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 March 31, 1999 Commission File Number 0-15040
-------------- -------
PennRock Financial Services Corp.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2400021
------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1060 Main St.
Blue Ball, Pennsylvania 17506
--------------------------------------- ----------
(Address of principal executive offices) (Zip code)
(717) 354-4541
--------------------------------------------------
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 May 10, 1999
------------------------------ --------------------------------
Common Stock ($2.50 par value) 5,997,975 Shares
<PAGE> 1
PENNROCK FINANCIAL SERVICES CORP.
---------------------------------
FORM 10-Q
---------
For the Quarter Ended March 31, 1999
Contents
--------
PART I. FINANCIAL INFORMATION
- -----------------------------
Item 1. Financial Statements
Consolidated balance sheets - March 31, 1999,
December 31, 1998 and March 31, 1998.<PAGE>
Consolidated statements of income - Three months ended
March 31, 1999 and 1998.
Consolidated statements of cash flows - Three months
ended March 31, 1999 and 1998.
Notes to condensed consolidated financial statements - March 31, 1999.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II. OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
- ----------
<PAGE> 2
Part I
For the Quarter Ended March 31, 1999
Item 1. Financial Statements
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31, March 31,
(Amounts in thousands) 1999 1998 1998
------------ ----------- -------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 18,908 $ 19,747 $ 18,991
Short-term investments 7,263 1,166 3,388
Mortgages held for sale 4,422 5,892 2,338
Securities available for sale 271,080 273,722 255,127
Loans:
Loans, net of unearned income 412,750 407,787 393,821
Allowance for loan losses (5,045) (4,897) (4,309)
--------- --------- ---------
Net loans 407,705 402,890 389,512
Bank premises and equipment 13,605 13,383 12,680
Accrued interest receivable 4,589 6,142 4,554
Other assets 8,852 7,589 7,165
--------- --------- ---------
Total assets $736,424 $730,531 $693,755
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 82,315 $ 88,061 $ 75,865
Interest bearing 478,379 461,985 401,236
--------- --------- ---------
Total deposits 560,694 550,046 477,101
Short-term borrowings 9,299 13,780 69,563
Long-term debt 90,000 90,700 75,000
Accrued interest payable 3,047 3,235 3,326
Other liabilities 6,203 5,859 5,576
--------- --------- ---------
Total liabilities 669,243 663,620 631,266
Stockholders' Equity:
Common stock, par value $2.50 per
share; authorized - 20,000,000
shares; issued - 6,077,614,
6,077,299 and 6,077,299 shares 15,194 15,193 15,193
Surplus 11,114 11,106 11,121
Accumulated other comprehensive
income, net of tax 1,263 2,602 1,197
Retained earnings 41,438 39,694 35,277
Treasury stock at cost (79,639,
70,454, and 12,286 shares) (1,828) (1,684) (299)
--------- --------- ---------
Total stockholders' equity 67,181 66,911 62,489
--------- --------- ---------
Total liabilities and
stockholders' equity $736,424 $730,531 $693,755
========= ========= =========
</TABLE>
<PAGE> 3
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
(Amounts in thousands) March 31,
------------------
1999 1998
------ ------
<S> <C> <C>
Interest income:
Interest and fees on loans $8,530 $8,729
Securities:
Taxable 2,459 2,380
Tax-exempt 1,593 1,170
Mortgages held for sale 68 16
Other 80 52
------- -------
Total interest income 12,730 12,347
Interest expense:
Deposits 4,979 4,526
Short-term borrowings 171 503
Long-term debt 1,263 1,076
------- -------
Total interest expense 6,413 6,105
------- -------
Net interest income 6,317 6,242
Provision for loan losses 222 148
------- -------
6,095 6,094
Other income:
Service charges on deposit
accounts 377 350
Other service charges and fees 59 61
Fiduciary activities 315 228
Security gains (losses), net 493 142
Mortgage banking 193 87
Other 187 147
------- -------
Total other income 1,624 1,015
------- -------
Net interest and other income 7,719 7,109
------- -------
Other expenses:
Salaries and benefits 2,646 2,464
Occupancy, net 295 268
Equipment depreciation and service 318 306
Other 976 1,087
------- -------
Total other expense 4,235 4,125
------- -------
Income before income taxes 3,484 2,984
Income taxes 778 622
------- -------
Net Income $2,706 $2,362
======= =======
Earnings per common share $ .45 $ .39
======= =======
Weighted average shares outstanding 6,008,404 6,071,582
========= =========
</TABLE>
Basic earnings per share and diluted earnings per share are the same for 1999
and 1998.
<PAGE> 4
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
(Amounts in thousands) March 31,
------------------
1999 1998
------ ------
<S> <C> <C>
Net income $2,706 $2,362
Other comprehensive income, net of tax:
Unrealized gains (losses) on
securities available for sale:
Losses arising during the
year, net of tax benefit
of $522,000 and $88,000 (1,014) (171)
Reclassification adjustment for
gains included in net income,
net of tax of $168,000 and
$48,000 (325) (94)
------- -------
Other comprehensive income (loss) (1,339) (265)
------- -------
Comprehensive income $1,367 $2,097
======= =======
</TABLE>
<PAGE> 5
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(Amounts in thousands) -----------------------
1999 1998
--------- ---------
<S> <C> <C>
Net cash provided by operations $ 5,107 $ 3,984
Investing activities:
Proceeds from sales of securities available
for sale 29,614 17,653
Purchases of securities available for sale (52,033) (77,935)
Maturities of securities available for sale 23,760 29,521
Net increase in loans (5,036) (17,549)
Purchases of premises and equipment (525) (281)
-------- --------
Net cash used in investing activities (4,220) (42,591)
Financing activities:
Net decrease in non-interest bearing deposits (5,746) (1,241)
Net increase (decrease) in interest
bearing deposits 16,394 (14,452)
Increase (decrease) in short-term borrowings (4,481) 56,731
Decrease in long-term debt (700) (1,300)
Issuance of common and treasury stock 451 321
Acquisition of treasury stock (647) (413)
Cash dividends (900) (789)
-------- --------
Net cash provided by financing activities 4,371 38,857
-------- --------
Increase in cash and cash equivalents 5,258 250
Cash and cash equivalents,
beginning of year 20,913 22,129
-------- --------
Cash and cash equivalents, end of period $26,171 $22,379
======== ========
</TABLE>
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 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 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
three months ended March 31, 1999 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1998.
The accounting policies of PennRock Financial Services Corp. and
Subsidiaries, as applied in the consolidated interim financial statements
presented, are substantially the same as those followed on an annual basis
as presented in the 1998 Annual Report to shareholders.
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 $14.2 million and commitments to extend credit totaled $117.6
million at March 31, 1999. Management does not anticipate any significant
loss as a result of these transactions.
<PAGE> 7
NOTE 3. NEW ACCOUNTING STANDARD
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, 2000. 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 flow
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> 8
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.
and subsidiary, Blue Ball National Bank. This discussion should be read in
conjunction with the financial statements which appear elsewhere in this
report.
This Form 10-Q Report includes forward looking statements based on current
management expectations. The Company's actual results could differ
materially from those management expectations and the results discussed in
these forward looking statements. Factors that could cause such a
difference include, but are not limited to, general economic conditions,
legislative and regulatory changes, monetary and fiscal policies of the
federal government, changes in real estate values, interest rates, deposit
flows, the cost of funds, demand for loan products, demand for financial
services, competition, changes in the quality or composition of the
Company's loan and investment portfolios, changes in accounting
principles, policies or guidelines, and other economic, competitive,
governmental and technological factors affecting the Company's operations,
markets, products, services and prices.
Total assets of PennRock increased $5.9 million or .8% since the end of
1998 and by $42.7 million or 6.2% over March 31, 1998. The increases in
assets were reflected in increases in short term investments and loans
outstanding. Most of the growth has been funded by interest bearing
deposits which increased $16.4 million from year end 1998 and $77.1 from
the first quarter of last year.
Net income for the quarter was $2.7 million or $.45 per share compared with
$2.4 million or $.39 per share for the first quarter of 1998, an increase
of $343,000 or 14.6%. Net interest income increased $75,000 from the first
quarter of 1998 due to primarily to volume increases, while other income
excluding security gains increased $258,000 and other expenses increased
$110,000.
Dividends declared for the quarter totaled $900,000 or $.15 per share.
This represented 33.3 of net income. Dividends declared during the first
quarter of last year were $789,000 or $.13 per share.
<PAGE> 9
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 first quarter 1998 and 1998. For the first quarter of 1999, net interest
income on a fully taxable equivalent basis totaled $7.1 million, an increase
of $275,000 or 4.0% from $6.8 million earned for the same period of 1998.
TABLE 1 - NET INTEREST INCOME
<TABLE>
<CAPTION>
Three Months Ended
(Amounts in thousands) March 31,
-------------------
1999 1998
------- -------
<S> <C> <C>
Total interest income $12,730 $12,346
Total interest expense 6,413 6,105
------- -------
Net interest income 6,317 6,241
Tax equivalent adjustment 792 593
------- -------
Net interest income
(fully taxable equivalent) $ 7,109 $ 6,834
======= =======
</TABLE>
Table 2 presents the average balances, taxable equivalent interest income and
expense and rates for PennRock's assets and liabilities for the three months
ended March 31, 1999 and 1998. For the first quarter of 1999 compared with
the first quarter of 1998, interest income increased due to increases in
volumes while the yield on earning assets declined 45 basis points. Interest
expense increased due to volume increases while the cost of funds decreased
23 basis points. Both the net interest margin and spread declined during the
first quarter of 1999 compared with last year primarily due to decreases in
loan yields.
<PAGE> 10
TABLE 2 - AVERAGE BALANCES, RATES, AND INTEREST INCOME AND EXPENSE
<TABLE>
<CAPTION>
Three Months Ended March 31,
(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 $ 6,365 $ 80 5.10% $ 3,673 $ 52 5.74%
Mortgages held for sale 3,748 68 7.36% 928 16 6.99%
Securities available for sale 271,120 4,785 7.16% 233,951 4,087 7.08%
Loans:
Mortgage 234,703 4,806 8.30% 220,806 5,000 9.18%
Commercial 102,573 2,161 8.54% 103,483 2,345 9.19%
Consumer 73,165 1,622 8.99% 63,486 1,439 9.19%
-------- ------- -------- -------
Total loans 410,441 8,589 8.49% 387,775 8,784 9.19%
-------- ------- -------- -------
Total earning assets 6691,674 13,522 7.93% 628,327 12,939 8.38%
Other assets 42,554 ------- 36,974 -------
-------- --------
$734,228 $663,301
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing deposits:
Demand $127,299 1,045 3.33% $ 71,056 450 2.57%
Savings 57,753 316 2.22% 57,682 316 2.22%
Time 287,054 3,618 5.11% 280,444 3,760 5.44%
-------- ------- -------- -------
Total interest bearing deposits 472,106 4,979 4.28% 409,182 4,526 4.49%
Short-term borrowings 15,330 171 4.52% 37,940 503 5.38%
Long-term debt 90,148 1,263 5.68% 76,567 1,076 5.70%
-------- ------- -------- -------
Total interest bearing liabilities 577,584 6,413 4.50% 523,689 6,105 4.73%
Non-interest bearing deposits 79,561 ------- 69,864 -------
Other liabilities 9,209 7,573
Stockholders' equity 67,874 62,175
-------- -------
Total liabilities and stockholders'
equity $734,228 $663,301
======== ========
Net interest income $ 7,109 $ 6,834
======= =======
Interest rate spread 3.43% 3.65%
====== ======
Net interest margin 4.17% 4.43%
====== ======
</TABLE>
<PAGE> 11
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses charged to earnings was $222,000 for the first
quarter of 1999 compared with $148,000 for the first quarter of last year.
The provision is based on management's estimate of the amount needed to
maintain an adequate allowance for loan losses. 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 first
quarter of 1999 and 1998.
TABLE 3 - ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
Three Months Ended
(Amounts in thousands) March 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Balance, beginning of period $4,897 $4,247
Provision charged to operating expense 222 148
Total loans charged off (104) (147)
Total recoveries 30 61
------- -------
Net (charge-offs) recoveries (74) (86)
------- -------
Balance, end of period $5,045 $4,309
======= =======
Total loans:
Average $410,577 $387,972
Period-end 413,698 397,055
Ratios:
Net charge-offs to
average loans (annualized) .07% .09%
Allowance for loan losses to
period-end loans 1.22% 1.11%
</TABLE>
NON-PERFORMING ASSETS
Table 4 reflects PennRock's non-performing assets at March 31, 1999, December
31, 1998 and March 31, 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.
<PAGE> 12
TABLE 4 - NON-PERFORMING ASSETS
<TABLE>
<CAPTION>
March 31, December 31, March 31,
(Amounts in thousands) 1999 1998 1998
---------- --------- -----------
S> <C> <C> <C
<PAGE>
Non-accrual loans $ 948 $ 143 $ 61
Loans accruing but 90 days past due
as to principal or interest 512 1,196 1,266
---------- --------- ----------
Total non-performing loans 1,460 1,339 1,327
Other real estate owned 225
--------- --------- ---------
Total non-performing assets $1,460 $1,339 $1,552
========= ========= =========
Ratios:
Non-accrual loans to total loans 0.35% 0.33% 0.33%
Non-accrual loans to total loans and
other real estate owned 0.35% 0.33% 0.39%
Allowance for loan losses to
non-accrual loans 345.55% 365.72% 324.72%
</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 on 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).
Total deposits increased $10.6 million or 1.9% since year end and by $67.9
million or 13.8% from last year. Total borrowings increased $5.5 million
since year end and by $77.4 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 first quarter of 1999 with year-end and the
first quarter of 1998.
<PAGE> 13
TABLE 5 - DEPOSITS AND BORROWINGS BY MAJOR CLASSIFICATION
(Amounts in thousands)
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1999 1998 1998
------------- ------------ -------------
<S> <C> <C> <C>
Non-interest bearing $ 82,315 $ 88,061 $ 75,106
NOW accounts 37,036 39,931 39,061
Money market deposit accounts 98,669 80,048 35,080
Savings accounts 58,488 56,534 57,557
Time deposits under $100,000 249,595 248,252 250,364
--------- --------- ---------
Total core deposits 526,103 512,826 459,168
Time deposits of $100,000 or more 34,591 37,220 33,627
--------- --------- ---------
Total deposits 560,694 550,046 492,795
Short-term borrowings 9,299 13,780 12,832
Long-term debt 90,000 90,700 77,000
--------- --------- ---------
Total deposits and borrowings $659,993 $654,526 $582,627
========= ========= =========
</TABLE>
CAPITAL RESOURCES:
Total stockholders' equity increased $4.4 million or 7.1% from March 31, 1998
and $270,000 or .4% since year-end 1998. On June 24, 1997, 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. The Company began
open market repurchases of its outstanding common stock in 1995. As of March
31, 1999, 79,639 shares were held as treasury shares.
Table 6 shows PennRock's capital resources at March 31, 1999 and at December
31 and March 31, 1998. PennRock and its subsidiary bank exceed all minimum
capital guidelines.
<PAGE> 14
TABLE 6 - CAPITAL RESOURCES
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1999 1998 1998
------------- ------------ -------------
<S> <C> <C> <C>
Leverage ratio:
Total capital to total assets 9.57% 9.96% 9.78%
Tier 1 capital to total assets 8.86% 9.22% 9.13%
Risk-based capital ratios:
Tier 1 capital to risk weighted
assets 13.07% 13.71% 13.66%
Total capital to risk weighted
assets 14.12% 14.77% 14.63%
</TABLE>
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.
The following is a description of the Plans phases, degree of completion and
deadlines:
<TABLE>
<CAPTION>
Date
Percentage Completed
Complete or Deadline
---------- -----------
<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 90% June
1999
</TABLE>
The Committee has met all of its goals to date and believes that it will
continue to meet the goals of the Plan.
Because of the exposure to the operations of the Company from the failure of
large customers negatively impacted by the 2000 problem, the 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. The Committee has followed
the advice of the OCC in developing two levels of contingency planning _
remediation and business resumption. Remediation contingency plans address
the actions to be taken if the remediation efforts fall behind schedule or
appear in jeopardy of not delivering a Year 2000 compliant system when
required. Business resumption contingency plans address the actions that
would be taken if key business process could not be performed in the normal
manner due to Year 2000 related system or third party failures.
The Committee has defined remediation contingency plan requirements that are
intended to provide alternative processes and actions to address failed or
unsuccessful remediation efforts. The first priority in the Company's core
processes and mission critical systems. The Committee has also developed
business resumption contingency plans for each key business process. We have
scheduled the testing of the viability of the two contingency plans to be
completed by the end of the second quarter of 1999.
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 and estimates
that it could spend another $50,000 to achieve compliance.
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.
<PAGE> 15
PART II. OTHER INFORMATION
---------------------------
For the Quarter ended March 31, 1999
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule regarding unaudited interim financial
information of PennRock for the quarter ended March 31, 1999.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three months ended March
31, 1999.
<PAGE> 16
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: May 14, 1999 By: /s/Melvin Pankuch
- ----------------------- -----------------------------------------------
Melvin Pankuch
Executive Vice President and
Chief Executive Officer
Date: May 14, 1999 By: /s/George B. Crisp
- ------------------------ -----------------------------------------------
George B. Crisp
Vice President and Treasurer
(Principal Financial and Accounting Officer)
<PAGE> 17
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