SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------------------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1999 Commission File Number 0-15040
------------------- -------
PennRock Financial Services Corp.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2400021
------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1060 Main St.
Blue Ball, Pennsylvania 17506
--------------------------------------- ----------
(Address of principal executive offices) (Zip code)
(717) 354-4541
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Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes /X/ No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Class Outstanding at October 29, 1999
------------------------------ --------------------------------
Common Stock ($2.50 par value) 5,946,255 Shares
<PAGE> 2
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
--------------------------------------------------
FORM 10-Q
---------
For the Quarter Ended September 30, 1999
Contents
--------
PART I. FINANCIAL INFORMATION
- -----------------------------
Item 1. Financial Statements
Consolidated balance sheets - September 30, 1999,
December 31, 1998 and September 30, 1998.
Consolidated statements of income - Three months and nine months ended
September 30, 1999 and 1998.
Consolidated statements of comprehensive income - Three months and
nine months ended September 30, 1999 and 1998.
Consolidated statements of cash flows - Nine months ended
September 30, 1999 and 1998.
Notes to consolidated financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II. OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
- ----------
<PAGE> 3
PART I. FINANCIAL INFORMATION
For the Quarter Ended September 30, 1999
Item 1. Financial Statements
<TABLE>
<CAPTION>
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31, September 30,
(Amounts in thousands) 1999 1998 1998
------------ ----------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 23,631 $ 19,747 $ 17,037
Short-term investments 2,345 1,166 2,028
Mortgages held for sale 414 5,892 551
Securities available for sale 309,207 273,722 260,140
Loans:
Loans, net of unearned income 439,766 407,787 399,192
Allowance for loan losses (5,310) (4,897) (4,413)
--------- --------- ---------
Net loans 434,456 402,890 394,779
Bank premises and equipment 13,399 13,383 12,878
Accrued interest receivable 5,540 6,142 5,175
Other assets 27,155 7,589 7,359
--------- --------- ---------
Total assets $816,147 $730,531 $699,947
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 85,885 $ 88,061 $ 74,187
Interest bearing 521,080 461,985 415,154
--------- --------- ---------
Total deposits 606,965 550,046 489,341
Short-term borrowings 51,089 13,780 42,762
Long-term debt 90,000 90,700 90,700
Accrued interest payable 3,550 3,235 2,927
Other liabilities 4,320 5,859 6,588
--------- --------- ---------
Total liabilities 755,924 663,620 632,318
Stockholders' Equity:
Common stock, par value $2.50 per share;
authorized - 20,000,000 shares;
issued - 6,077,614 and 6,077,299
of which 146,176, 70,454, and
36,865 shares are held as
treasury stock, respectively 15,194 15,193 15,193
Surplus 11,114 11,106 11,158
Accumulated other comprehensive
income (loss), net of tax (7,806) 2,602 3,591
Retained earnings 45,018 39,694 38,641
Less treasury stock, at cost (3,297) (1,684) (954)
--------- --------- ---------
Total stockholders' equity 60,223 66,911 67,629
--------- --------- ---------
Total liabilities and
stockholders' equity $816,147 $730,531 $699,947
========= ========= =========
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Nine Months Ended
(Amounts in thousands) September 30, September 30,
-------------------- ---------------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $9,223 $8,853 $26,690 $26,238
Securities:
Taxable 3,667 2,124 9,013 6,683
Tax-exempt 1,152 1,645 3,883 4,445
Mortgages held for sale 35 16 196 85
Other 16 36 171 122
------- ------- ------- -------
Total interest income 14,093 12,674 39,953 37,573
Interest expense:
Deposits 5,567 4,539 15,586 13,513
Short-term borrowings 451 575 810 1,837
Long-term debt 1,291 1,300 3,830 3,608
------- ------- ------- -------
Total interest expense 7,309 6,414 20,226 18,958
------- ------- ------- -------
Net interest income 6,784 6,260 19,727 18,615
Provision for loan losses 277 311 723 673
------- ------- ------- -------
Net interest income after
provision for loan losses 6,507 5,949 19,004 17,942
Other income:
Service charges on deposit
accounts 434 375 1,193 1,087
Other service charges and fees 65 66 192 195
Fiduciary activities 299 230 896 693
Security gains, net 186 283 1,163 931
Mortgage banking (51) 176 183 514
Other 403 141 923 413
------- ------- ------- -------
Total other income 1,336 1,271 4,550 3,833
------- ------- ------- -------
Net interest and other income 7,843 7,220 23,554 21,775
------- ------- ------- -------
Non-interest expenses:
Salaries and benefits 2,836 2,512 8,196 7,301
Occupancy, net 327 336 940 936
Equipment expenses 264 316 917 948
Other 1,217 1,082 3,362 3,393
------- ------- ------- -------
Total non-interest expense 4,644 4,246 13,415 12,578
------- ------- ------- -------
Income before income taxes 3,199 2,974 10,139 9,197
Income taxes 644 661 2,044 1,896
------- ------- ------- -------
Net Income $2,555 $2,313 $8,095 $7,301
======= ======= ======= =======
Earnings per share $ .43 $ .38 $ 1.35 $ 1.20
======= ======= ======= =======
Weighted average shares
outstanding 5,988,347 6,067,128 5,988,347 6,067,128
========= ========= ========= =========
</TABLE>
Basic earnings per share and diluted earnings per share are the same for
all periods presented.
<PAGE> 5
<TABLE>
<CAPTION>
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended Nine Months Ended
(Amounts in thousands) September 30, September 30,
------------------ -------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income $2,555 $2,313 $8,095 $7,301
Other comprehensive income,
net of tax:
Unrealized gains on securities
available for sale:
Gain (loss) arising during the
period, net of tax (4,047) 2,585 (10,013) 2,749
Reclassification adjustment
for gains included in net
income, net of tax (63) (187) (395) (615)
------- ------- ------- -------
Other comprehensive income (loss) (4,110) 2,398 (10,408) 2,134
------- ------- ------- -------
Comprehensive income (loss) ($1,555) $4,711 ($2,313) $9,435
======= ======= ======= =======
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended
September 30,
(Amounts in thousands) -----------------------
1999 1998
--------- ---------
<S> <C> <C>
Net cash provided by (used in) operations ($ 1,380) $ 9,379
Investing activities:
Proceeds from sales of securities available
for sale 64,870 71,578
Purchases of securities available for sale (153,234) (158,781)
Maturities of securities available for sale 38,855 56,091
Net increase in loans (32,290) (17,341)
Purchases of premises and equipment (913) (1,102)
Proceeds from sales of premises and equipment 7
-------- --------
Net cash used in investing activities (82,712) (49,548)
Financing activities:
Net decrease in non-interest bearing deposits (2,176) (2,919)
Net increase (decrease) in interest
bearing deposits 59,095 (534)
Net increase in short-term borrowings 37,309 29,930
Increase (decrease) in long-term debt (700) 13,700
Issuance of treasury stock 1,129 901
Acquisition of treasury stock (2,687) (1,610)
Cash dividends (2,816) (2,363)
-------- --------
Net cash provided by financing activities 89,154 37,105
-------- --------
Increase (decrease) in cash and cash
equivalents 5,062 (3,064)
Cash and cash equivalents,
beginning of year 20,914 22,129
-------- --------
Cash and cash equivalents, end of period $25,976 $19,065
======== ========
</TABLE>
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 1999
NOTE 1. ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts of
PennRock Financial Services Corp. and its subsidiaries. All material
intercompany balances and transactions have been eliminated in consolidation.
PennRock Financial Services Corp. (PennRock or the Company) is a bank holding
company incorporated under the laws of Pennsylvania in 1986. Blue Ball
National Bank (the Bank) is a wholly owned subsidiary of PennRock which
provides a broad range of banking, trust and other financial services to
consumers, small businesses and corporations in south-central and
southeastern Pennsylvania. The Bank's mortgage banking subsidiary, Atlantic
Regional Mortgage Corporation (ARMCO) was formed in 1996 to originate and
sell first mortgage loans of various types. Operations of ARMCO were
terminated during 1997. PennRock Insurance Group Inc., a wholly owned
subsidiary of the Bank, began operations in the first quarter of 1999 to
offer and sell annuity products.
The information contained in the financial statements is unaudited. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation of the results of
interim periods have been made. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. Operating results for the nine
months ended September 30, 1999 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1999.
The accounting policies of PennRock Financial Services Corp. and
Subsidiaries, as applied in the consolidated interim financial statements
presented, are substantially the same as those followed on an annual basis as
presented in the 1998 Annual Report to shareholders.
<PAGE> 8
NOTE 2. COMMITMENTS AND CONTINGENT LIABILITIES
The financial statements do not reflect various commitments and contingent
liabilities, such as commitments to extend credit, letters of credit,
guarantees, and liability for assets held in Trust, which arise in the normal
course of business. Commitments under outstanding letters of credit amounted
to $18.6 million and commitments to extend credit totaled $113.4 million at
September 30, 1999. Management does not anticipate any significant loss as a
result of these transactions.
NOTE 3. NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (_SFAS 133_), _Accounting for
Derivative Instruments and Hedging Activities._ The provisions of this
statement require that derivative instruments be carried at fair value on the
balance sheet. The statement continues to allow derivative instruments to be
used to hedge various risks and sets forth specific criteria to be used to
determine when hedge accounting can be used. The statement also provides for
offsetting changes in fair value or cash flows of both the derivative and the
hedged asset or liability to be recognized in earnings in the same period;
however, any changes in fair value or cash flow that represent the
ineffective portion of a hedge are required to be recognized in earnings and
cannot be deferred. For derivative instruments not accounted for as hedges,
changes in fair value are required to be recognized in earnings. The
provisions of this statement become effective for quarterly and annual
reporting beginning January 1, 2001. PennRock has no plans to adopt the
provisions of SFAS 133 prior to the effective date. The impact of adopting
the provisions of this statement on PennRock's financial position, results of
operations and cash flows subsequent to the effective date is not currently
estimable and will depend on the financial position of the Company and the
nature and purpose of the derivative instruments in use by management at that
time.
<PAGE> 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This section presents management's discussion and analysis of the financial
condition and results of operations of PennRock Financial Services Corp.
(PennRock or the Company) and subsidiaries, Blue Ball National Bank (the
Bank) and its insurance subsidiary, PennRock Insurance Group Inc. (the
Insurance Group). This discussion should be read in conjunction with the
financial statements which appear elsewhere in this report.
YEAR 2000 READINESS DISCLOSURE
The Company, like all companies that use computer technology is facing
significant challenges associated with the inability of computer systems to
recognize the year 2000. Many existing computer programs and systems use
only two digits to identify the calendar year in the date field. These
programs and systems were designed and developed without considering the
impact on the upcoming change in the century and, as a result, would read the
year 00 as 1900 rather than 2000. This could result in a system failure or
miscalculations causing disruptions of operations including the inability to
process transactions or engage in normal business activities. Software, data
processing hardware, and other equipment both within and outside the
Company's direct control are likely to be affected. In addition, under
certain circumstances, failure to adequately address the year 2000 issue
could adversely affect the viability of the Company's suppliers and creditors
and the creditworthiness of its borrowers. Therefore, if not adequately
addressed, the Year 2000 Problem could result in a significant adverse impact
on the Company's products, services and competitive condition.
In 1997, management formed a Year 2000 Project Committee (the Committee) to
establish and implement a Year 2000 Plan (the Plan) to mitigate exposure to
the Year 2000 issues. Goals of the Plan included identifying risks, testing
software, hardware and equipment used by the Company for Year 2000 readiness,
establishing contingency plans for non-compliant systems, vendors and other
service providers, implementing changes to achieve Year 2000 readiness and
verifying that systems are Year 2000 compliant. The Committee reports to the
Board of Directors on a monthly basis.
The Committee designed the Plan to comply with the requirements and deadlines
established by the Comptroller of the Currency (the OCC). The OCC has
performed Year 2000 examinations of the Plan and the Committee's progress in
implementing the plan. However, federal regulations prevent the disclosure
of the results of such examinations nor do they represent approval or
certification of individual plans or Year 2000 compliance.
<PAGE> 10
The following is a description of the Plans phases, degree of completion and
deadlines:
<TABLE>
<CAPTION>
Percentage Date
Complete Completed
---------- -----------
<S> <C> <C>
Awareness phase:
Establish Year 2000 Project Committee
establish Year 2000 plan 100% September
1997
Assessment phase:
Identify all software, hardware, environmental
and other systems, vendors and major business
customers that could potentially be impacted
by the Year 2000 problem
Establish priorities, time frames and resource
requirements
Establish contingency plans 100% September
1998
Renovation phase:
Complete all mission-critical software, hardware
or systems upgrades or replacements
Monitor vendor and outside service provider
progress toward Year 2000 readiness 100% December
1998
Validation phase:
Test all hardware, mission-critical software
and interfaces between systems and to
outside service providers 100% March
1999
Implementation phase:
Have all systems tested for Year 2000 readiness
or activate contingency plans for failed
systems or processes 100% June
1999
</TABLE>
As of the end of the second quarter of 1999, the Committee has met all of its
goals.
<PAGE> 11
Because of the exposure to the operations of the Company from the failure of
large customers negatively impacted by the 2000 problem, the Committee also
implemented a plan to assess the readiness of the Company's largest business
loan and deposit customers. A questionnaire was prepared and completed for
existing large business customers. To date, all existing large business
customers have been contacted. For all new business customers, we have
amended our loan documents to include a statement of Year 2000 compliance by
the business customer.
The Committee has also opened communications with other significant third
parties in addition to large business customers. These third parities
include vendors, utilities, correspondent financial institutions and
governmental agencies. The Committee wanted to determine the extent to which
these third parties are vulnerable to failures to remediate their own
potential Year 2000 problems. Our plans include tasks to monitor Year 2000
remediation progress for third parties throughout 1999 and to develop
contingency plans for threatened failures. Despite ongoing monitoring and
communications with these third parties, we do not have sufficient
information to estimate the likelihood of significant disruptions
attributable to such parties. Failure of a third party to fully address its
Year 2000 issues could have an adverse effect on the business, operations and
financial condition of the Company.
Although computer failure by third parties could disrupt the Company's
operations, the severity would depend on the nature and duration of the
failure. The most serious effect on the operations of the Company would
result if basic services provided by correspondent financial institutions and
governmental agencies were disrupted. Computer failures by correspondent
financial institutions and governmental agencies could affect the Company's
ability to send or receive checks, process automatic teller machine
transactions, access funding sources, or process outgoing or incoming wire
and other electronic transfers. Potential disruptions to telecommunications
and electric power in connection with Year 2000 issues could result in
interference with the Company's normal operations. We cannot estimate the
likelihood, extent, or costs associated with such potential disruptions.
While the Plan includes tasks to assess, remediate and test the Company's
systems to address Year 2000 processing issues, the Plan also contains tasks
for developing contingency plans. These contingency plans are intended to
provide alternative processes and actions in the event of systems
malfunctions or failures due to Year 2000 issues. Business resumption
contingency plans address the actions that would be taken if key business
processes could not be performed in the normal manner due to Year 2000
related system or third party failures. The Committee has developed business
resumption contingency plans for each key business process. We completed the
testing of the viability of the contingency plans by the end of the second
quarter of 1999.
<PAGE> 12
Because the Company does not write any of the software used in any of its
high or medium priority processes, and because all vendors of software and
hardware used by the Company have provided Year 2000 compliant upgrades, the
costs that have been or are expected to be incurred to achieve Year 2000
readiness are not significant. To date, the Company has incurred
approximately $150,000 in costs to upgrade existing systems of which
approximately $100,000 was spent in 1999.
We believe that we are taking reasonable steps to address and remediate Year
2000 issues especially with respect to mission-critical systems. However, we
are not able to predict the effects of public reaction on the Company's own
operations, the financial markets or the worldwide economy. Because of this
uncertainty, we can make no representation that all of our systems and
especially those of significant third parties will be Year 2000 compliant or
that the Company will not be adversely affected by Year 2000 issues.
FORWARD LOOKING STATEMENTS
In our this report, we have included certain forward looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products and similar matters. The
Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward looking statements. In order to comply with the terms of the safe
harbor, we must inform you that a variety of factors could cause the
Company's actual results and experiences to differ materially from the
anticipated results or other expectations expressed in these forward looking
statements. Our ability to predict the results or the effect of future plans
and strategies is inherently uncertain. Factors that could affect future
results include changes in market interest rates, local and national economic
trends and conditions, competition for products and services, changes in
customer preferences, legislative and regulatory changes, delinquency rates
on loans, changes in accounting principles, policies or guidelines, or the
failure of major customers, vendors or suppliers. You should consider these
factors in evaluating any forward looking statements and not place undue
reliance on such statements. We are not obligated to publicly update any
forward looking statements we may make in this report to reflect the impact
of subsequent events.
<PAGE> 13
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Total assets of PennRock increased $85.6 million or 11.7% since the end of
1998 and by $116.2 million or 16.6% over September 30, 1998. The increases
in assets were reflected in increases in securities available for sale and
loans outstanding and were funded primarily through growth of interest
bearing deposits.
Net income for the current quarter was $2.6 million or $.43 per share
compared with $2.3 million or $.38 per share for the third quarter of 1998,
an increase of $242,000 or 10.5%. Dividends paid in the third quarter of
1999 totaled $891,000 or $.15 per share and $787,000 or $.13 per share for
the third quarter of 1998.
For the first nine months of 1999, net income totaled $8.1 million or $1.35
per share compared with $7.3 million or $1.20 per share for the first nine
months of 1998. Net interest income increased $1.1 million from the first
nine months of 1998 while non-interest income excluding security gains
increased $485,000 and non-interest expenses increased $837,000. Dividends
of $2.7 million or $.45 per share in the first three quarters of 1999
compared with $2.4 million or $.39 in 1998. The dividend payout ratio was
33% in 1999 and 32% in 1998.
NET INTEREST INCOME
Net interest income is the product of the volume of average earning assets
and the average rates earned on them, less the volume of average interest
bearing liabilities and the average rates paid on them. The amount of net
interest income is affected by changes in interest rates, volumes and the mix
of earning assets and paying liabilities. For analytical purposes, net
interest income is adjusted to a taxable equivalent basis. This adjustment
allows for a more accurate comparison among taxable and tax-exempt assets by
increasing tax-exempt income by an amount equivalent to the federal income
tax which would have been paid if this income were taxable at the statutory
rate of 34%.
Table 1 presents net interest income on a fully taxable equivalent basis for
the third quarter and first nine months of 1999 and 1998. For the third
quarter of 1998, net interest income on a fully taxable equivalent basis
totaled $7.1 million, an increase of $1.1 million or 19.1% from $5.9 million
earned for the same period of 1997. For the first nine months of 1998, net
interest income on a fully taxable equivalent basis totaled $20.8 million, an
increase of $2.5 million or 13.5% from $18.4 million earned for the first
nine months of 1997.
<PAGE> 14
<TABLE>
<CAPTION>
TABLE 1 - NET INTEREST INCOME
Three Months Ended Nine Months Ended
(Amounts in thousands) September 30, September 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total interest income $14,093 $12,674 $39,573 $37,573
Total interest expense 7,309 6,413 20,226 18,958
------- ------- -------- --------
Net interest income 6,784 6,261 19,727 16,615
Tax equivalent adjustment 590 817 1,965 2,223
------- ------- -------- --------
Net interest income
(fully taxable equivalent) $ 7,374 $ 7,078 $21,692 $20,838
======= ======= ======== ========
</TABLE>
Table 2 presents the average balances, taxable equivalent interest income and
expense and rates for PennRock's assets and liabilities for the three and
nine months ended September 30, 1999 and 1998. For the third quarter and
first nine months of 1999, net interest income increased due to increases in
volumes while the interest spread and margin decreased over the comparable
period last year.
<PAGE> 15
<TABLE>
<CAPTION>
TABLE 2 - AVERAGE BALANCES, RATES, AND INTEREST INCOME AND EXPENSE
Three Months Ended September 30,
(Amounts in thousands) ---------------------------------------------------
1999 1998
-------------------------- ------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
-------- -------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Short-term investments $ 776 $ 16 8.18% $ 2,312 $ 36 6.18%
Mortgages held for sale 1,395 35 9.95% 698 16 9.09%
Securities available for sale 303,029 5,349 7.00% 248,329 4,526 7.23%
Loans:
Mortgage 254,393 5,255 8.20% 225,511 5,015 8.82%
Commercial 104,323 2,320 8.82% 98,738 2,294 9.22%
Consumer 77,278 1,708 8.77% 70,755 1,605 9.00%
-------- ------- -------- -------
Total loans 435,994 9,283 8.45% 395,004 8,914 8.95%
-------- ------- -------- -------
Total earning assets 741,194 14,683 7.86% 646,343 13,491 8.28%
Other assets 58,937 ------- 43,103 -------
-------- --------
$800,131 $689,446
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing deposits:
Demand $150,494 1,407 3.71% $ 89,726 709 3.13%
Savings 59,096 294 1.97% 56,198 314 2.22%
Time 305,029 3,866 5.01% 262,504 3,516 5.31%
-------- ------- -------- -------
Total interest bearing deposits 515,467 5,567 4.28% 408,428 4,539 4.41%
Short-term borrowings 36,501 451 4.90% 41,501 575 5.50%
Long-term debt 90,000 1,291 5.69% 90,700 1,299 5.68%
-------- ------- -------- -------
642,068 7,309 4.52% 540,629 6,413 4.71%
Non-interest bearing deposits 84,539 ------- 75,011 -------
Other liabilities 9,333 8,717
Stockholders' equity 64,191 65,089
-------- -------
Total liabilities and stockholders'
equity $800,131 $689,446
======== ========
Net interest income $ 7,374 $ 7,078
======= =======
Interest rate spread 3.34% 3.57%
====== ======
Net interest margin 3.95% 4.34%
====== ======
</TABLE>
<PAGE> 16
<TABLE>
<CAPTION>
Nine Months Ended September 30,
(Amounts in thousands) -----------------------------------------------------------
1999 1998
---------------------------------- ------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
-------- -------- ------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets
Short-term investments $ 3,549 $ 171 6.44% $ 2,578 $ 122 6.33%
Mortgages held for sale 4,304 196 6.09% 1,377 85 8.25%
Securities available for sale 284,763 14,682 6.89% 243,433 13,174 7.24%
Loans:
Mortgage 242,685 15,093 8.32% 223,749 14,859 8.88%
Commercial 104,431 6,772 8.67% 102,073 7,023 9.20%
Consumer 75,409 5,004 8.87% 66,952 4,534 9.05%
-------- ------- -------- -------
Total loans 422,525 26,869 8.50% 392,774 26,416 8.99%
-------- ------- -------- -------
Total earning assets 715,141 41,918 7.84% 640,162 39,796 8.31%
Other assets 47,641 ------- 40,331 -------
-------- --------
$762,782 $680,493
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing deposits:
Demand $138,332 3,621 3.50% $ 79,817 1,721 2.88%
Savings 58,635 911 2.08% 56,960 945 2.22%
Time 293,630 11,054 5.03% 269,760 10,847 5.38%
-------- ------- -------- -------
Total interest bearing deposits 490,597 15,586 4.25% 406,537 13,513 4.44%
Short-term borrowings 23,117 810 4.68% 44,596 1,837 5.51%
Long-term debt 90,049 3,830 5.69% 84,777 3,608 5.69%
-------- ------- -------- -------
603,763 20,226 4.48% 535,910 18,958 4.73%
Non-interest bearing deposits 83,042 ------- 72,713 -------
Other liabilities 9,262 8,330
Stockholders' equity 66,715 63,540
-------- --------
Total liabilities and stockholders'
equity $762,782 $680,493
======== ========
Net interest income $21,692 $20,838
======= =======
Interest rate spread 3.36% 3.58%
====== ======
Net interest margin 4.06% 4.35%
====== ======
</TABLE>
<PAGE> 17
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses charged to earnings was $277,000 for the third
quarter of 1999 compared with $311,000 for the third quarter of last year.
The provision for the first nine months of 1999 was $723,000 compared with
$673,000 for 1998. The provision is based on management's estimate of the
amount needed to maintain an adequate allowance for loan losses. Although
Table 4 shows that the level of non-performing assets is relatively low, the
allowance for loan losses was below management's target ratio relative to
loans outstanding. Therefore, management elected to increase the loan loss
provision in 1999. As a result, the ratio of the allowance for loan losses
to period-end loans increased from 1.10% last year to 1.20% this year. The
adequacy of the allowance will continue to be examined in light of past loan
loss experience, current economic conditions, volume of non-performing and
delinquent loans and other relevant factors. The allowance is established at
a level considered by management to be adequate to absorb potential future
losses contained in the portfolio and is monitored on a continuous basis with
independent formal reviews conducted semiannually. The allowance is
increased by provisions charged to expense and decreased by net charge-offs.
Table 3 reflects an analysis of the allowance for loan losses for the third
quarter and first nine months of 1999 and 1998.
<TABLE>
<CAPTION>
TABLE 3 - ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
Three Months Ended Nine Months Ended
(Amounts in thousands) September 30, September 30,
-------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Balance, beginning of period $5,136 $4,420 $4,497 $4,247
Provision charged to operating expense 277 311 723 673
Total loans charged off (128) (330) (374) (590)
Total recoveries 25 12 64 83
------- ------- ------- -------
Net charge-offs (103) (318) (310) (507)
------- ------- ------- -------
Balance, end of period $5,310 $4,413 $5,310 $4,413
======= ======= ======= =======
Total loans:
Average $437,276 $396,383 $423,404 $394,601
Period-end 440,974 400,221 440,974 400,221
Ratios:
Net charge-offs to
average loans (annualized) .09% .32% .10% .20%
Allowance for loan losses to
period-end loans 1.20% 1.10% 1.20% 1.10%
</TABLE>
<PAGE> 18
NON-PERFORMING ASSETS
Table 4 reflects PennRock's non-performing assets at September 30, 1999,
December 31, 1998 and September 30, 1998. PennRock's policy is to
discontinue the accrual of interest on loans for which the principal or
interest is past due 90 days or more unless the loan is well secured and
corrective action has begun or the loan is in the process of collection.
When a loan is placed on non-accrual status, any unpaid interest is charged
against income. Other real estate owned represents property acquired through
foreclosure.
<TABLE>
<CAPTION>
TABLE 4 - NON-PERFORMING ASSETS
September 30, December 31, September 30,
(Amounts in thousands) 1999 1998 1998
---------- --------- -----------
<S> <C> <C> <C>
Non-accrual loans $1,208 $ 143 $ 478
Loans accruing but 90 days past due
as to principal or interest 1,302 1,196 1,345
---------- --------- ----------
Total non-performing loans 2,510 1,339 1,823
Other real estate owned 238
--------- --------- ---------
Total non-performing assets $2,748 $1,339 $1,823
========= ========= =========
Ratios:
Non-accrual loans to total loans 0.62% 0.56% 0.46%
Non-accrual loans to total loans and
other real estate owned 0.62% 0.58% 0.46%
Allowance for loan losses to
non-performing loans 193.23% 198.37% 242.07%
</TABLE>
LIQUIDITY
The purpose of liquidity management is to ensure that there are sufficient
cash flows available to meet a variety of needs. These include financial
commitments such as satisfying the credit needs of our borrowers and
withdrawals by our depositors, the ability to capitalize in investment and
business opportunities as they occur, and the funding of PennRock's own
operations. Liquidity is provided by maturities and sales of investment
securities, loan payments and maturities and liquidating money market
investments such as federal funds sold. Liquidity is also provided by short-
term lines of credit with various correspondents and fixed and variable rate
advances from the Federal Home Loan Bank of Pittsburgh and other
correspondent banks. However, PennRock's primary source of liquidity lies in
PennRock's ability to renew, replace and expand its base of core deposits
(consisting of demand, NOW, money market, savings, and time deposits of less
than $100,000).
<PAGE> 19
Total deposits increased $50.1 million or 9.1% since year end and by $110.8
million or 22.6% from last year. Total borrowed funds increased $22.0
million since year end and decreased by $7.0 million from last year. Table 5
reflects the changes in the major classifications of deposits and borrowings
by comparing the balances at the end of the third quarter of 1999 with year-
end and the third quarter of 1998.
<TABLE>
<CAPTION>
TABLE 5 - DEPOSITS AND BORROWINGS BY MAJOR CLASSIFICATION
(Amounts in thousands)
September 30, December 31, September 30,
1999 1998 1998
------------- ------------ -------------
<S> <C> <C> <C>
Non-interest bearing $ 85,885 $ 88,061 $ 74,187
NOW accounts 36,100 39,931 34,468
Money market deposit accounts 117,454 80,048 58,123
Savings accounts 57,782 56,534 56,135
Time deposits under $100,000 263,427 248,252 236,021
--------- --------- ---------
Total core deposits 560,648 512,826 458,934
Time deposits of $100,000 or more 39,458 37,220 30,407
--------- --------- ---------
Total deposits 600,106 550,046 489,341
Short-term borrowings 36,501 13,780 42,762
Long-term debt 90,000 90,700 90,700
--------- --------- ---------
Total deposits and borrowings $726,607 $654,526 $622,803
========= ========= =========
</TABLE>
CAPITAL RESOURCES:
Total stockholders' equity decreased $7.4 million or 10.9% from September 30,
1998 and $6.7 million or 10.0% since year-end 1998. Stockholders' equity is
impacted by changes in the unrealized market gains and losses of the
securities available for sale portfolio, net of deferred taxes and is shown
on the consolidated balance sheets as a component of stockholders' equity as
accumulated other comprehensive income, net of tax. This portfolio had net
unrealized gains in the periods ending September 30, 1998 and December 31,
1998 and a net unrealized loss in the period ending September 30, 1999.
On June 8, 1999, the Company announced that the Board of Directors had
authorized the purchase of up to 200,000 shares of its outstanding common
stock. The shares are to be used for general corporate purposes including
employee benefit and executive compensation plans or for the dividend
reinvestment plan. As of September 30, 1999, the Company held 146,176 shares
as treasury stock.
<PAGE> 20
Table 6 shows PennRock's capital resources at September 30, 1999 and at
December 31 and September 30, 1998. PennRock and its subsidiary bank exceed
all minimum capital guidelines.
<TABLE>
<CAPTION>
TABLE 6 - CAPITAL RESOURCES
September 30, December 31, September 30,
1999 1998 1998
------------- ----------- -------------
<S> <C> <C> <C>
Leverage ratio:
Total capital to total
average assets 9.08% 9.96% 9.79%
Tier 1 capital to total
average assets 8.42% 9.22% 9.15%
Risk-based capital ratios:
Tier 1 capital to risk weighted
assets 12.06% 13.71% 14.31%
Total capital to risk weighted
assets 13.02% 14.77% 15.31%
</TABLE>
<PAGE> 21
PART II. OTHER INFORMATION
---------------------------
For the Quarter ended September 30, 1999
Item 1. Legal Proceedings
Various legal actions or proceedings are pending involving PennRock or its
subsidiaries. Management believes that the aggregate liability or loss, if
any, will not be material.
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule regarding unaudited interim financial
information of PennRock for the nine months ended September 30,
1999.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three months ended
September 30, 1999.
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PennRock Financial Services Corp.
---------------------------------
(Registrant)
Date: November 9, 1999 By: /s/Melvin Pankuch
- ----------------------- -----------------------------------------------
Melvin Pankuch
Executive Vice President and
Chief Executive Officer
Date: November 9, 1999 By: /s/George B. Crisp
- ------------------------ -----------------------------------------------
George B. Crisp
Vice President and Treasurer
(Principal Financial and Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 23,631
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,345
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 309,207
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 439,766
<ALLOWANCE> 5,310
<TOTAL-ASSETS> 816,147
<DEPOSITS> 606,965
<SHORT-TERM> 51,089
<LIABILITIES-OTHER> 7,870
<LONG-TERM> 90,000
0
0
<COMMON> 15,194
<OTHER-SE> 45,029
<TOTAL-LIABILITIES-AND-EQUITY> 816,147
<INTEREST-LOAN> 26,690
<INTEREST-INVEST> 12,896
<INTEREST-OTHER> 367
<INTEREST-TOTAL> 39,953
<INTEREST-DEPOSIT> 15,586
<INTEREST-EXPENSE> 20,226
<INTEREST-INCOME-NET> 19,727
<LOAN-LOSSES> 723
<SECURITIES-GAINS> 1,163
<EXPENSE-OTHER> 13,415
<INCOME-PRETAX> 10,139
<INCOME-PRE-EXTRAORDINARY> 8,095
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,095
<EPS-BASIC> 1.35
<EPS-DILUTED> 1.35
<YIELD-ACTUAL> 4.06
<LOANS-NON> 1,208
<LOANS-PAST> 1,302
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,897
<CHARGE-OFFS> 374
<RECOVERIES> 64
<ALLOWANCE-CLOSE> 5,310
<ALLOWANCE-DOMESTIC> 5,310
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
