeds from sales of mortgage loans 24,143 28,091 26,232
Originations of mortgages held for sale (24,139) (27,019) (27,273)
(Gain) loss on sale of mortgage loans, net 119 141 (90)
Loss on sale of equipment 161
Increase in interest receivable (465) (64) (338)
Increase in interest payable 400 265 677
Other changes, net (2,742) (978) (2,900)
---------- ---------- -----------
Net cash provided by operating activities of continuing operations 6,152 8,753 3,497
Net cash (used in) provided by discontinued operations 5,290 (5,290)
---------- ---------- -----------
Net cash provided by operations 11,442 3,463 3,497
---------- ---------- -----------
INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 119,243 77,025 65,045
Purchases of securities available for sale (172,934) (78,358) (56,395)
Purchases of investment securities (1,319)
Maturities of securities available for sale 20,625 9,974 13,266
Maturities of investment securities 2,000
Proceeds from sale of other real estate 150 451 1,340
Net increase in loans (63,064) (21,541) (58,097)
Purchases of premises and equipment (3,618) (2,193) (3,161)
Proceeds from sale of equipment 79
---------- ---------- -----------
Net cash used in investing activities (99,519) (14,642) (37,321)
---------- ---------- -----------
FINANCING ACTIVITIES:
Net increase in non-interest bearing deposits 11,569 7,762 7,370
Net increase in interest bearing deposits 29,759 25,776 68,126
Net decrease in short-term borrowings (9,274) (25,370) (34,601)
Net increase (decrease) in long-term debt 63,000 5,000 (1,500)
Issuance of common and treasury stock 1,257 1,407 1,635
Acquisition of treasury stock (784) (1,852) (374)
Cash dividends (2,970) (2,722) (2,480)
---------- ---------- -----------
Net cash provided by financing activities 92,557 10,001 38,176
---------- ---------- -----------
Increase (decrease) in cash and cash equivalents 4,480 (1,178) 4,352
Cash and cash equivalents at beginning of year 17,649 18,827 14,475
---------- ---------- -----------
Cash and cash equivalents at end of year $22,129 $17,649 $18,827
---------- ---------- -----------
Supplemental schedule of interest and income taxes paid:
Total interest paid $21,458 $18,637 $18,716
Total income taxes paid 1,200 2,725 2,377
</TABLE>
See notes to consolidated financial statements.
31
<PAGE>
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. As
discussed in Note 2, the Bank's mortgage banking subsidiary, Atlantic Regional
Mortgage Corporation ("ARMCO") was closed in 1997.
BASIS OF PRESENTATION:
The consolidated financial statements of PennRock include the accounts of
PennRock 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.
As discussed more thoroughly in Note 2, for years ending December 31, 1997 and
1996, the Consolidated Statements of Income reflect the operating results of
ARMCO as discontinued operations.
CASH EQUIVALENTS:
For purposes of the Consolidated Statements of Cash Flows, PennRock 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.
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 PennRock'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.
32
<PAGE>
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, PennRock adopted Statement of Financial Accounting
Standards No. 114 ("SFAS 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. PennRock 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, PennRock generally measures
impairment based upon the present value of the loan's expected future cash
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 PennRock's impaired loans has
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
33
<PAGE>
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
PREMISES AND EQUIPMENT:
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, PennRock adopted Statement of Financial Accounting
Standards No. 122 ("SFAS 122"), "Accounting for Mortgage Servicing Rights, an
amendment of FASB Statement No. 65" on a prospective basis as required by the
standard. SFAS 122 requires mortgage loan servicing rights ("MSR's") be
capitalized when acquired either through the purchase or origination of
mortgage loans that are subsequently sold with servicing rights retained. SFAS
122 provides for the recognition of MSR's retained for loans sold by allocating
total costs incurred between the loan and the servicing rights based on their
relative fair values. MSR's are amortized in proportion to, and over the
period of, estimated net servicing income. To determine the fair value of
MSR's, PennRock estimates the present value of future cash flows, incorporating
numerous assumptions including servicing income, cost of servicing, discount
rates, prepayment speeds and default rates.
SFAS 122 also requires establishment of a valuation allowance for the excess of
the carrying amount of capitalized MSR'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 MSR's are not recognized. Fair values are estimated
considering market prices for similar mortgage servicing rights and 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 MSR's increase or
decrease over time. The cost of the MSR's is amortized over the estimated
period of net servicing revenues. The adoption of SFAS 122 did not have a
material effect on the Company's financial condition or results of operations.
On January 1, 1997, the Company adopted SFAS No. 125 ("SFAS 125"), "Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities," as amended by Statement of Financial Accounting Standards No.127
("SFAS 127"), "Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125 - An Amendment of FASB Statement No. 125." SFAS 125, which
supersedes SFAS 122, 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 of the asset or liability. 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 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
34
<PAGE>
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, as provided by SFAS
127, the rules governing securities lending, repurchase and dollar repurchase
agreements and the recognition of collateral will not be adopted until January
1, 1998. The extension of the SFAS 115 approach to certain non-security
financial assets and the amendment to SFAS 115 is effective for financial
assets held on or acquired after January 1, 1997. The adoption of SFAS 125 did
not have a material effect on PennRock's financial statements or the results of
operations. The adoption of delayed provision of SFAS 125 is not expected to
have a material impact on the Company's financial condition or results of
operations.
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 are $708,000 and $863,000 of deposit
premiums as of December 31, 1997 and 1996 respectively. This premium is being
amortized using the straight-line method over 10 years.
LONG-LIVED ASSETS:
On January 1, 1996, PennRock adopted the provisions of Statement of Financial
Accounting Standards 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 PennRock'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.
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.
35
<PAGE>
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STOCK-BASED COMPENSATION:
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 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 ("APB 25"),
"Accounting for Stock Issued to Employees," 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. PennRock adopted the provisions of
SFAS 123 on January 1, 1996. However, PennRock will continue to account for
stock-based compensation under APB 25 and related Interpretations. Adoption of
SFAS 123 did not have a material impact on PennRock's consolidated financial
statements.
NET INCOME PER SHARE:
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per
Share." This statement simplifies the standards for computing earnings per
share previously found in APB Opinion No. 15 ("APB 15"), "Earnings Per Share,"
and makes them comparable to international EPS standards. Basic EPS (formerly
primary EPS) excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity. Diluted EPS is computed similarly
to fully diluted EPS pursuant to APB 15. SFAS 128 is effective for financial
statements ending after December 15, 1997, and requires restatement of all
prior period EPS data presented. Accordingly, PennRock adopted the provisions
of SFAS 128 as of December 31, 1997. There was no impact on the presentation
of per share earnings in the Consolidated Statements of Income because basic
earnings per share and diluted earnings per share are the same for 1997, 1996
and 1995.
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.
NOTE 2: DISCONTINUED OPERATIONS
On September 30, 1997, ARMCO's Board of Directors adopted a formal liquidation
plan that called for operations of ARMCO to be finalized by December 31, 1997.
The operating results of ARMCO are being accounted for in accordance with the
provisions of Accounting Principles Board Opinion No. 30 ("APB 30"), "Reporting
the Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," as a discontinued operation. Accordingly, ARMCO's operating
results (including shut-down and liquidation costs), net of applicable income
tax benefits, have been segregated from continuing operations and reported
separately as discontinued operations in the Consolidated Statements of Income
for 1997 and 1996.
ARMCO reported gross revenue of $3,313,000 in 1997 and $524,000 in 1996. These
amounts are not included in interest income or non-interest income in the
accompanying Consolidated Statements of Income. ARMCO had no income in 1995.
36
<PAGE>
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Assets and liabilities of ARMCO as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
In thousands
December 31,
1996
--------------
<S> <C>
Mortgages held for sale $4,531
Furniture and equipment 321
Accrued interest receivable 5
Prepaid and other assets 322
Federal income taxes receivable 218
--------------
Total assets 5,397
Accrued and other liabilities 107
--------------
Net assets of discontinued operations $5,290
--------------
</TABLE>
All assets and liabilities of ARMCO have been liquidated, purchased by the
parent company or written-off as of December 31, 1997.
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 amount of those
required reserves as of December 31, 1997 was approximately $6,727,000.
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 (the "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, PennRock transferred the
entire 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. As of December 31, 1997 and 1996, PennRock had
no securities classified as held to maturity.
37
<PAGE>
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The amortized cost and estimated fair value of securities available for sale
are as follows:
<TABLE>
<CAPTION>
In thousands
DECEMBER 31, 1997
---------------------------------------------------------
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 $ 54,959 $ 256 ($ 29) $ 55,186
Obligations of states and political
subdivisions 63,736 1,569 (8) 65,297
U. S. agency mortgage-backed securities 27,902 171 (72) 28,001
Collateralized mortgage obligations 39,005 (262) 38,743
Commercial paper 24,317 183 24,500
------------ ------------ ------------- -----------
Total debt securities available for sale 209,919 2,179 (371) 211,727
Equity securities 12,282 465 (66) 12,681
------------ ------------ ------------- -----------
Total securities available for sale $222,201 $2,644 ($437) $224,408
------------ ------------ ------------- -----------
</TABLE>
<TABLE>
<CAPTION>
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
----------- ------------- ------------ -----------
</TABLE>
The amortized cost and fair value of debt securities as of December 31, 1997,
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.
<TABLE>
<CAPTION>
In thousands
DECEMBER 31, 1997
-------------------------
AMORTIZED FAIR
COST VALUE
----------- -----------
<S> <C> <C>
Due in one year or less $ 25,392 $ 25,573
Due after one year through five years 13,407 13,480
Due after five years through ten years 7,199 7,230
Due after ten years 97,014 98,700
----------- -----------
143,012 144,983
Mortgage backed securities 27,902 28,001
Collateralized mortgage obligations 39,005 38,743
----------- -----------
Total debt securities $209,919 $211,727
----------- -----------
</TABLE>
38
<PAGE>
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Gains and losses from sales of securities available for sale are as follows:
<TABLE>
<CAPTION>
In thousands
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Debt securities
Gross gains $1,420 $1,009 $582
Gross losses (345) (114) (80)
-------- -------- --------
Total debt securities 1,075 895 502
Equity securities, net 418 277 145
-------- -------- --------
Total securities gains $1,493 $1,172 $647
-------- -------- --------
</TABLE>
Proceeds from sales of securities available for sale are as follows:
<TABLE>
<CAPTION>
In thousands
1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
Debt securities $112,312 $75,869 $64,441
Equity securities 6,931 1,156 604
---------- --------- ---------
Total proceeds $119,243 $77,025 $65,045
---------- --------- ---------
</TABLE>
Securities with a carrying value of $20,438,000 and $20,818,000 as of December
31, 1997 and 1996 were pledged to secure public and trust deposits, repurchase
agreements as well as other purposes.
NOTE 5: LOANS
The loan portfolio net of unearned income and deferred loan fees, as of
December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
In thousands
1997 1996
----------- ----------
<S> <C> <C>
Commercial, financial and agricultural:
Commercial, secured by real estate $161,939 $127,124
Agricultural 10,087 9,533
Other 58,405 56,118
Real estate - construction 22,365 9,415
Real estate - mortgage 111,689 99,798
Consumer 17,874 17,366
----------- ----------
Total loans $382,359 $319,354
----------- ----------
</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, 1997, was as follows:
<TABLE>
<CAPTION>
In thousands
<S> <C>
Balance, January 1, 1997 $7,728
New loans 9,068
Repayments (9,135)
--------
Balance, December 31, 1997 $7,661
--------
</TABLE>
39
<PAGE>
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Included in the loan portfolio are loans on which the Bank has ceased the
accrual of interest. Such loans amounted to $288,000 and $795,000 as of
December 31, 1997 and 1996, respectively. If interest income had been recorded
on all non-accrual loans outstanding during the years 1997, 1996 and 1995,
interest income would have been increased as shown in the following table:
<TABLE>
<CAPTION>
In thousands
1997 1996 1995
------ ----- ------
<S> <C> <C> <C>
Interest which would have been recorded
under original terms $27 $92 $73
Interest income recorded during the year 0 11 7
------ ----- ------
Net impact on interest income $27 $81 $66
------ ----- ------
</TABLE>
As of December 31, 1997, PennRock's recorded investment in loans considered to
be impaired under SFAS 114 was $625,000 of which $288,000 were on non-accrual
status. Included in this amount is $414,000 of impaired loans for which the
related allowance is $201,000 and $211,000 for which there is no related
allowance. The average recorded investment in impaired loans for 1997 was
$692,000 and the interest recognized for the year was $14,000.
As of December 31, 1996, PennRock'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.
NOTE 6: LOAN SERVICING
Mortgage loans serviced for Fannie Mae and Federal Home Loan Mortgage
Corporation are not included in the accompanying Consolidated Balance Sheets.
The unpaid principal balances of those loans as of December 31, 1997 and 1996
were $182.9 million and $188.9 million, respectively.
During 1997, $176,000 of originated mortgage servicing rights was capitalized
and $48,000 of amortization of mortgage servicing rights was recorded. In
1996, $141,000 of originated mortgage servicing rights was capitalized and
$4,000 of amortization of mortgage servicing rights was recorded. The
estimated fair value of mortgage servicing rights was $254,000 as of December
31, 1997 and $122,000 as of December 31, 1996.
NOTE 7: ALLOWANCE FOR LOAN LOSSES
During 1997, the Bank purchased $12.5 million residential mortgage loans from
ARMCO on which a valuation reserve totaling $80,000 had been established. This
reserve was added to the Bank's allowance for loan losses with the purchase of
these loans. Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
In thousands
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year $4,049 $3,661 $3,482
Provision charged to expense 258 600 360
Recoveries of loans charged-off 165 79 44
--------- -------- --------
4,472 4,340 3,886
Loans charged off (305) (291) (225)
Transfer of valuation reserve from
discontinued subsidiary 80
--------- -------- --------
Balance at end of year $4,247 $4,049 $3,661
--------- -------- --------
</TABLE>
40
<PAGE>
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8: PREMISES AND EQUIPMENT
Details of premises and equipment as of December 31 are as follows:
<TABLE>
<CAPTION>
In thousands
1997 1996
---------- ----------
<S> <C> <C>
Land $ 2,097 $ 2,105
Premises 9,191 6,888
Furniture and equipment 10,153 9,601
Construction in progress 115 581
---------- ----------
Total cost 21,556 19,175
Less accumulated depreciation (8,902) (8,513)
---------- ----------
Net book value $12,654 $10,662
---------- ----------
</TABLE>
Depreciation and amortization expense was $1,065,000 in 1997, $963,000 in 1996
and $861,000 in 1995.
Future minimum rental payments that are related to non-cancelable operating
leases having initial terms in excess of one year are:
<TABLE>
<S> <C>
1998 76,000
1999 76,000
2000 76,000
2001 81,000
2002 70,000
Thereafter 99,000
</TABLE>
Total lease payments were $145,000, $160,000 and $74,000 in 1997, 1996 and
1995.
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, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
In thousands
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Securities sold under agreements to repurchase $9,332 $21,136 $28,579
Overnight federal funds purchased 12,000
Federal Home Loan Bank borrowings 2,000 6,500
U. S. Treasury tax and loan note 1,500 970 397
--------- --------- ---------
Total short-term borrowings outstanding at year-end $12,832 $22,106 $47,476
--------- --------- ---------
Average interest rate at year-end 4.87% 5.50% 5.62%
Maximum outstanding at any month-end $70,225 $79,052 $62,594
Average amount outstanding $26,601 $49,611 $48,947
Weighted average interest rate 5.23% 5.46% 6.16%
</TABLE>
PennRock controls all securities that serve as collateral for the securities
sold under agreements to repurchase.
The Bank has approved federal funds lines totaling $12.0 million and a
borrowing capacity of $166.8 million at the Federal Home Loan Bank of
Pittsburgh (the "FHLB").
41
<PAGE>
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10: LONG-TERM DEBT
Long-term debt consists of fixed rate advances from the FHLB with maturity
schedules as follows:
<TABLE>
<CAPTION>
In thousands
December 31, 1997 December 31, 1996
- -------------------------------------------------- -------------------------------------------------
Interest Interest
Amount Maturity Date Rate Amount Maturity Date Rate
- ----------- ------------------- ----------- ---------- -------------------- ------------
<S> <C> <C> <C> <C> <C>
$ 1,300 February 28, 1998 5.83% $ 2,000 January 13, 1997 4.74%
700 January 13, 1999 5.37 1,300 February 28, 1998 5.83
25,000 June 5, 2000 6.01 700 January 13, 1999 5.37
35,000 March 24, 2002 5.46 8,000 December 27, 2001 4.97
15,000 September 17, 2002 5.74 2,000 December 31, 2001 4.97
- ----------- ----------
$77,000 $14,000
- ----------- ----------
</TABLE>
Certain of the outstanding advances have options that allow the FHLB to convert
the fixed-rate advance to a 3-month LIBOR variable-rate advance. If the FHLB
exercises its option to convert the advance, the balance may be repaid without
penalty. During 1997, $10.0 million of the advances outstanding as of December
31, 1996 were repaid without penalty.
NOTE 11: CAPITAL TRANSACTIONS
On June 24, 1997, PennRock announced that the Board of Directors had authorized
the purchase of up to 200,000 shares of the Company's outstanding common stock.
The shares are to be used for general corporate purposes including stock
dividends and stock splits, executive compensation plans or for issuance under
the dividend reinvestment plan. The Company began open market repurchases of
its outstanding common stock in 1995. In 1997, PennRock purchased 42,882
shares for $784,000 and reissued 72,123 shares for PennRock's dividend
reinvestment plan. In 1996, PennRock purchased 100,083 shares for $1.9 million
and reissued 60,782 shares. PennRock purchased 20,000 shares for $374,000 and
reissued 19,421 shares in 1995. There were 10,639 shares with a cost of
$205,000 and 39,880 shares with a cost of $740,000 held as treasury stock on
December 31, 1997 and 1996, respectively.
42
<PAGE>
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12: INCOME TAXES
An analysis of the provision for income taxes included in the Consolidated
Statements of Income is as follows:
<TABLE>
<CAPTION>
In thousands
1997 1996 1995
-------- ------- --------
<S> <C> <C> <C>
Current expense $2,503 $2,537 $2,130
Deferred taxes 104 76 18
-------- ------- --------
Provision for income taxes applicable to
continuing operations 2,607 2,613 2,148
Income tax benefit applicable to
discontinued operations (777) (413)
-------- ------- --------
Total income tax expense $1,830 $2,200 $2,148
-------- ------- --------
</TABLE>
A reconciliation between the provision for income taxes from continuing
operations and the amount computed by applying the statutory federal income tax
rate to income from continuing operations before provision for income taxes is
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
Statutory federal income tax rate 34.0% 34.0% 34.0%
Tax exempt income (11.7) (8.8) (6.6)
Other, net (.4) .4 (1.6)
------- ------ ------
Effective income tax rate 21.9% 25.6% 25.8%
------- ------ ------
</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 PennRock's
deferred tax liabilities and assets as of December 31, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
In thousands
1997 1996
-------- --------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $1,393 $1,302
Net unrealized losses on securities available for sale 420
Other 63 43
-------- --------
Total deferred tax assets 1,456 1,765
-------- --------
Deferred tax liabilities:
Depreciation 270 271
Investment security discount 103 95
Net unrealized gain on securities available for sale 751
-------- --------
Total deferred tax liabilities 1,124 366
-------- --------
Net deferred tax asset $ 332 $1,399
-------- --------
</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 $332,000 will be realized since PennRock has a long history of
earnings and has a carry-back potential greater than the deferred tax asset and
is unaware of any reason that PennRock would not ultimately realize this asset.
43
<PAGE>
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 PennRock
were $749,000 in 1997, $607,000 in 1996 and $491,000 in 1995.
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 were options totaling 750 shares exercisable
as of December 31, 1997. All options have been adjusted to reflect stock
splits since the date of grant.
<TABLE>
<CAPTION>
Price per
Shares 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
Incentive options granted 2,000 $16.69
Incentive options granted 3,500 $16.63
-----------
Balance, December 31, 1997 10,125
-----------
</TABLE>
The pro forma disclosures that are required by SFAS 123 are not applicable due
to immateriality.
NOTE 15: COMMITMENTS AND CONTINGENT LIABILITIES AND CONCENTRATIONS OF CREDIT
RISK
PennRock'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
credit, guarantees, and liability for assets held in trust, which arise in the
normal course of business. PennRock uses the same credit policies in
commitments and conditional obligations as it does for on-balance sheet
instruments.
A summary of PennRock's commitments and contingent liabilities as of December
31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
In thousands
1997 1996
--------- ---------
<S> <C> <C>
Commitments to extend credit $77,937 $62,327
Financial and performance standby letters of credit 8,463 8,657
Commitments to purchase securities 2,995 3,074
Commitments to sell residential mortgages 4,552
</TABLE>
44
<PAGE>
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Commitments to extend credit are agreements to lend to a customer to the extent
that there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
represent future cash requirements. Management evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained if
deemed necessary by management upon extension of credit is based on a credit
evaluation of the customer.
Stand-by letters of credit are conditional commitments issued by PennRock 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. PennRock holds
collateral supporting those commitments for which collateral is deemed
necessary.
PennRock'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 PennRock's business activity is with customers located within
PennRock's defined market area. Investments in state and municipal securities
may also involve government entities within PennRock'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. As of December 31, 1997, this limit was $5,769,000.
NOTE 16: RESTRICTIONS ON RETAINED EARNINGS
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 1998
without approval of the Comptroller of the Currency of approximately $8.7
million plus an additional amount equal to the Bank's net profit (as defined)
for 1998 up to the date of any such dividend declaration.
NOTE 17: REGULATORY MATTERS
PennRock 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
PennRock's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, PennRock must meet specific
capital guidelines that involve quantitative measures of PennRock's assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. PennRock's capital amounts and classification are also
subject to qualitative judgements by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require PennRock 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, 1997,
that PennRock meets all capital adequacy requirements to which it is subject.
45
<PAGE>
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of December 31, 1997, the most recent notification from the Federal Reserve
Bank categorized PennRock as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized, PennRock
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. PennRock'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>
As of December 31, 1997:
Total capital
(to risk weighted assets) $63,324 14.22% $44,538 10.0%
Tier 1 capital
(to risk weighted assets) $59,077 13.26% $26,723 6.0%
Tier 1 capital
(to average assets) $59,077 9.75% $30,280 5.0%
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% $27,200 5.0%
</TABLE>
NOTE 18: FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 ("SFAS 107"), "Disclosures
about Fair Value of Financial Instruments," requires disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instrument.
These estimates are subjective in nature and involve uncertainties and matters
of significant judgment and therefore cannot be determined with precision.
Changes in assumptions would significantly affect the estimates. Statement 107
excludes certain financial instruments and all non-financial instruments from
its disclosure requirements.
Fair value estimates are based on existing on and off-balance sheet financial
instruments without attempting to estimate the value of future business. The
value of significant sources of income such as trust or mortgage banking
operations has 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.
We used the following methods and assumptions in estimating the fair value of
the Company's financial instruments:
Cash and cash equivalents:
The carrying amounts reported in the Consolidated Balance Sheets for cash
and short-term investments approximate their fair values.
Mortgages held for sale:
The fair value of mortgages held for sale is estimated using current
secondary market rates.
46
<PAGE>
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 PennRock'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.
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 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.
47
<PAGE>
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of December 31, 1997 and 1996, the estimated fair values of financial
instruments based on disclosed assumptions are as follows:
<TABLE>
<CAPTION>
In thousands
1997 1996
------------------------- ------------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 21,075 $ 21,075 $ 16,405 $ 16,405
Short-term investments 1,054 1,054 1,244 1,244
Mortgages held for sale 1,036 1,034 5,690 5,690
Securities available for sale 224,408 224,408 186,026 186,026
Loans:
Commercial, financial and agricultural 230,431 230,466 192,775 198,835
Real estate - construction 22,365 22,368 9,415 9,714
Real estate - mortgage 111,689 111,706 99,798 100,011
Consumer 17,874 17,876 17,366 17,196
Allowance for loan losses (4,247) (4,049)
----------- ----------- ---------- ----------
Net loans 378,112 382,416 315,305 325,756
Accrued interest receivable 3,794 3,794 3,333 3,333
Financial liabilities:
Deposits:
Non-interest bearing demand 77,106 77,106 65,537 65,537
Interest bearing demand 74,141 74,141 75,334 75,334
Savings 57,557 57,557 59,977 59,977
Time deposits under $100,000 250,364 249,720 224,071 223,888
Time deposits over $100,000 33,627 33,586 26,548 26,521
----------- ----------- ---------- ----------
Total deposits 492,795 492,110 451,467 451,257
Short-term borrowings 12,832 12,832 22,106 22,106
Long-term debt 77,000 77,193 14,000 16,610
Accrued interest payable 3,158 3,158 2,758 2,758
Off-balance sheet financial instruments:
Commitments to extend credit 77,937 77,937 62,327 62,327
Financial and performance standby letters
of credit 8,463 8,463 8,657 8,657
Commitments to purchase securities 2,995 2,995 3,074 3,074
Commitments to sell residential mortgages 4,552 4,561
</TABLE>
48
<PAGE>
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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,
------------------------
1997 1996
---------- -----------
<S> <C> <C>
ASSETS:
Short-term investments $ 70 $ 600
Securities available for sale 4,754 1,707
Due from subsidiary 381 649
Investment in subsidiary 57,048 51,557
Other assets 10 15
---------- -----------
Total assets $62,263 $54,528
---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Dividends payable $ 789 $ 725
Accrued expenses and taxes 207 74
---------- -----------
Total liabilities 996 799
---------- -----------
Stockholders' equity:
Common stock 15,193 15,193
Surplus 11,118 11,153
Unrealized gain (loss) on securities available for sale,
net of deferred taxes 1,457 (816)
Retained earnings 33,704 28,939
Treasury stock at cost (10,639 and 39,880 shares) (205) (740)
---------- -----------
Total stockholders' equity 61,267 53,729
---------- -----------
Total liabilities and stockholders' equity $62,263 $54,528
---------- -----------
</TABLE>
PENNROCK FINANCIAL SERVICES CORP. (PARENT COMPANY ONLY) STATEMENTS OF INCOME
<TABLE>
<CAPTION>
In thousands
December 31,
-------------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Income:
Dividends from bank subsidiary $4,200 $3,225 $1,380
Securities available for sale 106 86 89
Net realized gains on sales of available for sale securities 363 278 145
--------- --------- ---------
Total income 4,669 3,589 1,614
--------- --------- ---------
General and administrative expenses 243 257 240
--------- --------- ---------
Income before income taxes and undistributed net income
of subsidiaries 4,426 3,332 1,374
Income tax expense (benefit) 68 29 (17)
--------- --------- ---------
Income before equity in undistributed net income
of subsidiaries 4,358 3,303 1,391
Equity in undistributed net income of subsidiaries 3,402 3,504 4,791
--------- --------- ---------
Net income $7,760 $6,807 $6,182
--------- --------- ---------
</TABLE>
49
<PAGE>
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
PENNROCK FINANCIAL SERVICES CORP. (PARENT COMPANY ONLY) STATEMENTS OF CASH
FLOWS
<TABLE>
<CAPTION>
In thousands
Year Ended December 31,
-------------------------------------
1997 1996 1995
---------- --------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $7,760 $6,807 $6,182
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income from subsidiaries (3,402) (3,504) (4,791)
Net realized gain on sale of available for sale securities (363) (278) (145)
(Increase) decrease in due from bank subsidiary 268 63 (219)
Other, net 107 144 118
---------- --------- --------
Net cash provided by operating activities 4,370 3,232 1,145
INVESTING ACTIVITIES
Proceeds from sale of securities available for sale 1,156 1,156 1,147
Purchases of securities available for sale (3,561) (760) (1,009)
---------- --------- --------
Net cash provided by (used in) investing activities (2,405) 396 138
FINANCING ACTIVITIES
Issuance of common and treasury stock 1,257 1,406 1,637
Acquisition of treasury stock (784) (1,852) (375)
Cash dividends paid (2,968) (2,722) (2,480)
---------- --------- --------
Net cash used in financing activities (2,495) (3,168) (1,218)
---------- --------- --------
Increase (decrease) in cash and cash equivalents (530) 460 65
Cash and cash equivalents at beginning of year 600 140 75
---------- --------- --------
Cash and cash equivalents at end of year $ 70 $ 600 $ 140
---------- --------- --------
</TABLE>
50
<PAGE>
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 20: CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
In thousands except per share data
1997
---------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Interest income $10,558 $11,312 $11,687 $12,061
Interest expense 4,724 5,580 5,626 5,948
---------- ---------- --------- ---------
Net interest income 5,834 5,732 6,061 6,113
Provision for loan losses 30 44 92 92
Non-interest income 846 1,342 1,739 1,178
Non-interest expense 3,900 4,175 4,345 4,245
---------- ---------- --------- ---------
Income from continuing operations before
income taxes 2,750 2,855 3,363 2,954
Income taxes 669 712 354 872
---------- ---------- --------- ---------
Income from continuing operations 2,081 2,143 3,009 2,082
Loss from discontinued operations, net of tax (177) (214) (1,164)
---------- ---------- --------- ---------
Net income $ 1,904 $ 1,929 $ 1,845 $ 2,082
---------- ---------- --------- ---------
Earnings per share:
Income from continuing operations, net of tax $ 0.34 $ 0.36 $ 0.50 $ 0.34
Loss from discontinued operations, net of tax (0.03) (0.04) (0.19)
---------- ---------- --------- ---------
Net income $ 0.31 $ 0.32 $ 0.31 $ 0.34
---------- ---------- --------- ---------
Dividends declared per share $ 0.12 $ 0.12 $ 0.12 $ 0.13
---------- ---------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------
1996
----------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Interest income $9,904 $10,325 $10,171 $10,199
Interest expense 4,719 4,879 4,640 4,678
----------- ----------- ---------- ----------
Net interest income 5,185 5,446 5,531 5,521
Provision for loan losses 149 149 151 151
Non-interest income 903 742 1,043 1,175
Non-interest expense 3,605 3,516 3,735 3,870
----------- ----------- ---------- ----------
Income from continuing operations before
income taxes 2,334 2,523 2,688 2,675
Income taxes 637 563 629 783
----------- ----------- ---------- ----------
Income from continuing operations 1,697 1,960 2,059 1,892
Loss from discontinued operations, net of tax (36) (253) (286) (226)
----------- ----------- ---------- ----------
Net income $1,661 $ 1,707 $ 1,773 $ 1,666
----------- ----------- ---------- ----------
Earnings per share:
Income from continuing operations, net of tax $ 0.28 $ 0.32 $ 0.34 $ 0.31
Loss from discontinued operations, net of tax (0.01) (0.04) (0.04) (0.04)
----------- ----------- ---------- ----------
Net income $ 0.27 $ 0.28 $ 0.30 $ 0.27
----------- ----------- ---------- ----------
Dividends declared per share $ 0.11 $ 0.11 $ 0.11 $ 0.12
----------- ----------- ---------- ----------
</TABLE>
51
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PENNROCK FINANCIAL SERVICES CORP.
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 28, 1998 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 28, 1998 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 28, 1998, 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 28, 1998.
52
<PAGE>
PENNROCK FINANCIAL SERVICES CORP.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The consolidated financial statements listed on the index to Item 8 of
this Annual Report on Form 10-K are filed as a part of this Annual
Report.
(a) 2. Financial Statement Schedules
All schedules applicable to the Registrant are shown in the respective
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(b) to Form 10-Q for the quarter ended
June 30, 1996.
(3)(b) Bylaws of the Corporation
(10)(a) Omnibus Stock Plan is incorporated by reference to Exhibit 4.1
to Registration Statement Number 33-53022 of Form S-8 dated
October 8, 1992.
(10)(b) Executive Incentive Compensation Plan
(10)(c) Melvin Pankuch Deferred Compensation Agreement Plan
(21) Subsidiaries of the Registrant
(23) Consent of Simon Lever & Company, 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 1997.
53
<PAGE>
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 24, 1998 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 24th of March 1998.
<TABLE>
<CAPTION>
Signatures Title
- ------------------------------------ ------------------------------------------------
<S> <C> <C>
/s/ Norman Hahn Chairman and Director
- ------------------------------------
NORMAN HAHN
/s/ Glenn H. Weaver President and Director
- ------------------------------------
GLENN H. WEAVER
/s/ Robert K. Weaver Secretary and Director
- ------------------------------------
ROBERT K. WEAVER
/s/ Melvin Pankuch Executive Vice President, Chief
- ------------------------------------ Executive Officer and Director
MELVIN PANKUCH
/s/ George B. Crisp Vice President and Treasurer
- ------------------------------------ (Principal Financial and Accounting
GEORGE B. CRISP Officer)
/s/ Dale M. Weaver Director
- ------------------------------------
DALE M. WEAVER
/s/ Aaron S. Kurtz Director
- ------------------------------------
AARON S. KURTZ
/s/ Robert L. Spotts Director
- ------------------------------------
ROBERT L. SPOTTS
/s/ Elton Horning Director
- ------------------------------------
ELTON HORNING
/s/ Lewis M. Good Director
- ------------------------------------
LEWIS M. GOOD
/s/ Irving E. Bressler Director
- ------------------------------------
IRVING E. BRESSLER
</TABLE>
54
<PAGE>
EXHIBIT 3 (b)
PENNROCK FINANCIAL SERVICES CORP.
BYLAWS
Adopted March 25, 1986
Amended February 24, 1987
Effective April 28, 1987
ARTICLE I
SHAREHOLDER MEETINGS
Section 1.1 Annual Meeting. The annual meeting of the
shareholders of the Company shall be held at the administrative
office of the Company at 1058 Main Street, Blue Ball,
Pennsylvania, or at such other place as may be authorized by the
Board of Directors, on such day each year as may be fixed from
time to time by the Board of Directors, or, if no day be so
fixed, on the last Tuesday in April of each year. Directors
shall be elected at the annual meeting of the shareholders and
such other business as shall properly come before the meeting may
be transacted.
Section 1.2 Special Meetings. Special meetings of the
shareholders may be called at any time by (i) the Chairman of the
Board, (ii) the Chief Executive Officer, (iii) the Executive
Committee of the Board of Directors, or (iv) the Board of
Directors pursuant to a resolution adopted by the affirmative
vote of a majority of the whole Board of Directors. Special
meetings may not be called by shareholders.
Section 1.3 Notice of Meetings. Written notice of all
meetings of shareholders shall be given to each shareholder of
record entitled to vote at the meeting at least ten (10) days
prior to the day of the meeting by mail addressed to the
shareholder at his address as it appears on the books of the
Company. Such notice shall state the date, hour and place of the
meeting and shall also state the general nature of the business
to be transacted in the case of a special meeting. Notices shall
be deemed to have been delivered when deposited in the United
States mail, postage prepaid, addressed to the shareholder at his
address as it appears on the books of the Company.
Section 1.4 Record Date. The Board of Directors may fix
a date for the purpose of determining shareholders entitled to
receive notice of and to vote at any meeting or to receive any
dividend, distribution or allotment of rights or a date for any
change, conversion or change of shares by fixing a record date
not more than fifty (50) days prior thereto.
Section 1.5 Voting List. The officer or agent having
charge of the transfer books for the shares of the Company shall
make, at least five (5) days before each meeting of shareholders,
a complete list of the shareholders entitled to vote at such
meeting, arranged in alphabetical order, with the address of and
the number of shares held by each. Such list shall be kept on
file at the registered office of the Company until the time of
the meeting and shall be subject to inspection by any shareholder
during usual business hours and shall also be made available for
inspection by any shareholder at any time during the meeting.
Section 1.6 Judges of Election. In advance of each
meeting of the shareholders, the Board of Directors shall appoint
three (3) judges of election, each of whom shall be a
shareholder, to act at such meeting and any adjournment thereof.
The judges of election shall conduct all elections and
shareholder votes held at the meeting with respect to which they
have been appointed and shall take all such actions as may be
necessary in order to fulfill their responsibilities under
applicable law. Following each election or shareholder vote, the
judges of election shall file with the chairman of the meeting a
certificate certifying the result thereof.
Section 1.7 Quorum and Majority Action. A majority of
the outstanding shares, represented in person or by proxy, shall
constitute a quorum at any meeting of shareholders. A majority
of votes cast shall decide each matter submitted to the
shareholders, except in cases where the vote of a larger number
of shares is required under the Articles of Incorporation or by
law and except that in elections of directors, the candidates
receiving the highest number of votes shall be elected.
Section 1.8 Voting of Shares. Each outstanding share
entitled to vote at a meeting shall be entitled to one (1) vote
on each matter. Shareholders shall not have the right to
cumulate their votes in the election of directors.
Shareholders may vote at any meeting of shareholders by
proxy duly authorized in writing. A proxy shall be valid only
for one meeting to be specified therein and any adjournments of
such meeting. Proxies shall be dated and shall be filed with the
Secretary of the Company.
Section 1.9 Conduct of Meetings. At every meeting of
the shareholders, the Chairman of the Board or, in his absence,
the Chief Executive Officer, or in his absence, a chairman (who
shall be one of the officers, if any is present) chosen by the
shareholders of the Company present, shall act as chairman of the
meeting. The chairman of the meeting shall appoint a person to
serve as secretary of the meeting.
Section 1.10 No Action by Written Consent. No action
required to be taken or which may be taken at any annual or
special meeting of the shareholders may be taken without a duly
called meeting and the power of the shareholders of the Company
to consent in writing to action without a meeting is specifically
denied.
ARTICLE II
DIRECTORS
Section 2.1 Powers. The business and affairs of the
Company and all corporate powers shall be exercised by or under
the authority of the Board of Directors, subject to any
limitation imposed by law, the Articles of Incorporation, or
these Bylaws as to action which requires approval by the
shareholders.
Section 2.2 Number and Qualifications of Directors. The
Board of Directors shall consist of not less than one (1) nor
more than twenty-five (25) persons. The directors shall be
classified with respect to the time they shall severally hold
office by dividing them into three (3) classes, each consisting
as nearly as possible of one-third (1/3) of the number of the
whole Board of Directors; provided, however, that nothing herein
shall be construed to require exact equality in the number of
directors in each class. At the Annual Meeting of Shareholders
to be held in 1987, the directors of one class shall be elected
for a term of one (1) year; directors of a second class shall be
elected for a term of two (2) years; and directors of a third
class shall be elected for a term of three (3) years and at each
Annual Meeting of Shareholders thereafter the successors to the
class of directors whose term shall expire that year shall be
elected to hold office for a term of three (3) years, so that the
term of office of one (1) class of directors shall expire in each
year. The directors shall hold office until the expiration of
the term for which they were elected and until their successors
are elected and have qualified. The number of directors in each
class of directors shall be determined by the Board of Directors.
Any shareholder who owns not less than 100 shares of the
stock of the Company shall be eligible to be elected as a
director of the Company.
Section 2.3 Nomination of Directors. Nomination for
election to the Board of Directors may be made by the Board of
Directors or by any shareholder entitled to vote for the election
of directors. Each nomination shall specify the term of office
for which the person nominated is to be elected. Nominations,
other than those made by or on behalf of the existing management
of the Company, shall be made in writing and shall be delivered
or mailed to the Chairman of the Board not less than fourteen
(14) days nor more than fifty (50) days prior to any meeting of
shareholders called for the election of directors; provided,
however, that if less than twenty-one (21) days' notice of a
meeting is given to shareholders, such nominations shall be
mailed or delivered to the Chairman of the Board not later than
the close of business on the seventh day following the day on
which the notice of meeting was mailed. The notice to the
Chairman of the Board of a nomination, other than one made on
behalf of existing management, shall set forth the name, age,
residence address, and principal occupation of the nominee. The
chairman of the meeting shall determine whether nominations have
been made in accordance with the requirements of this Section
and, if he determines that a nomination is defective, the
nomination and any votes cast for the nominee shall be
disregarded.
Section 2.4 Elections. If directors of more than one
class are to be elected at a meeting of the shareholders by
reason of vacancy or otherwise, there shall be a separate
election for each class of directors to be elected at that
meeting.
Section 2.5 Organizational Meeting. Following the Annual
Meeting of Shareholders, the chairman or the secretary of the
meeting shall notify the directors elect of their election and
they shall meet along with the continuing directors for the
purpose of organizing the new Board, appointing officers and
transacting such other business as may properly come before the
meeting. The organizational meeting shall be held immediately
following the final adjournment of the Annual Meeting of
Shareholders or as soon thereafter as practicable and, in any
event, within thirty (30) days thereof.
Section 2.6 Vacancies. A vacancy in the Board of
Directors shall occur in the case of the happening of any of the
following events: (a) a director shall die, resign or retire;
(b) the shareholders shall fail to elect the number of directors
authorized to be elected at any meeting of shareholders at which
any director is to be elected; (c) the Board of Directors shall
by resolution have elected to increase the number of directors;
(d) the Board of Directors shall declare vacant the office of any
director for such cause as the Board may determine; or (e) a
vacancy shall occur for any other reason.
Any vacancy occurring in the Board of Directors shall be
filled by a majority of the remaining members of the Board of
Directors, though less than a quorum, and each person so elected
shall hold office until the next Annual Meeting of Shareholders
and until his successor is duly elected and has qualified.
Section 2.7 Place of Meetings. All meetings of the Board
of Directors shall be held at the administrative office of the
Company at Route 23 and Ranck's Church Road, Blue Ball,
Pennsylvania or at such other place within or without this
Commonwealth as may be designated from time to time by a majority
of the directors or as may be designated in the notice calling
the meeting.
Section 2.8 Regular Meetings. Regular meetings of the
Board of Directors shall be held, without call or notice, on
Tuesday of each week or at such other time as a majority of the
Board of Directors may from time to time determine. When any
regular meeting of the Board of Directors falls upon a holiday,
the meeting shall be held on the next business day unless the
Board shall designate some other day.
Section 2.9 Special Meetings. Special meetings of the
Board of Directors may be called by the Chairman of the Board, by
the Chief Executive Officer or at the request of three (3) or
more directors. Not less; than twenty-four (24) hours' notice of
the date, time and place of any special meeting of the Board of
Directors shall be given to each director either: (a) in person;
(b) by telephone; or (c) by notice to the director's personal
residence or business address appearing on the books of the
Company by telephone, mail, telegram or written notice delivered
to such place.
Section 2.10 Quorum and Majority Action. A majority of
all the members of the Board of Directors in office shall
constitute a quorum for the transaction of business. If at any
time fixed for a meeting, including the meeting to organize the
new Board following the Annual Meeting of Shareholders, a quorum
is not present, the directors in attendance may adjourn the
meeting from time to time until a quorum is obtained and the
meeting may be held as adjourned without further notice. Except
as otherwise provided herein, a majority of those directors
present at any meeting of the Board of Directors at which a
quorum is present shall decide each matter considered.
A director may not vote by proxy or otherwise act by proxy
at a meeting of the Board of Directors.
Section 2.11 Conduct of Meetings. At every meeting of the
Board of Directors, the Chairman of the Board or, in his absence,
the Vice Chairman of the Board, or in his absence, an officer of
the Company designated by one of them, or, in the absence of such
designation, a chairman chosen by a majority of the directors
present, shall preside. A person to be designated by the
Chairman of the Board shall serve as secretary of the Board of
Directors.
One or more directors may participate in a meeting of the
Board of Directors by means of a conference telephone or similar
communications equipment by means of which all persons
participating in the meeting can hear each other.
Section 2.12 Retirement. The office of a director shall
be considered vacant as of December 31 of the calendar year in
which he attains the age of seventy-five (75) years. A director
who retires pursuant to the provisions of this Section 2.12 shall
serve as a Director Emeritus until December 31 of the calendar
year in which he attains the age of seventy-eight (78) years. A
Director Emeritus may attend meetings of the Board of Directors,
but he may not vote and he shall not be charged with the
responsibilities or be subject to the liabilities of a director.
A Director Emeritus shall serve without compensation, but shall
be subject to all restrictions applicable to directors generally
with respect to conflicts of interest.
Section 2.13 Compensation. The Board of Directors, by the
affirmative vote of a majority of the directors then in office
and irrespective of any personal interest of any of its members,
shall have authority to establish a fee to be paid to each
director for attendance at meetings; provided, however, that no
such fee may be paid to any director who is also a salaried
officer of the Company or of any subsidiary of the Company.
Section 2.14 Personal Liability of Directors.
(a) General Rule: A director of the corporation shall
not be personally liable for monetary damages for any action
taken or any failure to take any action, except to the extent
that exemption from liability for monetary damages is not
permitted under the laws of the Commonwealth of Pennsylvania as
now or hereafter in effect. The provisions of this Subsection
(a) are intended to exempt the directors of the corporation from
liability for monetary damages to the maximum extent permitted
under the Pennsylvania Directors' Liability Act (42 Pa. C.S.
Sec. 8361 et seq.) or under any other law now or hereafter in effect.
(b) Specific Rule Under Directors' Liability Act:
Without limitation of Subsection (a) above, a director of the
corporation shall not be personally liable for monetary damages
for any action taken or any failure to take any action, unless:
(i) the director has breached or failed to perform the duties of
his office under Section 8363 of the Directors' Liability Act,
and (ii) the breach or failure to perform constitutes self-
dealing, willful misconduct or recklessness. The provisions of
the preceding sentence shall not exempt a director from: (i) the
responsibility or liability of a director pursuant to any
criminal statute; or (ii) the liability of a director for the
payment of taxes pursuant to local, state or federal law.
(c) Modification or Repeal: The provisions of this
Section 2.14 may be modified or repealed by the Board of
Directors in accordance with the procedures for amending these
Bylaws; provided, however, that any such modification or repeal
shall not have any effect upon the liability of a director
relating to any action taken, any failure to take any action, or
events which occurred prior to the effective date of such
modification or repeal.
(d) Effective Date: The provisions of this Section
2.14 shall become effective immediately following its
ratification by the shareholders of the corporation at a meeting
of shareholders duly convened after notice to the shareholders of
such purpose.
[Adopted by the Board of Directors February 24, 1987; ratified by
the shareholders April 28, 1987; effective April 28, 1987]
ARTICLE III
COMMITTEES
Section 3.1 Authority. The Board of Directors, by
resolution adopted by a majority of the whole Board of Directors,
may create such permanent or temporary committees as the Board of
Directors deems necessary for the proper conduct of the business
of the Company. Each committee shall consist of at least three
(3) directors and shall have and may exercise such powers as
shall be conferred or authorized by resolution of the Board and
which are not inconsistent with these Bylaws. The creation of
any committee and the delegation to it of authority shall not
relieve the Board of Directors of any responsibility imposed by
law upon it.
Section 3.2 Appointment of Committees. The Chairman of
the Board shall submit to the Board of Directors, at its first
meeting after the Annual Meeting of Shareholders, his
recommendations for the members of and chairman of each standing
committee. The Board of Directors shall then appoint, in
accordance with such recommendations or otherwise, the members
and a chairman for each such committee. If the appointees accept
their appointment, they shall serve for one (1) year or until
their successors are appointed. The Board of Directors may fill
any vacancy occurring on any committee and may remove and replace
any member of any committee. A director may be a member of more
than one committee.
The Chairman of the Board and the Chief Executive Officer
shall be ex-officio members of all committees of the Board of
Directors, except the Audit Committee (if one be appointed).
Section 3.3 Place and Notice of Meetings. All committee
meetings shall be held at the administrative office of the
Company at Route 23 and Ranck's Church Road, Blue Ball,
Pennsylvania or at such other place as may be designated by the
chairman of the committee or as may be designated in the notice
calling the meeting.
Not less than twenty-four (24) hours notice of the date,
time and place of any special committee meeting shall be given to
each member of that committee either: (a) in person; (b) by
telephone; or (c) by notice to the member's personal residence or
business address appearing on the books of the Company by
telephone, mail, telegram, or written notice delivered to such
place.
Section 3.4 Conduct of Committees. A majority of the
membership of a committee shall constitute a quorum for the
transaction of business; provided, however, that in any case
where the Chairman of the Board and the Chief Executive Officer
are members ex-officio of a committee and have not been
specifically appointed to a committee by resolution of the Board
of Directors, then the number of members of that committee
necessary to constitute a quorum shall be that number which is a
majority of the number of members of that committee other than
the ex-officio members, but, for purposes of determining the
presence of a quorum at any meeting of that committee, any ex-
officio members who are present shall be counted. In any case,
ex-officio committee members shall be entitled to vote.
Regular meetings of a committee may be held, without call or
notice, at such times as the committee members decide or as the
Board of Directors may require. Special meetings of a committee
may be called at any time by its chairman or by the Chairman of
the Board or by the Chief Executive Officer. Except for its
chairman (who shall be appointed by the Board of Directors), each
committee may appoint a secretary and such other officers as the
committee members deem necessary. Each committee shall have the
power and authority to obtain from the appropriate officers of
the Company all information necessary for the conduct of the
proper business of the committee.
One or more directors may participate in a meeting of a
committee by means of conference telephone or similar
communication equipment by means of which all persons
participating in the meeting can hear each other.
Section 3.5 Executive Committee. There shall be a
standing committee of the Board of Directors to be known as the
Executive Committee consisting of the Chairman of the Board, the
Vice Chairman of the Board, the Chief Executive Officer, and the
Secretary of the Company. Such committee, during the intervals
between meetings of the Board of Directors, shall exercise all
the powers and authority of the Board of Directors in the
management of the affairs of the Company, except the power and
authority to do the following: (a) to fill vacancies in the Board
of Directors and the Executive Committee; (b) to propose to the
shareholders amendment of the Articles of Incorporation; (c) to
make, alter, amend or repeal these Bylaws; (d) to adopt or
propose to the shareholders for adoption any plan of merger,
consolidation, liquidation, or dissolution; (e) to approve the
sale of substantially all of the assets of the Company; (f) to
approve the sale and issuance of long-term debt; (g) to declare
dividends; (h) to authorize the issuance of stock; or (i) to
authorize redemption of stock or distributions to shareholders.
The Executive Committee shall keep minutes of its
proceedings and shall report on its activities at each regular
meeting of the Board of Directors.
Meetings of the Executive Committee may be called from time
to time by the persons specified in Section 3.4 above, or, in
their absence or inability to act, by a Vice President.
ARTICLE IV
OFFICERS
Section 4.1 Number and Titles. The officers of the
Company shall be a Chairman of the Board, a Vice Chairman of the
Board, a President, one or more Vice Presidents, a Secretary, a
Treasurer and such other officers as may be appointed by the
Board of Directors. The same person may hold two (2) or more
offices, except both the offices of President and Treasurer.
Section 4.2 Election and Term. The officers of the
Company, except such officers as may be appointed in accordance
with the provisions of Section 4.4 below shall be elected
annually by the Board of Directors and shall hold office until
they shall resign, shall be removed or otherwise disqualified to
serve, or their successors shall be elected and have qualified.
Section 4.3 Chief Executive Officer. At the annual
organization meeting of the new Board of Directors, the Board
shall designate an officer to be the Chief Executive Officer of
the Company. The Chief Executive Officer shall be an ex-officio
member of all committees of the Board of Directors, except the
Audit Committee (if one be appointed). The Chief Executive
Officer shall have the authority to sign the share certificates
of the Company.
Section 4.4 Subordinate Officers. The Board of Directors
may appoint such other officers or agents as it may deem
necessary. A subordinate officer shall hold office for such
period, have such authority and perform such duties as may be
assigned to him by the Board of Directors. The Board of
Directors may delegate to any officer or committee the power to
appoint subordinate officers and to specify their duties and
authority and to determine their compensation.
Section 4.5 Chairman of the Board. The Chairman of the
Board shall be a member of the Board of Directors. The Chairman
of the Board shall, if present, preside at all meetings of the
Board of Directors and shall be an ex-officio member of all
committees of the Board of Directors except the Audit Committee
(if one be appointed). The Chairman of the Board shall supervise
the administration of the policies adopted or approved by the
Board of Directors and he shall also have and may exercise such
further powers and duties as from time to time may be conferred
upon or assigned to him by the Board of Directors. The Chairman
of the Board shall have authority to sign the share certificates
of the Company.
Section 4.6 Vice Chairman of the Board. The Vice
Chairman of the Board shall be a member of the Board of Directors
and shall have and may exercise such powers and duties as may be
assigned to him by the Board of Directors.
Section 4.7 President. The President of the Company
shall be a member of the Board of Directors. Subject to such
supervisory powers as may be given by the Board of Directors to
the Chairman of the Board, the President shall have and may
exercise any and all powers and duties of supervision, direction
and control of the business and affairs of the Company vested by
law, regulation and practice in the office of President of a
corporation and, in addition, he shall also have and may exercise
such further powers and duties as from time to time may be
conferred upon or assigned to him by the Board of Directors. The
President shall have the authority to sign the share certificates
of the Company.
Section 4.8 Vice-President. Each Vice President of the
Company shall have such powers and duties as may be assigned to
him by the Board of Directors. One Vice President shall be
designated by the Board of Directors to be the Executive Vice
President of the Company.
Section 4.9 Secretary. The Secretary of the Company
shall be responsible for the minute book of the Company. The
Secretary shall attest such documents as may be required and, in
addition, shall have and may exercise such further powers and
duties as from time to time may be conferred upon or assigned to
him by the Board of Directors. The Secretary shall have
authority to sign the share certificates of the Company.
Section 4.10 Treasurer. The Treasurer of the Company
shall be responsible for all of the Company's funds and
securities, shall be responsible for keeping complete and
accurate records relating thereto, and shall prepare such reports
of the financial condition of the Company as may from time to
time be requested by the Board of Directors. In addition, the
Treasurer shall have and may exercise such further powers and
duties as from time to time may be conferred upon or assigned to
him by the Board of Directors.
ARTICLE V
INDEMNIFICATION
Section 5.1 General Rule. The corporation shall, subject
to limitations set forth herein, indemnify any person (and his
heirs, executors and administrators) who was or is a party,
witness or other participant or is threatened to be made a party,
witness or participant to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal,
administrative or investigative (including, without limitation,
actions by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other
enterprise, against all expenses (including attorneys' fees,
court costs, transcript costs, fees of experts and witnesses,
travel expenses and all other similar expenses), judgments,
fines, penalties and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit
or proceeding. The corporation's obligation to indemnify shall
be subject to the following limitations:
(a) Directors and executive officers shall be
indemnified to the fullest extent permitted under the laws of the
Commonwealth of Pennsylvania as they now exist or as they may
from time to time be amended.
(b) Non-executive officers, employees, and agents of
the corporation shall be indemnified to the fullest extent
permitted under the laws of the Commonwealth of Pennsylvania as
they now exist or as they may from time to time be amended,
except that no such person shall be indemnified for liability
involving self-dealing, criminal acts, violations of applicable
taxing laws, or actions undertaken by such person in bad faith.
Section 5.2 Advance Payment of Expenses. The corporation
shall advance all reasonable expenses (including attorney's fees,
court costs, transcript costs, fees of experts and witnesses,
travel expenses and all other similar expenses) reasonably
incurred in connection with the defense of or other response to
any action, suit or proceeding referred to in Section 1 above
upon receipt of an undertaking by or on behalf of the person
seeking the advance to repay all amounts advanced if it shall
ultimately be determined upon final disposition of such action,
suit or proceeding that he is not entitled to be indemnified by
the corporation, provided, however, that in the event that such
action, suit or proceeding involves an allegation of conduct
which, if proven, would result in the denial of indemnification
under the terms of this Article, advance payment shall not be
made except upon the vote of a majority of the members of the
Board of Directors of the corporation.
Section 5.3 No Duplication of Payments. The corporation
shall not be liable under this Article V to make any payment of
amounts otherwise indemnifiable hereunder if and to the extent
that the person seeking indemnification has otherwise actually
received payment therefor under any insurance policy, contract
agreement or otherwise. In the event that the corporation makes
an advance payment of expenses to a person, such person shall
repay to the corporation the amount so advanced, if and to the
extent that he subsequently receives payment therefor under any
insurance policy, contract, agreement or otherwise.
Section 5.4 Insurance. The corporation may purchase and
maintain at its own expense one or more policies of insurance to
protect itself and to protect any director, officer, employee or
agent of the corporation or of another corporation, partnership,
joint venture, trust or other enterprise against any expense,
liability or loss incurred by such person in such capacity,
whether or not the corporation would have the authority to
indemnify such person against any such expense, liability or loss
under this Article V or under the laws of the Commonwealth of
Pennsylvania.
Section 5.5 Indemnification Agreements. The corporation
shall have the authority by vote of a majority of the Board of
Directors to enter into an Indemnification Agreement with any
person who may be indemnified by corporation pursuant to the
provisions of this Article V or otherwise. Any such
Indemnification Agreement may contain such terms and conditions
as a majority of the Board of Directors shall in the exercise of
their discretion determine to be necessary or appropriate. Such
terms and conditions may include provisions for greater or lesser
indemnification than provided for in this Article V, provisions
establishing procedures for the processing or approval of
indemnification claims, and other provisions. The fact that the
corporation has not entered into an Indemnification Agreement
with any person shall not in any way limit the indemnification
rights of such person under this Article V or otherwise.
Section 5.6 Non-exclusive. The rights to indemnification
and to the payment of expenses incurred in defending against or
otherwise responding to any action, suit or proceeding in advance
of its final disposition as set forth in this Article V shall not
be exclusive of any other rights which any person may now have or
hereafter acquire under any agreement, vote of shareholders, vote
of disinterested directors, or under any applicable law or under
the Articles of Incorporation of the corporation, or otherwise.
Section 5.7 Survival of Rights. The indemnification
rights provided to a person under the provisions of this Article
V shall continue after such person ceases to be a director,
officer, employee or agent of the corporation or of another
entity, as to any action taken, any failure to take action, or
any events which occurred while such person was a director,
officer, employee or agent of the corporation or of another
entity.
Section 5.8 Modification or Repeal. The provisions of
this Article V may be modified or repealed in accordance with the
procedures for amending these Bylaws; provided however, that any
such modification or repeal shall not have any effect upon the
indemnification rights of any person as they relate to any action
taken, any failure to take action, or events which occurred prior
to the effective date of such modification or repeal.
Section 5.9 Effective Date. The provisions of this
Article V shall become effective immediately following its
ratification by the shareholders of the corporation at a meeting
of shareholders duly convened after notice to the shareholders of
such purpose.
[Amended and restated by the Board of Directors February 24,
1987; ratified by the shareholders April 28, 1987; effective
April 28, 1987]
ARTICLE VI
EMERGENCIES
Section 6.1 Emergency Executive Committee. In the event
of any emergency declared by governmental authority, the result
of a regional or national disaster and of such severity as to
prevent the normal conduct and management of the affairs of the
Company by its directors and officers as contemplated by these
Bylaws, and three (3) available directors shall constitute the
Executive Committee and may exercise the full authority of that
committee until such time as a duly elected Board of Directors
can again assume full responsibility for and control of the
Company.
ARTICLE VII
AMENDMENT
Section 7.1 Procedure. The authority to make, amend,
alter, change or repeal the Bylaws of the Company is hereby
expressly and solely granted to and vested in the Board of
Directors, subject always to the power of the shareholders to
make, amend, alter, change or repeal the Bylaws by the
affirmative vote of the holders of not less than 85 percent of
the then outstanding shares of stock of the Company entitled to
vote generally in the election of directors, voting together as a
single class, at a meeting of shareholders duly convened after
notice to the shareholders of such purpose. The authority hereby
granted to and vested in the Board of Directors may be exercised
upon the vote of a majority of entire Board of Directors at any
meeting of the Board, provided that 10 days' notice of the
proposed amendment has been given to each directo
EXHIBIT 10 (b)
PENNROCK FINANCIAL SERVICES CORP.
EXECUTIVE INCENTIVE COMPENSATION PLAN
1. The plan is adopted pursuant to the Omnibus Stock Plan and
is designed to calculate a bonus when the net income over
average equity investment in PennRock Financial Services
Corp. (the "Company") (expressed as a percentage) exceeds
the same measurement for the Company's peer group. Both the
Company's and peer group's data will be taken from the Bank
Holding Company Performance Report published by the Federal
Reserve. In addition, any calculated bonus can be increased
(and at maximum, doubled) depending on the amount of
earnings growth the Company has. The growth factor is
described in paragraph 3. Both measurements, the return on
average equity in the Company and growth, are expressed as a
two year simple average.
2. The plan uses a tier approach where, as the degree of
increase in the Company's performance over that of the peer
group increases, the amount of the bonus increases. For
example, if the Company's performance exceeds the peer
group's performance by 2.5 percentage points the bonus is 4%
of the executive's base pay. If the Company's performance
exceeds the peer group's performance by 8 percentage points
or more, the bonus is 15% of the executive's base pay.
3. The plan contains a growth factor which considers the growth
in after-tax earnings of the current year over the prior
year. The growth percentage of both the current and prior
year are averaged and this two-year average determines the
additional bonus amount. The larger the two-year average,
the more the bonus increases. However, this is not the
primary focus of the Incentive Compensation Plan and if
there is no growth in the current year alone (without regard
to the two year average), incentive compensation can still
be earned based on the Company's performance relative to the
peer group. See Schedule II for the actual growth factors.
4. The annual incentive compensation amount is determined by
using Schedules I and II which are presented on a separate
page. The operation of the Incentive Compensation Plan is
illustrated on two separate pages. One page uses actual
data from 1992 and 1993 and the second page uses estimated
data from 1994 compared to actual data for 1993.
5. The President, all Senior Vice Presidents, and all Vice
Presidents of Blue Ball National Bank (the "Bank") will be
eligible for an award of incentive compensation, based on
their respective base salaries for the year, excluding any
bonuses or other compensation awards. For example, base
salaries for 1994 will be used to determine any 1994
incentive compensation (which will be calculated and paid in
1995).
6. Each year, incentive compensation will be determined
utilizing year-end figures for the Company and for peer
group operations. All performance figures for the Company
and for the peer group shall be adjusted to reflect asset
values prior to the "mark-to-market" of assets as required
by FASB 115.
7. For any year in which the published Bank Holding Company
Performance Report does not provide sufficient information
to calculate the "Net Income Over Average Equity Investment
In Bank" exclusive of the FASB 115 adjustments for both the
bank holding company and peer group, the Board of Directors
may calculate the incentive compensation amount using a
return on equity measurement (or similar measurement) for
the bank holding company if data is available from the
Performance Report to make this calculation exclusive of the
FASB 115 adjustment for both the bank holding company and
peer group.
8. Incentive compensation will be paid within thirty (30) days
after the date on which year-end performance figures for the
Company and for the peer group are made available to the
Board.
9. Seventy (70%) percent of incentive compensation shall be
paid by the Bank in cash, subject to ordinary payroll
deductions, including withholding taxes applicable for the
entire incentive compensation award. Thirty (30%) percent
of incentive compensation shall be payable in the form of an
award of whole shares of common capital stock of the
Company, the number of shares representing such award to be
calculated based on the fair market value per share of such
stock determined under Section 8 of the Company's Omnibus
Stock Plan as of the day before the day which the Board
formally confirms the amount of incentive compensation
determined on the basis of the year-end figures referred to
in paragraph 6. However, no fractional shares shall be
issued under the plan; in lieu of the issuance of fractional
shares, each participant shall receive cash in an amount
equal to the fair market value of any fractional share to
which he would otherwise be entitled, based upon the fair
market value per share determined as provided
in this paragraph.
PENNROCK FINANCIAL SERVICES CORP.
EXECUTIVE INCENTIVE COMPENSATION PLAN
SCHEDULE I - BASE PAY PERCENTAGE:
Description
Bank's two-year simple average percentage of net income to
average equity investment in bank compared to same
measurement for peer group (data obtained from annual
performance report prepared by the Federal Reserve and using
current year and immediate prior year to calculate the two-
year average.)
1. If the Bank's current year percentage of net income to
average equity investment in bank is less than the peer
group's current year percentage then use 0.0% as base
pay percentage and DO NOT USE THE FOLLOWING TABLE.
<TABLE>
<CAPTION>
Bank's Performance Base Pay
Compared to Peer Group Percentage
<S> <C>
Less than or equal to 0.0
Exceeds by 0.01 to 0.99 0.0
Exceeds by 1.00 to 1.99 3.0
Exceeds by 2.00 to 2.99 4.0
Exceeds by 3.00 to 3.99 5.0
Exceeds by 4.00 to 4.99 7.0
Exceeds by 5.00 to 5.99 9.0
Exceeds by 6.00 to 6.99 11.0
Exceeds by 7.00 to 7.99 13.0
Exceeds by 8.00 or greater 15.0
</TABLE>
SCHEDULE II - GROWTH FACTOR:
Description
Simple average of current year and prior year percentage
increase in total after-tax net earnings.
1. If prior year increase in after-tax earnings is less
than 0.0%, use 0.0% as the prior year percentage to
calculate the two-year simple average.
2. If the current year after-tax earnings are less than
the prior year after tax earnings use 1.0 as the growth
factor and DO NOT USE THE FOLLOWING TABLE.
<TABLE>
<CAPTION>
Percentage Increase
in Annual Earnings Growth
Two Year Average Factor
<S> <C>
0.0% thru 2.99 1.0
3.0% thru 4.99 1.1
5.0% thru 6.99 1.2
7.0% thru 8.99 1.3
9.0% thru 10.99 1.4
11.0% thru 12.99 1.5
13.0% thru 14.99 1.6
15.0% thru 16.99 1.7
17.0% thru 18.49 1.8
18.5% thru 19.99 1.9
20.0% and greater 2.0
</TABLE>
ILLUSTRATION OF PENNROCK FINANCIAL SERVICES CORP.
EXECUTIVE INCENTIVE COMPENSATION PLAN
EMPLOYEE NAME: CEO /VP
EMPLOYEE BASE PAY: 200,000 80,000
<TABLE>
<CAPTION>
ASSUMED DATA: CURRENT PRIOR TWO YEAR
YEAR YEAR AVERAGE
(Estimated)
Year 1994 1993
% %
<S> <C> <C> <C>
Percentage of net income to average
equity investment in Bank:
Bank Holding Company 14.29 17.71 16.00
Peer Group 12.00 13.64 12.82
Excess 3.18
Growth in Earnings Over Prior
Year None 14.54 N/A
INCENTIVE COMPENSATION AMOUNT:
(CALCULATION)
CEO VP
Base Pay % from Schedule I 5.0 5.0
Multiplied times Growth Factor
from Schedule II x1.0 x1.0
Equals, Incentive Compensation
Rate 5.0 5.0
Base Pay (current year) $200,000 $80,000
Incentive Compensation Amount $ 10,000 $ 4,000
</TABLE>
ILLUSTRATION OF PENNROCK FINANCIAL SERVICES CORP.
EXECUTIVE INCENTIVE COMPENSATION PLAN
<TABLE>
<CAPTION>
EMPLOYEE NAME: CEO /VP
EMPLOYEE BASE PAY: 200,000 80,000
ASSUMED DATA: CURRENT PRIOR TWO YEAR
YEAR YEAR AVERAGE
Year 1993 1992
% %
<S> <C> <C> <C>
Percentage of net income to average
equity investment in Bank:
Bank Holding Company 17.71 18.56 18.14
Peer Group 13.64 11.98 12.81
Excess 5.33
Growth in Earnings Over Prior
Year 14.54 21.98 18.26
INCENTIVE COMPENSATION AMOUNT:
(CALCULATION)
CEO VP
Base Pay % from Schedule I 9.0 9.0
Multiplied times Growth Factor
from Schedule II x1.8 x1.8
Equals, Incentive Compensation
Rate 16.2% 16.2%
Base Pay (current year) $200,000 $80,000
Incentive Compensation Amount $ 32,400 $12,960
</TABLE>
PENNROCK FINANCIAL SERVICES CORP.
INCENTIVE COMPENSATION CALCULATION - 1994
(USING: BANK HOLDING COMPANY PERFORMANCE REPORT)
<TABLE>
<CAPTION>
1994% 1993% 2-Yr.Avg.%
<S> <C> <C> <C>
Return On Equity (ROE)
(From calculation below)
Bank 13.72 15.70 14.71
Peer Group 12.27 12.34 12.31
Excess 2.40
Growth in Earnings Over Prior Year
None 14.54 N/A
Base Pay % - Schedule I 4.0
x Growth Factor - Schedule II x 1.0
= Incentive Compensation Rate 4.0%
x Base Pay (1994) _____
= Incentive Compensation Amount _____
</TABLE>
<TABLE>
<CAPTION>
Bank Peer Group
'94% '93% '94% '93%
R.O.E. Calculation:
<S> <C> <C> <C> <C>
A. ROA 1.32 1.55 1.08 1.03
B. Tier One Leveraged Cap 9.62 9.87 8.80 8.35
C. ROE = A divided by B 13.72 15.70 12.27 12.34
</TABLE>
EXHIBIT 10 (c)
MELVIN PANKUCH DEFERRED COMPENSATION PLAN AGREEMENT
THIS AGREEMENT, made and entered into this _____ day of
______________, 1995, by and between BLUE BALL NATIONAL BANK, a
national banking association with principal offices and place of
business at 1060 Main Street, Post Office Box 580, Blue Ball,
Pennsylvania, 17506 (hereinafter referred to as the "Bank"), and
MELVIN PANKUCH, an adult individual residing at 58 Heister
Avenue, New Holland, Pennsylvania (hereinafter referred to as
"Pankuch"),
WITNESSETH:
WHEREAS, Pankuch is employed by the Bank; and
WHEREAS, the Bank recognizes the valuable services
heretofore performed for it by Pankuch and wishes to encourage
his continued employment; and
WHEREAS, Pankuch wishes to defer a certain portion of
compensation payable to him; and
WHEREAS, the parties hereto wish to provide the terms and
conditions upon which the Bank shall pay such deferred
compensation to Pankuch or his designated beneficiary; and
WHEREAS, the parties intend that this Agreement be
considered an unfunded arrangement, maintained primarily to
provide deferred compensation benefits for Pankuch, a member of
select group of management or highly compensated employees of the
Bank, for purposes of Employee Retirement Income Act of 1974, as
amended;
NOW, THEREFORE, in consideration of the premises and of the
mutual promises herein contained, the parties hereto agree as
follows:
1. DEFINITION OF TERMS. Certain words and phrases are
defined when first used in this Agreement. In addition, the
following words and phrases when used herein, unless the context
clearly requires otherwise, shall have the following respective
meanings:
(a) Accrued Benefit. The sum of all Deferred Amounts
credited to Pankuch's Retirement Account and due and owing
to Pankuch or his beneficiaries pursuant to this Agreement,
together with Additions thereto calculated as set forth in
paragraph 3 hereof, minus any distributions hereunder.
(b) Affiliate. Any corporation, partnership, joint
venture, association, or similar organization or entity, the
employees of which would be treated as employed by the Bank
under Section 414(b) and 414(c) of the Code.
(c) Agreement. This Agreement, together with any and
all amendments or supplements thereto.
(d) Code. The Internal Revenue Code of 1986, 26
U.S.C. 101 et seq., as amended or as it may be amended from
time to time.
(e) Compensation. Total salary and commissions of
Pankuch paid or accrued by the Bank, exclusive of Accrued
Benefits, stock options, stock appreciation rights, and any
employer contributions or payments to any other trust, fund,
agreement or plan providing retirement, pension, profit
sharing, health, welfare, death, insurance or similar
benefits.
(f) Deferred Amount. A portion of the Compensation
otherwise payable to Pankuch, receipt of which Pankuch has
elected to defer under the provisions of paragraphs 2 and 4
hereof.
(g) Effective Date. The date of the execution of this
Agreement.
(h) Election of Deferral. A written notice filed by
Pankuch with the Payroll Department of the Bank in
substantially the form attached hereto as Exhibit "A,"
specifying the amount of Compensation to be deferred.
(i) Fiscal Year. The taxable year of the Bank.
(j) Normal Retirement Date. The date Pankuch attains
sixty-five (65) years of age.
(k) Notice of Discontinuance. A written notice filed
by Pankuch with the Payroll Department of the Bank in
substantially the form attached hereto as Exhibit "B,"
requesting discontinuance of the deferral of Pankuch's
Compensation.
(l) Retirement Account. Book entries maintained by
the Bank reflecting Deferred Amounts and Additions thereon;
provided, however, that the existence of such book entries
and the Retirement Account shall not create and shall not be
deemed to create a trust of any kind, or a fiduciary
relationship between the Bank and Pankuch, his designated
beneficiary, or other beneficiaries under this Agreement.
2. DEFERRED COMPENSATION. Commencing on the Effective
Date, and continuing through the date on which Pankuch's
employment terminates because of his death, normal retirement,
disability, or any other cause, Pankuch and the Bank agree that
Pankuch shall be entitled to elect to defer into his Retirement
Account up to the following maximum amounts of the Compensation
that Pankuch would otherwise be entitled to receive from the Bank
in each of the following Fiscal Year of the Bank:
<TABLE>
Amount Deferred
<S> <C>
1995 $10,000.00
1996 $11,000.00
1997 $12,100.00
1998 $13,310.00
1999 $14,641.00
2000 $16,105.00
2001 $17,716.00
2002 $19,487.00
2003 $21,436.00
2004 $23,579.00
</TABLE>
The contemplated Annual Deferral Sum shall be deferred in
substantially equal bi-weekly amounts during each Fiscal Year or
portion thereof during which this Agreement is in effect. The
amount of Compensation actually deferred in any Fiscal Year,
taking into account discontinuance of deferral pursuant to a
Notice of Discontinuance, termination of Pankuch's employment,
the death of Pankuch, or otherwise is hereinafter referred to as
the "Annual Deferred Amount." The portions of Pankuch's Annual
Deferred Amount deferred bi-weekly shall be credited to Pankuch's
Retirement Account bi-weekly, as Deferrals are accrued.
3. ADDITIONS TO DEFERRED AMOUNTS. The Bank hereby agrees
that it will credit Deferred Amounts in Pankuch's Retirement
Account with additions thereon ("Additions") from and after the
dates Deferred Amounts are credited to the Retirement Account,
subject to the limitations herein set forth. Additions to
Deferred Amounts, calculated at the rate of eight percent (8%)
per annum, compounded annually at the end of each Fiscal Year,
shall accrue commencing on the date the Retirement Account first
has a positive balance and shall continue until the first of the
following events to occur:
(a) The date that Death Benefits as described in
paragraph 7(b) hereof, Retirement Benefits, or Disability
Benefits, whichever applies, end hereunder; or
(b) The date on which Death Benefits as described in
paragraph 7(a) hereof commence; or
(c) The date on which a Termination Benefit or an
Acquisition Termination Benefit, as herein defined, is paid.
4. ELECTION TO DEFER COMPENSATION. Pankuch may elect an
Annual Deferral Sum hereunder by filing an Election of Deferral.
The initial Election of Deferral must be filed within thirty (30)
days of the Effective Date of this Agreement. Such initial
Election of Deferral, if any, shall be effective commencing with
the first day of the first month after it is filed. Thereafter,
an Election of Deferral must be filed at least thirty (30) days
prior to the beginning of the Fiscal Year to which it pertains
and shall be effective on the first day of the Fiscal Year
following the filing thereof.
5. TERMINATION OF ELECTION. Pankuch's initial Election of
Deferral shall continue in effect, pursuant to the terms of the
Election of Deferral, unless and until Pankuch files with the
Bank a Notice of Discontinuance or a subsequent Election of
Deferral specifying a different amount of deferral. Each
Election of Deferral filed subsequent to the initial Election of
Deferral shall similarly continue in effect until Pankuch files a
Notice of Discontinuance or a new Election of Deferral. Any new
Election of Deferral, to be effective, must be filed at least
thirty (30) days prior to the beginning of the Fiscal Year in
which deferral is sought. A Notice of Discontinuance shall be
effective if filed at least twenty (20) days prior to any
January 1st, April 1st, July 1st or October 1st. Such Notice of
Discontinuance shall be effective commencing with the
January 1st, April 1st, July 1st or October 1st following its
filing, whichever applies, and shall apply only with respect to
Pankuch's Compensation and bonuses attributable to services not
yet performed.
6. RETIREMENT BENEFITS.
(a) Retirement Benefit. The Bank agrees that, from
and after the retirement of Pankuch from the service of the
Bank upon reaching his Normal Retirement Date, the Bank
shall thereafter pay as a retirement benefit (herein
referred to as the "Retirement Benefit") to Pankuch
Pankuch's entire Accrued Benefit, payable in equal annual
installments, due on the 31st day of January of each year
commencing on the first such date following the Normal
Retirement Date, for a period of fifteen (15) years. The
amount of each annual installment shall be an amount which,
if paid annually over the remainder of the fifteen (15) year
payment term, would result in payment of the entire Accrued
Benefit, together with interest accrued at the rate of eight
(8%) percent per annum, in equal annual installments.
(b) Election of Benefits Upon Normal Retirement Date.
Pankuch shall have the option, upon attaining his Normal
Retirement Date, to elect to receive his Retirement Benefit,
notwithstanding his continued employment with the Bank after
he has attained his Normal Retirement Date. Pankuch's
election to receive his Retirement Benefit notwithstanding
his continued employment must be made in writing at least
ninety (90) days prior to his Normal Retirement Date. The
Retirement Benefit payable upon election pursuant to this
paragraph 6.b shall be the amount that would have been
payable had Pankuch retired from service with the Bank as of
his Normal Retirement Date. Any such election shall be
irrevocable and shall result in the termination of Pankuch's
right to any further deferrals hereunder.
7. DEATH BENEFITS.
(a) Death Benefit Prior to Commencement of Retirement
or Disability Benefits. In the event of Pankuch's death
while in the employment of Bank and prior to commencement of
Retirement Benefits or Disability Benefits, Bank shall pay
to Pankuch's designated beneficiary, in accordance with the
last such designation received by the Bank from Pankuch
prior to his death, a benefit in fifteen (15) annual
installments, each in the amount of Forty-Four Thousand Five
Hundred Sixty and 00/100 ($44,560.00). If no such
designation has been received by Bank from Pankuch prior to
his death, or if said payments are otherwise to be made as
provided herein, said payments shall be made to Pankuch's
then-living spouse, so long as she shall live, and
thereafter to such person or persons, including her estate,
as she may appoint under her Will, making specific reference
hereto; if Pankuch is not survived by a spouse, or if said
spouse shall be then deceased, having failed to so appoint,
then said payments shall be made to the then-living children
of Pankuch, if any, in equal shares, for their joint and
survivor lives; and if none, or after their respective joint
and survivor lives, any balance thereof in one lump sum to
the estate of Pankuch. Payments shall be due on January 31
of each year, commencing on the first such date occurring
after the death of Pankuch. To the extent that the Accrued
Benefit in Pankuch's Retirement Account exceeds the total of
payments required under this section, such excess sums shall
be forfeited.
(b) Death Benefit After Commencement of Benefits. In
the event of Pankuch's death after the commencement of
Normal Retirement Benefits, but prior to the completion of
all such payments due and owing hereunder, the Bank shall
continue to make such payments, in equal annual
installments, over the remainder of the period specified in
paragraph 6 hereof that would have been applicable to
Pankuch had he survived. Such continuing payments shall be
made to Pankuch's designated beneficiary, in accordance with
the last such designation received by the Bank from Pankuch
prior to his death. If no such designation has been
received by the Bank from Pankuch prior to his death or if
said payments are otherwise to be made as provided herein,
said payments shall be made to Pankuch's then living spouse,
so long as she shall live and thereafter to such person or
persons, including her estate, as she may appoint under her
Will, making specific reference hereto; if Pankuch is not
survived by a spouse or if she shall fail to so appoint,
then said payments shall be made to the then living children
of Pankuch, if any, in equal shares, for their joint and
survivor lives; and if none, or after their respective joint
and survivor lives, any balance thereof in one lump sum to
the estate of Pankuch. Such continuing payments shall be
payable on January 31 of each year, commencing on the first
such date occurring after the death of Pankuch.
8. DISABILITY BENEFIT. In the event that Pankuch is
determined to be Disabled, as defined in the Blue Ball National
Bank Long Term Disability Plan (which definition is incorporated
herein and made a part hereof), then the date of such
determination shall, for purposes of this Agreement, be deemed to
be Pankuch's Normal Retirement Date, and all benefits otherwise
payable to Pankuch following the Normal Retirement Date shall be
payable to Pankuch as a Disability Benefit.
9. TERMINATION BENEFIT. In the event of Pankuch's
termination of employment with the Bank before his Normal
Retirement Date for any reason, other than his death or
Disability (as herein defined) or the occurrence of any
Acquisition Termination (as herein defined), the Bank shall pay
to Pankuch, as compensation for services rendered prior to such
termination, a single sum equal to the total Deferred Amounts
hereunder, exclusive of Additions thereto (herein referred to as
the "Termination Benefit"). In the event of the payment of a
Termination Benefit, any and all Additions credited to Pankuch's
Retirement Account shall be forfeited to the Bank. The
Termination Benefit shall be payable on the first day of the
first month following the termination of Pankuch's employment
with the Bank.
10. ACQUISITION TERMINATION BENEFIT. In the event that
Bank or PennRock Financial Services Corp., of which Bank is a
wholly-owned subsidiary, should at any time prior to Pankuch's
Normal Retirement Date be acquired by any other entity, and in
the event that Pankuch's employment with Bank or its successor is
subsequently terminated involuntarily prior to Pankuch's Normal
Retirement Date, then such termination shall be deemed an
Acquisition Termination hereunder. In such event, Bank or its
successor shall pay to Pankuch, as compensation for services
rendered prior to such termination, a single sum equal to the
total Deferred Amounts hereunder, together with all Additions
thereto (the "Acquisition Termination Benefit"). The Acquisition
Termination Benefit shall be payable on the first day of the
first month following the termination of Pankuch's employment
with the Bank or its successor.
11. HARDSHIP BENEFIT. In the event Pankuch suffers a
financial hardship (as hereinafter defined), the Bank may, if it
deems advisable in its sole and absolute discretion, distribute
to or utilize on behalf of Pankuch as a hardship benefit (the
"Hardship Benefit") any portion of Pankuch's Retirement Account
up to, but not in excess of, the Termination Benefit to which
Pankuch would have been entitled as of the date a Hardship
Benefit is distributed or utilized. Any Hardship Benefit shall
be distributed or utilized at such times as the Bank shall
determine, and the Accrued Benefit in Pankuch's Benefit Account
shall be reduced by the amount so distributed and/or utilized.
Financial Hardship shall mean dire financial need of Pankuch
caused by temporary or permanent disability or incapacity,
medical or educational expenses, the purchase or maintenance of a
residence, or a material reduction in family income.
12. OFFSET FOR OBLIGATIONS TO BANK. If, at such time as
Pankuch becomes entitled to benefit payments hereunder, Pankuch
has any debt, obligation or other liability representing an
amount owing to the Bank or an Affiliate of the Bank, and if such
debt, obligation, or other liability is due and owing at the time
benefit payments are payable hereunder, the Bank may offset the
amount owing it or an Affiliate against the amount of benefits
otherwise distributable hereunder.
13. BENEFICIARY DESIGNATION. Pankuch shall have the right,
at any time, to submit in substantially the form attached hereto
as Exhibit "C," a written designation of primary and secondary
beneficiaries to whom payment under this Agreement shall be made
in the event of his death prior to complete distribution of the
benefits due and payable under the Agreement. Each beneficiary
designation shall become effective only when receipt thereof is
acknowledged in writing by the Bank.
14. NO TRUST CREATED. Nothing created in this Agreement,
and no action taken pursuant to its provisions by either party
hereto shall create, or be construed to create, a trust of any
kind, or a fiduciary relationship between the Bank and Pankuch,
his designated beneficiary, other beneficiaries of Pankuch or any
other person.
15. BENEFITS PAYABLE ONLY FROM GENERAL CORPORATE ASSETS;
UNSECURED GENERAL CREDITOR STATUS OF PANKUCH.
(a) The payments to Pankuch or his designated
beneficiary or any other beneficiary hereunder shall be made
from assets which shall continue, for all purposes, to be a
part of the general, unrestricted assets of the Bank; no
person shall have any interest in any such assets by virtue
of the provisions of this Agreement. The Bank's obligation
hereunder shall be an unfunded and unsecured promise to pay
money in the future. To the extent that any person acquires
a right to receive payments from the Bank under the
provisions hereof, such right shall be no greater than the
right of any unsecured creditor of the Bank, no such person
shall have nor require any legal or equitable right,
interest or claim in or to any property or assets of the
Bank.
(b) This promise of future payment by Bank to Pankuch
shall be unfunded and unsecured and shall not be construed
as a transfer of any present right to receive payment.
Pankuch shall derive no present economic benefit from this
Agreement. In the event that, in its discretion, the Bank
purchases an insurance policy or policies insuring the life
of Pankuch (or any other property), to allow the Bank to
recover the cost of providing benefits, in whole or in part,
hereunder, neither Pankuch, his designated beneficiary nor
any other beneficiary shall have any rights whatsoever
therein or in the proceeds therefrom. The Bank shall be the
sole owner and beneficiary of any such insurance policy and
shall possess and may exercise all incidents of ownership
therein. No such policy, policies or other property shall
be held in any trust for Pankuch or any other person nor as
collateral security for any obligation of the Bank
hereunder.
16. NO CONTRACT OF EMPLOYMENT. Nothing contained herein
shall be construed to be a contract of employment for any term of
years, nor as conferring upon Pankuch the right to continue to be
employed by the Bank in his present capacity, or in any capacity.
It is expressly understood by the parties hereto that this
Agreement relates to the payment of deferred compensation for
Pankuch's services, payable after termination of his employment
with the Bank, and is not intended to be an employment contract.
17. BENEFITS NOT TRANSFERABLE. Neither Pankuch, his
designated beneficiary, nor any other beneficiary under this
Agreement shall have any power or right to transfer, assign,
anticipate, hypothecate or otherwise encumber any part or all of
the amounts payable hereunder. No such amounts shall be subject
to seizure by any creditor of any such beneficiary, by a
proceeding at law or in equity, nor shall such amounts be
transferable by operation of law in the event of bankruptcy,
insolvency or death of Pankuch, his designated beneficiary, or
any other beneficiary hereunder. Any such attempted assignment
or transfer shall be void.
18. DETERMINATION OF BENEFITS.
(a) Claim.
A person who believes that he is being denied a benefit
to which he is entitled under the Plan (hereinafter referred
to as a "Claimant") may file a written request for such
benefit with the Bank, setting forth his claim. The request
must be addressed to any Senior Vice President of the Bank
at its then principal place of business.
(b) Claim Decision.
Upon receipt of a claim, the Bank shall advise the
Claimant that a reply will be forthcoming within ninety (90)
days and shall, in fact, deliver such reply within such
period. The Bank may, however, extend the reply period for
an additional ninety (90) days for reasonable cause.
If the claim is denied in whole or in part, the Bank
shall adopt a written opinion, using language calculated to
be understood by the Claimant, setting forth:
(i) The specific reason or reasons for such
denial;
(ii) The specific reference to pertinent
provisions of this Agreement on which such denial is based;
(iii) A description of any additional material or
information necessary for the Claimant to perfect his claim
and an explanation why such material or such information is
necessary;
(iv) Appropriate information as to the steps to
be taken if the Claimant wishes to submit the claim for
review; and
(v) The time limits for requesting a review under
subsection c. and for review under subsection d. hereof.
(c) Request for Review.
Within sixty (60) days after the receipt by the
Claimant of the written opinion described above, the
Claimant may request in writing that the Secretary of the
Bank review the determination of the Bank. Such request
must be addressed to the Secretary of the Bank, at its then
principal place of business. The Claimant or his duly
authorized representative may, but need not, review the
pertinent documents and submit issues and comments in
writing for consideration by the Bank. If the Claimant does
not request a review of the Bank's determination by the
Secretary of the Bank within such sixty (60) day period, he
shall be barred and estopped from challenging the Bank's
determination.
(d) Review of Decision.
Within sixty (60) days after the Secretary's receipt of
a request for review, he will review the Bank's
determination. After considering all materials presented by
the Claimant, the Secretary will render a written opinion,
written in a manner calculated to be understood by the
Claimant, setting forth the specific reasons for the
decision and containing specific references to the pertinent
provisions of this Agreement on which the decision is based.
If special circumstances require that the sixty (60) day
time period be extended, the Secretary will so notify the
Claimant and will render the decision as soon as possible,
but no later than one hundred twenty (120) days after
receipt of the request for review.
19. AMENDMENT. This Agreement may not be amended, altered
or modified, except by a written instrument signed by the parties
hereto, or their respective successors, and may not be otherwise
terminated except as provided herein.
20. INUREMENT. This Agreement shall be binding upon and
inure to the benefit of the Bank and its successors and assigns,
and Pankuch, his successors, heirs, executors, administrators and
beneficiaries.
21. NOTICE. Any notice, consent or demand required or
permitted to be given under the provisions of this Agreement
shall be in writing, and shall be signed by the party giving or
making the same. If such notice, consent or demand is mailed to
a party hereto, it shall be sent by United States certified mail,
postage prepaid, addressed to such party's last known address as
shown on the records of the Bank. The date of such mailing shall
be deemed the date of notice, consent or demand. Either party
may change the address to which notice is to be sent by giving
notice of the change of address in the manner aforesaid.
22. GOVERNING LAW. This Agreement, and the rights of the
parties hereunder, shall be governed by and construed in
accordance with the laws of the United States of America and of
the Commonwealth of Pennsylvania.
IN WHEREOF, the parties have executed this Agreement, in
duplicate, as of the day and year first above written.
ATTEST: BLUE BALL NATIONAL BANK
___________________________ By:______________________________
ROBERT K. WEAVER, Secretary JOSEPH SPADA, SR.,
Vice President
____________________________(SEAL)
MELVIN PANKUCH Exhibit A
ELECTION OF DEFERRAL
TO: BLUE BALL NATIONAL BANK
Attention: Payroll Department
I hereby elect to defer a portion of my annual compensation
under the following Schedule:
<TABLE>
<CAPTION>
Amount Deferred
<S> <C>
1995 $10,000.00
1996 $11,000.00
1997 $12,100.00
1998 $13,310.00
1999 $14,641.00
2000 $16,105.00
2001 $17,716.00
2002 $19,487.00
2003 $21,436.00
2004 $23,579.00
</TABLE>
I further authorize Blue Ball National Bank to credit all amounts
so deferred to the Retirement Account established pursuant to
that certain Melvin Pankuch Deferred Compensation Plan Agreement,
by and between the undersigned and Blue Ball National Bank, dated
the _____ day of _____________, 1995.
I understand that this authorization shall remain in effect
until revoked or amended. I understand that I may revoke
deferral upon at least 20 days' prior written notice, effective
on any January 1st, April 1st, July 1st or October 1st. I
further understand that I may file an amended Election of
Deferral at least 30 days prior to the beginning of a Fiscal Year
of the Bank, effective on the first day of such Fiscal Year.
Date: _________________ ______________________________
Melvin Pankuch Exhibit B
NOTICE OF DISCONTINUANCE
TO: BLUE BALL NATIONAL BANK
Attention: Payroll Department
I hereby give notice of my election to discontinue deferral
of my Compensation under that certain Melvin Pankuch Deferred
Compensation Plan Agreement, by and between Blue Ball National
Bank and the undersigned, dated the _____ day of ______________,
1995. This notice is submitted at least twenty (20) days prior
to January 1st, April 1st, July 1st, or October 1st, and shall be
effective as of such date, as specified below.
Discontinue deferral as of [ ] January 1st, 19__
(mark one) [ ] April 1st, 19__
[ ] July 1st, 19__
[ ] October 1st, 19__
____________________________
Melvin Pankuch
Dated:______________________
Exhibit C
DESIGNATION OF BENEFICIARY
UNDER THE
MELVIN PANKUCH
DEFERRED COMPENSATION PLAN AGREEMENT
I. Employee: Melvin Pankuch
II. The above-named Employee's Revocable Beneficiary under the
Melvin Pankuch Deferred Compensation Plan Agreement is set
forth below (CHECK BOX TO LEFT OF APPLICABLE NUMBERED
SUBPARAGRAPH AND FILL IN THE BLANK(S); CHECK AND COMPLETE
ONLY ONE NUMBERED SUBPARAGRAPH):
[x] 1. Employee's spouse, Ruth A. Pankuch, if living at the
Employee's death; if not, such of the children of the
marriage of the Employee and said spouse as shall be
then living, equally, or the issue of any deceased
child per stirpes.
[ ] 2. Employee's spouse, _______________________, if living
at the Employee's death, if not, such of the Employee's
children as shall be then living, equally.
[ ] 3. Such of the following children of the Employee as shall
be living at the Employee's death, equally:
_________________________, __________________________,
_____________________________________________________.
[ ] If this box is checked, and if paragraph 1, 2 or 3 is
checked, then the living children of any deceased child
designated shall take the share, divided equally, which
such child would have taken, if living.
[ ] 4. Employee's ______________________, if living at the
Employee's death, if not, Employee's ________________,
if then living, if not, Employee's ________________, if
then living.
(Insert relationship to Employee and name).
[ ] 5. Such of the following as shall be living at the
Employee's death, equally: Employee's _______________
______________________________________________________.
(Insert relationship to Employee and name).
[ ] 6. Employee's _________________________, if living at the
Employee's death.
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). ARMCO is incorporated under the laws of
Pennsylvania for the purpose of originating and selling residential mortgage
loans in the secondary market. On September 30, 1997, ARMCO's Board of Directors
adopted a formal liquidation plan that called for operations of ARMCO to be
finalized by December 31, 1997.
<PAGE>
EXHIBIT 23
PENNROCK FINANCIAL SERVICES CORP.
(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 30, 1998 on the consolidated financial statements of PennRock
Financial Services Corp. and subsidiaries which expresses an unqualified
opinion and includes an explanatory paragraph related to the Company
discontinuing the operations of Blue Ball National Bank's mortgage subsidiary,
Atlantic Regional Mortgage Corporation, appearing in and incorporated
by reference in this Annual Report on Form 10-K.
/s/ SIMON LEVER & COMPANY
Lancaster, Pennsylvania
March 24, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 21,705
<INT-BEARING-DEPOSITS> 1,054
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 224,408
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 382,359
<ALLOWANCE> 4,247
<TOTAL-ASSETS> 649,089
<DEPOSITS> 492,795
<SHORT-TERM> 12,832
<LIABILITIES-OTHER> 5,195
<LONG-TERM> 77,000
0
0
<COMMON> 15,193
<OTHER-SE> 46,074
<TOTAL-LIABILITIES-AND-EQUITY> 649,089
<INTEREST-LOAN> 32,218
<INTEREST-INVEST> 11,709
<INTEREST-OTHER> 1,691
<INTEREST-TOTAL> 45,618
<INTEREST-DEPOSIT> 17,632
<INTEREST-EXPENSE> 21,878
<INTEREST-INCOME-NET> 23,740
<LOAN-LOSSES> 258
<SECURITIES-GAINS> 1,493
<EXPENSE-OTHER> 16,665
<INCOME-PRETAX> 11,922
<INCOME-PRE-EXTRAORDINARY> 9,315
<EXTRAORDINARY> 1,555
<CHANGES> 0
<NET-INCOME> 7,760
<EPS-PRIMARY> 1.28
<EPS-DILUTED> 1.28
<YIELD-ACTUAL> 4.48
<LOANS-NON> 288
<LOANS-PAST> 1,853
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 10,700
<ALLOWANCE-OPEN> 4,049
<CHARGE-OFFS> 305
<RECOVERIES> 165
<ALLOWANCE-CLOSE> 4,247
<ALLOWANCE-DOMESTIC> 4,247
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 994
</TABLE>
