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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, 1999
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 0-15040
PENNROCK FINANCIAL SERVICES CORP.
- -------------------------------------------------------------------------------
(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
--------------
Securities registered pursuant to Section 12(b) of the Act:
None
-------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $2.50 per share
---------------------------------------
(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 18, 2000 was approximately
$92.4 million.
As of February 18, 2000, there were 5,964,015 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 25, 2000, is incorporated by
reference in partial response to Part III of this report.
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PENNROCK FINANCIAL SERVICES CORP.
TABLE OF CONTENTS
<TABLE>
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PAGE
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PART I
Item 1. Business....................................................................................3
Item 2. Properties..................................................................................8
Item 3. Legal Proceedings...........................................................................8
Item 4. Submission of Matters to a Vote of Security Holders.........................................8
Item 4A. Executive Officers of the Registrant........................................................8
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................10
Item 6. Selected Financial Data....................................................................11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......12
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.................................28
Item 8. Financial Statements and Supplementary Data................................................31
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures......55
PART III
Item 10. Directors and Executive Officers of the Registrant.........................................55
Item 11. Executive Compensation.....................................................................55
Item 12. Security Ownership of Certain Beneficial Owners and Management.............................55
Item 13. Certain Relationships and Related Transactions.............................................55
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................56
SIGNATURES................................................................................................57
</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 PennRock'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. The risks and uncertainties that may affect the operations,
performance, development and results of PennRock's business include:
o Changes in market interest rates;
o Local and national economic trends and conditions;
o Competition for products and services among community, regional and national
financial institutions;
o New services and product offerings by competitors;
o Changes in customer preferences;
o Changes in technology;
o Legislative and regulatory changes; o Delinquency rates on loans;
o 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.
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PENNROCK FINANCIAL SERVICES CORP.
PART I
ITEM 1. BUSINESS
PENNROCK FINANCIAL SERVICES CORP.
PennRock Financial Services Corp. ("PennRock" 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.
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 14 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 and administration 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.
PENNROCK INSURANCE GROUP, INC.
PennRock Insurance Group, Inc. ("PIGI") is a Pennsylvania corporation formed as
a wholly owned subsidiary of Blue Ball National Bank on September 22, 1998. PIGI
is an insurance agency organized for the sale of annuities and other types of
insurance. The Company did not begin operations until the first quarter of 1999.
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
have been 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.
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EMPLOYEES
PennRock has no employees. The Bank employed 234 full-time and 63 part-time
employees at the end of 1999.
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, PennRock
has made a significant investment in technological resources that allows us to
offer a wide variety of products and services and enables us to compete with any
size financial institution. As an example, in the first quarter of 1999, we
introduced our internet banking services, "BBNB On-line" and "BBNB On-line for
Business" on our web site, www.bbnb.com. These on-line banking services offer
advanced features not offered by competitors in our market area, such as the
ability for customers to view their cancelled checks over the internet.
Among the most important factors influencing PennRock's ability to compete
successfully for new loans and deposits are interest rates, convenience of
office locations, and quality of service. 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, PennRock has, on average,
added one new office per year over the past ten years.
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 under the
Bank Holding Act of 1956, as amended. 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 Bank Holding Company Act 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 PennRock to stand ready to use its resources to provide
adequate capital funds to its bank subsidiary during periods of financial stress
or adversity.
The Bank Holding Company Act prohibits PennRock 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 Bank Holding Company Act prohibits
PennRock 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. The types of businesses that are permissible for bank holding companies
to own have been expanded by recent federal legislation; see discussion below.
As a Pennsylvania bank holding company for purposes of the Pennsylvania Banking
Code, PennRock 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, 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,
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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. The Community Reinvestment Act
requires the Bank to help meet the credit needs of the entire community where
the Bank operates, including low and moderate income neighborhoods. The Bank's
rating under the Community Reinvestment Act, assigned by the Comptroller of the
Currency pursuant to an examination of the Bank, is important in determining
whether the bank may receive approval for, or utilize certain streamlined
procedures in, applications to engage in new activities. 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 Comptroller' s Office.
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). PennRock 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 Comptroller and the FDIC have formal and informal
policies which provide that insured banks and bank holding companies should
generally pay dividends only out of current operating earnings, with some
exceptions. The Prompt Corrective Action Rules, described above, further limit
the ability of banks to pay dividends, because banks which are not classified as
well capitalized or adequately capitalized may not pay dividends.
Under these policies and subject to the restrictions applicable to the Bank, the
Bank could declare, during 2000, without prior regulatory approval, aggregate
dividends of approximately $13.2 million, plus net profits earned to the date of
such dividend declaration.
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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, 1999,
the Bank was well capitalized for purposes of calculating insurance assessments.
The Bank Insurance Fund is presently fully funded at more than the minimum
amount required by law. Accordingly, the 2000 Bank Insurance Fund 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 bonds. The Financing
Corporation 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 Financing Corporation 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 and provided that commercial banks would be subject to 1/5 of the
assessment to which thrifts are subject for Financing Corporation bond payments
through 1999. Beginning in 2000, commercial banks and thrifts are subject to the
same assessment for Financing Corporation bonds. The FDIC sets the Financing
Corporation assessment rate every quarter. The Financing Corporation assessment
for the Bank (and all other banks) for the first quarter of 2000 is an annual
rate of $.0212 for each $100 of deposits.
New Legislation
Landmark legislation in the financial services area was signed into law by the
President on November 12, 1999. The Gramm-Leach-Bliley Act dramatically changes
certain banking laws that have been in effect since the early part of the 20th
century. The most radical changes are that the separation between banking and
the securities businesses mandated by the Glass-Steagall Act has now been
removed, and the provisions of any state law that prohibits affiliation between
banking and insurance entities have been preempted. Accordingly, the new
legislation now permits firms engaged in underwriting and dealing in securities,
and insurance companies, to own banking entities, and permits bank holding
companies (and in some cases, banks) to own securities firms and insurance
companies. The provisions of federal law that preclude banking entities from
engaging in non-financially related activities, such as manufacturing, have not
been changed. For example, a manufacturing company cannot own a bank and become
a bank holding company, and a bank holding company cannot own a subsidiary that
is not engaged in financial activities, as defined by the regulators.
The new legislation creates a new category of bank holding company called a
"financial holding company." In order to avail itself of the expanded financial
activities permitted under the new law, a bank holding company must notify the
Federal Reserve that it elects to be a financial holding company. A bank holding
can make this election if it, and all its bank subsidiaries, are well
capitalized, well managed, and have at least a satisfactory Community
Reinvestment Act rating, each in accordance with the definitions prescribed by
the Federal Reserve and the regulators of the subsidiary banks. Once a bank
holding company makes such an election, and provided that the Federal Reserve
does not object to such election by such bank holding company, the financial
holding company may engage in financial activities (i.e., securities
underwriting, insurance underwriting, and certain other activities that are
financial in nature as to be determined by the Federal Reserve) by simply giving
a notice to the Federal reserve within thirty days after beginning such business
or acquiring a company engaged in such business. This makes the regulatory
approval process to engage in financial activities much more streamlined than it
was under prior law.
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PennRock believes it qualifies to become a financial holding company, but has
not yet determined whether or not it will file to become treated as one. The
Federal Reserve has only recently promulgated rules implementing these
provisions of the new legislation, and PennRock may wait to see what the
experience of other companies is under the new rules before it makes an
election.
The new law also permits certain financial activities to be undertaken by a
subsidiary of a national bank. As the Bank is a national bank, some of these
provisions apply directly to the Bank. Generally, for financial activities that
are conducted as a principal, such as an underwriter or dealer holding an
inventory, a national bank must be one of the 100 largest national banks in the
United States and have its debt be rated investment grade. Because the Bank is
not one of the 100 largest national banks in the United States, it is not
authorized under the new law to conduct financial activities as a principal.
However, the Bank may own a securities broker or an insurance agency and certain
other financial agency entities under the new law. Under prior law, national
banks could only own an insurance agency if it was located in a town of fewer
than 5,000 residents, or under certain other conditions. Under the new law,
there is no longer any restriction on where the insurance agency subsidiary of a
national bank is located or does business.
In addition to the foregoing provisions of the new law that make major changes
to the federal banking laws, the new legislation also makes a number of
additions and revisions to numerous federal laws that affect the business of
banking. For example, there is now a federal law on privacy with respect to
customer information held by banks. The federal banking regulators are
authorized to adopt rules regarding privacy for customer information. Banks must
establish a disclosure policy for non-public customer information, disclose the
policy to their customers, and give their customers the opportunity to object to
non-public information being disclosed to a third party. Also, the Community
Reinvestment Act has been amended by the new law to provide that small banks
(those under $250 million in assets) that previously received an "outstanding"
on their last CRA exam will not have to undergo another CRA exam for five years,
or for four years if their last exam was "satisfactory." In addition, any CRA
agreement entered into between a bank and a community group must be disclosed,
with both the bank and the group receiving any grants from the bank detailing
the amount of funding provided and what it was used for. The new law also
requires a bank's policy on fees for transactions at ATM machines by
non-customers to be conspicuously posted on the ATM. A number of other
provisions affecting other general regulatory requirements for banking
institutions were also adopted.
It is too early to tell what effect the Gramm-Leach-Bliley Act may have on
PennRock and the Bank. The intent and scope of the act is positive for the
financial industry, and is an attempt to modernize federal banking laws and make
U. S. institutions competitive with those from other countries. While the
legislation makes significant changes in U. S. banking law, such changes may not
directly affect PennRock's business unless it decides to avail itself of new
opportunities available under the new law. PennRock does not expect any of the
provisions of the new Act to have a material adverse effect on our existing
operations, or to significantly increase its costs.
Separately from the Gramm-Leach-Bliley Act, Congress is often considering some
financial industry legislation. PennRock cannot predict how any new legislation,
or new rules adopted by the federal banking agencies, may affect its business in
the future.
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.
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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 12 of the Bank's full service
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, 1999 is $13.3 million.
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 1999.
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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 18, 2000, are listed below, along with the positions with PennRock and
Blue Ball National Bank held by each of them during the past five years.
Officers are elected annually by the Board of Directors.
<TABLE>
<CAPTION>
POSITION AND EXPERIENCE
NAME AGE DURING PAST 5 YEARS
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<S> <C> <C>
Norman Hahn 63 PennRock Financial Services Corp.:
Chairman of the Board (January 1991 to date)
Blue Ball National Bank:
Chairman of the Board (January 1991 to date)
Glenn H. Weaver 65 PennRock Financial Services Corp.:
President (April 1989 to date)
Robert K. Weaver 51 PennRock Financial Services Corp.:
Secretary (March 1986 to date)
Blue Ball National Bank:
Secretary (1977 to date)
Melvin Pankuch 60 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 52 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 49 Blue Ball National Bank:
Senior Vice President - Banking Sales/Service (July 1993 to date)
Michael H. Peuler 49 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 $17.25 to $23.88 in 1999 and
from $19.50 to $27.50 in 1998. The book value per share was $9.97 as of December
31, 1999 and $11.14 as of December 31, 1998. The prices listed below represent
the high, low and quarter ending prices for stock trades reported during each
quarter.
<TABLE>
<CAPTION>
Quarter Per Share
High Low End Dividend
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<S> <C> <C> <C> <C>
1999
FIRST QUARTER $23.88 $21.75 $22.50 $.15
SECOND QUARTER 22.50 20.88 22.00 .15
THIRD QUARTER 22.88 21.75 22.75 .15
FOURTH QUARTER 22.75 17.50 17.50 .17
1998
First quarter $26.75 $19.50 $25.25 $.13
Second quarter 27.50 25.75 26.50 .13
Third quarter 26.75 21.25 22.00 .13
Fourth quarter 24.50 21.25 24.00 .21
</TABLE>
PennRock 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
1999 1998 1997 1996 1995
----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR:
Interest income $54,783 $50,643 $45,618 $40,599 $38,404
Interest expense 28,137 25,458 21,878 18,916 19,393
Net interest income 26,646 25,185 23,740 21,683 19,011
Provision for loan losses 1,026 1,225 258 600 360
Non-interest income 6,159 5,087 5,105 3,863 3,199
Non-interest expense 18,566 17,451 16,665 14,725 13,520
Income from continuing operations,
net of tax 10,710 9,615 9,315 7,608 6,182
Loss from discontinued operations,
net of tax (1,555) (801)
Net income 10,710 9,615 7,760 6,807 6,182
Per share:
Income from continuing operations,
net of tax 1.79 1.59 1.54 1.25 1.02
Loss from discontinued operations,
net of tax (.26) (.13)
Net income 1.79 1.59 1.28 1.12 1.02
Cash dividends .62 .60 .49 .45 .41
Book value as of year-end 9.97 11.14 10.10 8.90 8.52
Market value as of year-end 17.50 24.00 19.25 16.13 16.63
AS OF YEAR-END:
Securities 309,462 273,722 224,408 186,026 196,029
Loans 460,065 407,787 382,359 319,354 298,025
Earning assets 766,714 683,670 604,610 508,265 497,366
Total assets 842,446 730,531 649,089 547,603 532,082
Deposits 631,415 550,046 492,795 451,467 417,929
Short-term borrowings 53,207 13,780 12,832 22,106 47,476
Long-term debt 90,000 90,700 77,000 14,000 9,000
Stockholders' equity 59,233 66,911 61,267 53,729 51,674
Full time equivalent employees 271 255 238 277 217
Number of shares outstanding 5,941,767 6,006,845 6,066,660 6,037,419 6,062,412
SELECTED RATIOS:
Return on average assets:
From continuing operations 1.37% 1.39% 1.54% 1.40% 1.21%
From net income 1.37 1.39 1.28 1.25 1.21
Return on average equity:
From continuing operations 16.39 14.86 16.47 14.67 13.41
From net income 16.39 14.86 13.72 13.12 13.41
Efficiency ratio 54.03 53.74 56.59 57.60 60.45
Net interest margin (tax equivalent) 4.02 4.36 4.48 4.48 4.09
Total capital to average assets 9.01 9.96 10.46 10.62 10.46
Total capital to risk-weighted assets 12.80 14.77 14.22 16.08 16.97
Price to earnings 9.78 15.09 15.19 14.40 16.30
Market to book value 1.76 2.15 1.92 1.81 1.95
Allowance for loan losses to loans 1.20 1.20 1.11 1.26 1.23
Non-performing loans to loans .43 .33 .56 .35 .41
Dividend payout ratio 34.52 37.70 38.29 39.99 40.12
</TABLE>
11
<PAGE> 12
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"), its subsidiary, Blue Ball National
Bank ("the Bank"), and the Bank's subsidiaries, PennRock Insurance Group, Inc.
("PIGI"), and, for 1997, Atlantic Regional Mortgage Corporation ("ARMCO"). This
discussion and analysis should be read in conjunction with the financial
statements and other financial data presented elsewhere in this Annual Report.
The following discussion is intended to focus on certain financial data that
might not otherwise be readily apparent.
RESULTS OF OPERATIONS
OVERVIEW
PennRock Financial Services Corp. recorded net income of $10.7 million or $1.79
per share in 1999, an increase of 11.4% from net income of $9.6 million or $1.59
per share recorded in 1998. Net income was $7.7 million or $1.28 per share in
1997. Return on average assets was 1.37% in 1999, 1.39% in 1998 and 1.28% in
1997. Return on average equity was 16.39% in 1999, 14.86% in 1998 and 13.72% in
1997.
Average earning assets increased $80.0 million or 12.3% during 1999, while
average interest bearing liabilities grew $80.0 million or 14.8%. The average
yield on earning assets decreased from 8.28% in 1998 to 7.88% in 1999, while the
average yield on paying liabilities decreased from 4.69% in 1998 to 4.52% in
1999. PennRock's net interest income on a fully taxable equivalent basis
increased $1.0 million or 3.6% during 1999 and $3.4 million or 13.7% in 1998.
The net interest margin was 4.02% in 1999, 4.36% in 1998 and 4.48% in 1997.
The provision for loan losses decreased from $1.2 million in 1998 to $1.0
million in 1999. The provision for loan losses was $258,000 in 1997.
Non-interest income from sources other than realized securities gains increased
$765,000 or 19.8% in 1999 compared with an increase of $245,000 or 6.8% in 1998
and an increase of $921,000 or 34.2% in 1997. Fees earned from fiduciary
activities and service charges on deposit accounts contributed to these
increases. In 1999, the increase in cash surrender value of Bank Owned Life
Insurance ("BOLI") totaling $451,000 is included in other non-interest income.
Non-interest expenses increased $1.1 million or 6.4% in 1999. Non-interest
expenses increased $786,000 or 4.7% in 1998 and $1.9 million or 13.2% in 1997.
Income in 1997 was negatively impacted by the discontinued operations of the
Bank's mortgage subsidiary, ARMCO. 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.
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 statement of income for 1997.
12
<PAGE> 13
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 1999, 1998, and 1997.
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. The net average assets of ARMCO for 1997 have
been reported as "Net assets of discontinued subsidiary." Interest income and
expense relative to this balance has been eliminated from the following tables
and throughout this discussion.
13
<PAGE> 14
TABLE 1 - AVERAGE BALANCES, RATES AND INTEREST INCOME AND EXPENSE SUMMARY
(Taxable equivalent basis)
<TABLE>
<CAPTION>
In thousands 1999 1998 1997
------------------------------ ---------------------------- ------------------------------
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 $ 4,250 $ 197 4.64% $ 2,720 $ 148 5.44% $ 17,025 $ 953 5.60%
Mortgages held for sale 2,797 202 7.22 1,910 159 8.32 944 64 6.78
Securities available for
sale:
U.S. Treasury and agency 124,060 8,253 6.65 101,710 6,862 6.75 118,551 7,478 6.31
State and municipal 93,147 7,587 8.15 109,448 8,975 8.20 57,382 5,038 8.78
Other 75,201 4,644 6.18 37,680 2,142 5.68 13,068 804 6.15
-------- ------- -------- ------- -------- -------
Total securities available
for sale 292,408 20,484 7.01 248,838 17,979 7.23 189,001 13,320 7.05
Loans: (1)
Mortgage 247,909 20,780 8.38 225,596 20,081 8.90 194,428 17,975 9.25
Commercial 104,876 9,203 8.78 101,125 9,168 9.07 92,974 8,707 9.36
Consumer (2) 76,274 6,547 8.58 68,356 6,174 9.03 60,060 5,693 9.48
-------- ------- -------- ------- -------- -------
Total loans 429,059 36,530 8.51 395,077 35,423 8.97 347,462 32,375 9.32
-------- ------- -------- ------- -------- -------
Total earning assets 728,514 57,413 7.88 648,545 53,709 8.28 554,432 46,712 8.43
------- ------- -------
Other assets 51,122 41,419 35,343
Net assets of discontinued
subsidiary 15,836
-------- -------- --------
Total assets $779,636 7.36% $689,964 7.78% $605,611 7.71%
======== ==== ======== ==== ======== ====
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest bearing deposits:
Demand $142,980 5,113 3.58% $ 86,027 2,569 2.99% $ 70,513 1,774 2.52%
Savings 58,412 1,198 2.05 56,814 1,260 2.22 58,823 1,304 2.22
Time 299,533 15,155 5.06 272,835 14,560 5.34 269,029 14,554 5.41
-------- ------- -------- ------- -------- -------
Total interest bearing
deposits 500,925 21,466 4.29 415,676 18,389 4.42 398,365 17,632 4.43
Short-term borrowings 31,059 1,511 4.86 40,271 2,162 5.37 26,601 1,390 5.23
Long-term debt 90,228 5,160 5.72 86,270 4,907 5.69 50,293 2,836 5.64
-------- ------- -------- ------- -------- -------
Total interest bearing
liabilities 622,212 28,137 4.52 542,217 25,458 4.69 475,259 21,858 4.60
------- ------- -------
Non-interest bearing
demand deposits 83,382 74,486 65,631
Other liabilities 8,706 8,564 8,159
Stockholders' equity 65,336 64,697 56,562
-------- -------- --------
Total liabilities and
stockholders' equity $779,636 3.61% $689,964 3.69% $605,611 3.61%
======== ==== ======== ==== ======== ====
Net interest income $29,276 $28,251 $24,854
======== ========= ========
Interest rate spread 3.36% 3.59% 3.83%
Effect of non-interest
bearing funds .66 .77 .65
---- ---- ----
Net interest margin 4.02% 4.36% 4.48%
==== ==== ====
</TABLE>
(1) Interest income on loans includes fees of $1,039,000 in 1999, $961,000 in
1998 and $984,000 in 1997. Average loan balances exclude non-accrual loans.
(2) Consumer loans outstanding net of unearned income.
14
<PAGE> 15
Table 2 presents the net interest income on a fully taxable equivalent basis for
the years ended December 31, 1999, 1998 and 1997.
TABLE 2 - NET INTEREST INCOME
<TABLE>
<CAPTION>
In thousands 1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Total interest income $54,783 $50,643 $44,944
Total interest expense 28,137 25,458 21,858
------- ------- -------
Net interest income 26,646 25,185 23,086
Tax equivalent adjustment 2,630 3,066 1,768
------- ------- -------
Net interest income (fully taxable equivalent) $29,276 $28,251 $24,854
======= ======= =======
</TABLE>
Net interest income on a fully taxable equivalent basis was $29.3 million in
1999, an increase of $1.0 million or 3.6% from the $28.3 million earned in 1998.
Taxable equivalent net interest income in 1998 increased $3.4 million or 13.7%
from $24.9 million in 1997.
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 PennRock 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 1999, net interest income increased $3.4 million due to changes in volume
and decreased $2.4 million due to changes in interest rates. In 1998, net
interest income increased $4.7 million due to changes in volume and decreased by
$1.2 million due to changes in interest rates.
TABLE 3 - VOLUME AND RATE ANALYSIS OF CHANGES IN INTEREST INCOME
(Taxable equivalent basis)
<TABLE>
<CAPTION>
In thousands Year Ended December 31,
----------------------------------------------------------------------------------
1999 OVER 1998 1998 over 1997
-------------------------------------- -------------------------------------
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 $ 83 $ (34) $ 49 $ (801) $ (4) $ (805)
Mortgages held for sale 74 (31) 43 65 30 95
Securities 3,148 (643) 2,505 4,217 442 4,659
Loans 3,047 (1,940) 1,107 4,437 (1,389) 3,048
------- ------- ------- ------- ------- -------
Total interest income 6,352 (2,648) 3,704 7,918 (921) 6,997
------- ------- ------- ------- ------- -------
Interest paid on:
Interest bearing demand deposits 1,701 843 2,544 390 405 795
Savings deposits 35 (97) (62) (45) 1 (44)
Time deposits 1,425 (830) 595 206 (200) 6
Short-term borrowings (495) (156) (651) 714 58 772
Long-term debt 225 28 253 2,029 42 2,071
------- ------- ------- ------- ------- -------
Total interest expense 2,891 (212) 2,679 3,294 306 3,600
------- ------- ------- ------- ------- -------
Net interest income $ 3,461 $(2,436) $ 1,025 $ 4,624 $(1,227) $ 3,397
======= ======= ======= ======= ======= =======
</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 interest margin takes into account the benefit
derived from assets funded by interest free sources such as non-interest bearing
demand deposits and capital.
15
<PAGE> 16
TABLE 4 - INTEREST RATE SPREAD AND NET INTEREST MARGIN ON EARNING ASSETS
(Taxable equivalent basis)
<TABLE>
<CAPTION>
In thousands
1999 1998 1997
------------------------- ------------------------ ------------------------
AVERAGE Average Average
BALANCES RATE Balances Rate Balances Rate
------------ -------- ----------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Earning assets $728,514 7.88% $648,545 8.28% $554,432 8.43%
======== ======== ========
Interest bearing liabilities $622,212 4.52% $542,217 4.69% $475,259 4.60%
---- ---- ----
Interest rate spread 3.36% 3.59% 3.83%
Interest free sources used
to fund earning assets 106,302 .66% 106,328 .77% 79,173 .65%
-------- ---- -------- ---- -------- ----
Total sources of funds $728,514 $648,545 $554,432
======== ======== ========
Net interest margin 4.02% 4.36% 4.48%
==== ==== ====
</TABLE>
The following discussion analyzes changes in PennRock'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 equal 1%.
Interest rate spreads decreased 23 basis points in 1999 while the net interest
margin declined 34 basis points. Both the interest rate spread and margin were
negatively impacted by a 46 basis point decline in earning asset yields and
helped by a 17 basis point decline in interest bearing liability costs. Loan
yields declined 47 basis points despite three separate increases in the prime
rate during 1999. The competitive environment for higher quality loans required
us to make such loans with rates and related loan fees lower than those realized
in prior years. The yield on securities available for sale declined 22 basis
points primarily due to the sale of long-term higher yielding municipal bonds
and the purchase of lower yielding adjustable rate securities in anticipation of
rising interest rates in an attempt to reduce our exposure to interest rate
risk. The reduction in liability costs is primarily the result of higher rate
certificates of deposit renewing at lower rates during the year.
Interest rate spreads decreased 24 basis points during 1998. Earning asset
yields decreased 15 basis points while funding costs increased 9 basis points.
The net interest margin also declined in 1998 from 4.48% in 1997 to 4.36% in
1998. The primary factor in the decline in the interest margin and spread was
the 35 basis point decline in loan yields in 1998. Yields on securities
increased 18 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
("CMOs"). Rates on interest bearing demand deposits increased due to the
introduction of a new money market deposit product which offset the decline in
market rates. Time deposits decreased while savings rates remained unchanged
during 1998. Rates on both short-term borrowings and long-term debt increased in
1998.
PROVISION FOR LOAN LOSSES
The amount of provision for loan losses that was charged against earnings was
$1.0 million in 1999 compared with $1.2 million in 1998 and $258,000 in 1997.
The amount of the provision is based, among other factors, on the amount of
realized net credit losses. Net credit losses totaled $409,000 in 1999, $575,000
in 1998 and $140,000 in 1997. 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 increased from .04% in 1997 to
.15% in 1998 but declined to .10% in 1999. Net charge-offs in 1999 totaled 7.42%
of the allowance for loan losses compared with 11.74% in 1998 and 3.30% in 1997.
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
$1.3 million at the end of 1998 to $2.0 million at the end of 1999.
Non-performing loans represented .43% of total loans as of December 31, 1999 and
.33% at the end of 1998.
16
<PAGE> 17
NON-INTEREST INCOME
Total non-interest income increased $1.1 million or 21.1% in 1999 and declined
$18,000 or .4% in 1998. Excluding net security gains, non-interest income
increased $765,000 or 19.8% in 1999 compared with a $245,000 or 6.8% increase in
1998. Table 5 indicates changes in the major categories of non-interest income.
TABLE 5 - NON-INTEREST INCOME
<TABLE>
<CAPTION>
In thousands 1999/1998 1998/1997
----------------------------------------- -------------------------------------
INCREASE Increase
(DECREASE) (Decrease)
------------------ ----------------
1999 AMOUNT % 1998 Amount % 1997
------- -------- ------ ------ ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Service charges on deposit
accounts $1,607 $ 176 12.3% $1,431 $ 94 7.0% $1,337
Other service charges and fees 251 (6) (2.3) 257 162 170.5 95
Fiduciary activities 1,201 243 25.4 958 154 19.2 804
Net realized gains on sales of
available for sale securities 1,537 307 25.0 1,230 (263) (17.6) 1,493
Mortgage banking 259 (403) (60.9) 662 171 34.8 491
Other 1,304 755 137.5 549 (336) (38.0) 885
------ ------- ------
Total $6,159 $ 1,072 21.1% $5,087 $ (18) (.4)% $5,105
====== ======= ===== ====== ===== ===== ======
</TABLE>
Net security gains totaled $1.5 million in 1999, $1.2 million in 1998 and $1.5
million in 1997. Securities gains and losses in all three years were
attributable to sales of PennRock's equity portfolio and to the sale of other
securities for the purpose of adding liquidity, to control interest rate risk
and reflect the Bank's active management of the available for sale security
portfolio. We continuously monitor PennRock'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. PennRock maintains and actively manages a portfolio of equity securities.
Net equity gains totaled $505,000 in 1999, $598,000 in 1998 and $418,000 in
1997.
Fiduciary fees increased $243,000 or 25.4% in 1999 and by $154,000 or 19.2% in
1998. Assets under trust management were $274 million at the end of 1999, an
increase of $50 million or 22% over assets of $224 million at the end of 1998.
Trust assets increased $59 million or 36% in 1998.
Other non-interest income increased $755,000 or 137.5% in 1999 compared with a
decrease of $336,000 or 38.0% in 1998. In May 1999, the Bank purchased $15
million of Bank Owned Life Insurance ("BOLI"). The increase in the cash
surrender value of the BOLI is included in other non-interest income and totaled
$451,000.
NON-INTEREST EXPENSE
Total non-interest expense for 1999 increased $1.1 million or 6.4% compared with
a $786,000 or 4.7% increase in 1998. Salaries and employee benefits increased
$1.2 million or 12.2% in 1999 and $955,000 or 10.7% in 1998. Total full-time
equivalent employees increased from 238 at year-end 1997 to 255 at the end of
1998 and to 271 in 1999. The ratio of average assets (in millions) per employee
was $2.55 in 1997, $2.71 in 1998 and $2.88 in 1999. The average salary expense
per employee was $32,000 in 1997, $31,000 in 1998 and $30,979 in 1999.
Expenses related to occupancy, premises and equipment decreased $1,000 or .1% in
1999 and increased by $9,000 or .7% in 1998. Expenses relating to equipment,
depreciation and service decreased by $63,000 in 1999 and grew by $105,000 in
1998.
Computer software expense increased $131,000 or 21.9% in 1999 and decreased $1.1
million or 64.1% in 1998. Most of the increase in 1999 is attributable to
upgrades and testing of software systems in response to the century date change.
The decrease in 1998 was due in part to a computer hardware and software
conversion completed in 1997 which reduced 1998 operating costs and improved
operating efficiencies.
17
<PAGE> 18
Other non-interest expenses decreased $166,000 or 3.8% in 1999 and increased by
$786,000 or 21.9% in 1998. Table 6 summarizes the changes in the major
categories of non-interest expense.
TABLE 6 - NON-INTEREST EXPENSE
<TABLE>
<CAPTION>
In thousands 1999/1998 1998/1997
----------------------------------------- -----------------------------------------
INCREASE Increase
(DECREASE) (Decrease)
------------------ -----------------
1999 AMOUNT % 1998 Amount % 1997
-------- ------- ----- ------- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits $11,130 $ 1,214 12.2% $ 9,916 $ 955 10.7% $ 8,961
Occupancy, net 1,287 (1) (.1) 1,288 9 .7 1,279
Equipment, depreciation and
service 1,208 (63) (5.0) 1,271 105 9.0 1,166
Computer software expense 730 131 21.9 599 (1,069) (64.1) 1,668
Other 4,211 (166) (3.8) 4,377 786 21.9 3,591
------- ------- ---- ------- ------- ----- -------
Total $18,566 $ 1,115 6.4% $17,451 $ 786 4.7% $16,665
======= ======= ==== ======= ======= ===== =======
</TABLE>
PROVISION FOR INCOME TAXES
Income tax expense applicable to continuing operations totaled $2.5 million in
1999, $2.0 million in 1998 and $2.6 million in 1997. There was an income tax
benefit of $777,000 in 1997 applicable to discontinued operations. The statutory
federal tax rate was 34% each year. PennRock's effective tax rate applicable to
continuing operations was 18.9% in 1999 compared to 17.1% in 1998 and 21.9% in
1997. The primary reason for the change in the effective tax rate is due to the
change in tax-exempt income. For a more comprehensive analysis of income tax
expense, refer to Note 11 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 $1.6 million (net of an income tax benefit of $777,000) or
$.26 per share in 1997. In accordance with the provisions of APB 30, the
operating results of ARMCO have been segregated from continuing operations and
reported separately as discontinued operations in the statements of income for
1997.
18
<PAGE> 19
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 $80.0 million or 12.3% in 1999 compared
with an increase of $94.1 million or 17.0% in 1998.
TABLE 7 - SOURCES AND USES OF FUNDS
<TABLE>
<CAPTION>
In thousands 1999 1998 1997
--------------------------------------- ---------------------------------------- ------------
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 $ 4,250 $ 1,530 56.3% $ 2,720 $(14,305) (84.0)% $ 17,025
Mortgages held for
sale 2,797 887 46.4 1,910 966 102.3 944
Securities available
for sale 292,408 43,570 17.5 248,838 59,837 31.7 189,001
Loans 429,059 33,982 8.6 395,077 47,615 13.7 347,462
-------- -------- -------- -------- --------
Total uses $728,514 $ 79,969 12.3% $648,545 $ 94,113 17.0% $554,432
======== ======== ===== ======== ======== ===== ========
Funding sources:
Interest-bearing
demand deposits $142,980 $ 56,953 66.2% $ 86,027 $ 15,514 22.0% $ 70,513
Savings deposits 58,412 1,598 2.8 56,814 (2,009) (3.4) 58,823
Time deposits 299,533 26,698 9.8 272,835 3,806 1.4 269,029
Short-term
borrowings 31,059 (9,212) (22.9) 40,271 13,670 51.4 26,601
Long-term debt 90,228 3,958 4.6 86,270 35,977 71.5 50,293
Non-interest bearing
funds, net 106,302 (26) 0.0 106,328 27,155 34.3 79,173
-------- -------- -------- -------- --------
Total sources $728,514 $ 79,969 12.3% $648,545 $ 94,113 17.0% $554,432
======== ======== ===== ======== ======== ===== ========
</TABLE>
SECURITIES AND SHORT-TERM INVESTMENTS
Table 8 indicates the composition and maturity of the securities available for
sale portfolio as of December 31, 1999. Included in the portfolio are callable
agencies, state and municipal securities, mortgage-backed securities (including
adjustable rate mortgage-backed securities) and CMOs that 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 5.2 years as of December 31, 1999 and 5.5
years as of December 31, 1998.
19
<PAGE> 20
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 $2,997 $10,106 $29,698 $ 70,856 $ $113,657 6.66%
States and political subdivisions 1,099 99,426 100,525 8.27
Mortgage backed securities 5,879 21,292 27,171 6.62
Collateralized mortgage
obligations 1,773 2,455 1,965 1,943 8,136 6.24
Corporate obligations 49,626 49,626 6.74
Equity securities 26,431 26,431
---------- ----------- ---------- ---------------------- ----------
Total (amortized cost) $4,770 $19,539 $52,955 $221,851 $26,431 $325,546 7.26%
========== =========== ========== ====================== ==========
Total fair value $4,723 $18,966 $50,952 $208,013 $26,808 $309,462
Taxable equivalent yield 4.85% 6.02% 6.71% 7.53%
Percent of portfolio 1.47% 6.00% 16.27% 68.14% 8.12%
Average maturity 18.8 YEARS
</TABLE>
Measured on an amortized cost basis, securities increased $55.8 million or 20.7%
in 1999 and increased $47.6 million or 21.4% during 1998. As of December 31,
1999, securities available for sale at fair value totaled $309.5 million
compared with $273.7 million at the end of 1998. During 1999, PennRock sold
$79.6 million and purchased $173.6 million in available for sale securities.
During 1998, PennRock sold $83.4 million in securities and purchased $199.1
million. In addition, $40.0 million in 1999 and $70.9 million in 1998 was
received from securities that matured or were called and from principal
repayments of mortgage-backed securities.
As of December 31, 1999, the AFS portfolio had a net unrealized loss of $16.1
million consisting of gross unrealized gains of $1.4 million and gross
unrealized losses of $17.5 million. As of December 31, 1998, the AFS portfolio
had a net unrealized gain of $3.9 million consisting of gross unrealized gains
of $4.5 million and gross unrealized losses of $554,000. In the first and second
quarters of 1999, in anticipation of rising interest rates, we sold $56 million
in longer term fixed-rate securities and reinvested in adjustable rate
securities at significantly lower yields. In spite of this restructuring, with
longer term interest rates increasing nearly 200 basis points during the year,
the net fair value of the portfolio declined $20 million.
As of December 31, 1999, PennRock had $35.3 million invested in mortgage-backed
pass-through securities and CMOs compared with $43.6 million as of December 31,
1998. 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 $27.2 million in mortgage-backed pass-through securities as of
December 31, 1999 of which $8.9 million were adjustable rate and $18.3 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 $8.1 million in CMO securities at the end of both 1999 and 1998.
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 CMOs in
the portfolio was considered "high risk CMOs" as defined by banking regulations.
All CMOs and mortgage-backed pass-through securities were issued by Federal
agencies.
During 1999 and 1998, there were no investments in securities of any single,
non-federal issues in excess of 10% of stockholders' equity.
20
<PAGE> 21
LOANS
Table 9 presents loans outstanding, by type of loan, for the past five years.
Loans increased from year-end 1998 to year-end 1999 by $52.3 million or 12.8%,
compared with a $25.4 million or 6.7% increase from year-end 1997 to year-end
1998. Most of the growth in 1999 was realized in commercial real estate loans,
which grew $31.6 million or 18.8%. PennRock sold $37.5 million in conforming
residential mortgage loans in 1999 and $41.9 million in 1998.
TABLE 9 - LOANS OUTSTANDING, NET OF UNEARNED INCOME
<TABLE>
<CAPTION>
In thousands December 31,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural
Commercial, secured by real estate $199,519 $167,931 $161,939 $127,124 $106,675
Agricultural 7,408 8,999 10,087 9,533 10,268
Other 62,964 58,553 58,405 56,118 52,734
Real estate - construction 26,669 17,474 22,365 9,415 8,761
Real estate - mortgage 146,500 136,969 111,689 99,798 104,211
Consumer loans 17,005 17,861 17,874 17,366 15,376
-------- -------- -------- -------- --------
Total loans $460,065 $407,787 $382,359 $319,354 $298,025
======== ======== ======== ======== ========
</TABLE>
TABLE 10 - LOAN MATURITIES AND INTEREST SENSITIVITY (1)
<TABLE>
<CAPTION>
In thousands DECEMBER 31, 1999
----------------------------------------------------
ONE YEAR ONE THROUGH OVER
OR LESS FIVE YEARS FIVE YEARS TOTAL
------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $ 9,951 $42,261 $217,679 $269,891
Real estate - construction 26,669 26,669
------- ------- -------- --------
Total $36,620 $42,261 $217,679 $296,560
======= ======= ======== ========
Loans with predetermined interest rate $19,530 $23,626 $ 12,744 $ 55,900
Loans with variable interest rate 17,090 18,635 204,935 240,660
------- ------- -------- --------
Total $36,620 $42,261 $217,679 $296,560
======= ======= ======== ========
</TABLE>
TABLE 11 Excludes residential mortgages and consumer loans.
NON-PERFORMING ASSETS
Table 11 shows PennRock's non-performing loans for the five years ended December
31, 1999. 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.
21
<PAGE> 22
TABLE 11 - NON-PERFORMING ASSETS
<TABLE>
<CAPTION>
In thousands December 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Non-accrual loans $1,114 $ 143 $ 288 $ 795 $ 862
Loans accruing but 90 days past due as to
principal or interest 853 1,196 1,853 311 375
------ ------ ------ ------ ------
Total non-performing loans 1,967 1,339 2,141 1,106 1,237
Other real estate owned 162 65 187 276
------ ------ ------ ------ ------
Total non-performing assets $2,129 $1,339 $2,206 $1,293 $1,513
====== ====== ====== ====== ======
Ratios:
Non-performing loans to total loans 0.43% 0.33% 0.56% 0.35% 0.41%
Non-performing assets to total loans and
other real estate owned 0.46% 0.33% 0.58% 0.40% 0.51%
Allowance for loan losses to
non-performing loans 280.33% 365.72% 198.37% 366.09% 295.96%
</TABLE>
As of December 31, 1999, 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, 1999, PennRock did not have any loans outstanding
to any foreign entity or government.
As of December 31, 1999, real estate acquired in foreclosure known as "other
real estate owned" ("OREO") totaled $162,000 and was included in other assets on
the Consolidated Balance Sheets. As of December 31, 1998, PennRock had no OREO.
As of December 31, 1997, OREO totaled $65,000. Valuation reserves are
established for OREO properties whenever estimated current realizable values
fall below the original fair value recorded.
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.
22
<PAGE> 23
TABLE 12 - ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
In thousands Year Ended December 31,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance, beginning of year $ 4,897 $ 4,247 $ 4,049 $ 3,661 $ 3,482
Provision charged to expense 1,026 1,225 258 600 360
Loans charged off:
Commercial, financial and agricultural 216 396 74 159 103
Consumer 277 283 231 132 122
-------- -------- -------- -------- --------
Total loans charged off 493 679 305 291 225
-------- -------- -------- -------- --------
Recoveries:
Commercial, financial and agricultural 21 51 129 49 15
Consumer 63 53 36 30 29
-------- -------- -------- -------- --------
Total recoveries 84 104 165 79 44
-------- -------- -------- -------- --------
Net charge-offs 409 575 140 212 181
-------- -------- -------- -------- --------
Transfer of valuation reserve from
discontinued subsidiary 80
-------- -------- -------- -------- --------
Balance, end of year $ 5,514 $ 4,897 $ 4,247 $ 4,049 $ 3,661
======== ======== ======== ======== ========
Total loans:
Average $429,059 $395,077 $347,462 $312,173 $275,960
Year-end 460,065 407,787 382,359 319,354 298,025
Ratios:
Net charge-offs to:
Average loans 0.10% 0.15% 0.04% 0.07% 0.07%
Total loans 0.09% 0.14% 0.04% 0.07% 0.06%
Allowance for loan losses 7.42% 11.74% 3.30% 5.24% 4.94%
Provision for loan losses 39.86% 46.94% 54.26% 35.33% 50.28%
Allowance for loan losses to:
Average loans 1.29% 1.24% 1.22% 1.30% 1.33%
Loans as of year-end 1.20% 1.20% 1.11% 1.26% 1.23%
</TABLE>
The allowance for loan losses totaled $5.5 million as of December 31, 1999, an
increase of 12.6% from 1998. The allowance for loan losses as a percentage of
year-end loans was 1.20% as of December 31, 1999 and 1998. The provision for
loan losses exceeded net charge-offs by $617,000 in 1999, by $650,000 in 1998
and by $118,000 in 1997. The allowance for loan losses as a percentage of
non-performing loans was 280.33% as of December 31, 1999 and 365.72% as of
December 31, 1998.
Total loans charged-off increased from $305,000 in 1997 to $679,000 in 1998 and
decreased to $493,000 in 1999. Recoveries of loans previously charged-off
decreased from $165,000 in 1997 to $104,000 in 1998 to $84,000 in 1999. The
ratio of net charge-offs to average loans was .04% in 1997, increased to .15% in
1998 and decreased to.10% in 1999.
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.
23
<PAGE> 24
TABLE 13 - ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------- -------------- --------------- ---------------- --------------
% 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 $4,181 58.7% $3,523 57.7% $2,858 60.3% $2,835 60.4% $2,713 56.9%
Real estate -
Construction 5.8 4.3 5.8 2.9 2.9
Real estate - mortgage 225 31.8 235 33.6 60 29.2 53 31.2 118 35.0
Consumer 440 3.7 407 4.4 335 4.7 323 5.5 313 5.2
Unallocated 668 732 994 838 517
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total $5,514 100.0% $4,897 100.0% $4,247 100.0% $4,049 100.0% $3,661 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
As of December 31, 1999, PennRock's recorded investment in loans considered to
be impaired under Statement of Financial Accounting Standards No. 114 was $1.6
million of which $1.1 million was on non-accrual status. Included in this amount
is $628,000 of impaired loans for which the related allowance is $328,000 and
$970,000 for which there is no related allowance. The average recorded
investment in impaired loans for 1999 was $1.2 million and the interest
recognized for the year was $98,000.
As of December 31, 1998, PennRock's recorded investment in impaired loans was
$889,000 of which $143,000 was on non-accrual status. Included in this amount is
$668,000 of impaired loans for which the related allowance is $182,000 and
$220,000 for which there is no related allowance. The average recorded
investment in impaired loans for 1998 was $757,000 and the interest recognized
for the year was $100,000.
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 $81.4 million or 14.8% in 1999 compared with $57.3
million or 11.6% in 1998. 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.
TABLE 14 - DEPOSITS BY MAJOR CLASSIFICATION
<TABLE>
<CAPTION>
In thousands December 31,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Non-interest bearing deposits $ 87,524 $ 88,061 $ 77,106 $ 65,537 $ 57,775
NOW accounts 38,418 39,931 39,061 41,209 39,942
Money market deposit accounts 117,603 80,048 35,080 34,125 31,227
Savings accounts 57,545 56,534 57,557 59,977 60,852
Time deposits under $100,000 283,309 248,252 250,364 224,071 208,022
-------- -------- -------- -------- --------
Total core accounts 584,399 512,826 459,168 424,919 397,818
Time deposits of $100,000 or more 47,016 37,220 33,627 26,548 20,111
-------- -------- -------- -------- --------
Total deposits $631,415 $550,046 $492,795 $451,467 $417,929
======== ======== ======== ======== ========
</TABLE>
24
<PAGE> 25
TABLE 15 - MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
<TABLE>
<CAPTION>
In thousands December 31,
------------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Three months or less $19,228 $12,848 $16,857
Over three months through six months 9,786 14,151 7,226
Over six months through twelve months 9,374 8,020 6,578
Over twelve months 8,628 2,201 2,966
------- ------- -------
Total $47,016 $37,220 $33,627
======= ======= =======
</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 increased from $13.7 million as of December 31, 1998 to $51.7 million
as of December 31, 1999. Approximately $10 million of the short-term borrowings
outstanding as of the end of 1999 were used to fund a higher than normal
cash-on-hand balance in case of an above normal demand for cash by our customers
as result of century date change concerns. All of this extra cash had been
returned to the Federal Reserve Bank of Philadelphia by the end of the second
week of 2000. The Bank also maintains a line of credit with the Federal Home
Loan Bank of Pittsburgh. There were no line advances outstanding as of December
31, 1998 or 1999. The level of short-term borrowings depends on loan growth,
deposit growth, current market rates and other factors. The average cost of
short-term borrowings increased from 5.23% in 1997 to 5.37% in 1998 and
decreased to 4.86% in 1999. Table 16 shows PennRock's short-term borrowings for
the five years ended December 31, 1999.
TABLE 16 - SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
In thousands December 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Federal funds purchased and securities
sold under agreements to repurchase $51,707 $13,742 $ 9,332 $21,136 $40,579
Advances from Federal Home Loan Bank 2,000 6,500
U.S. Treasury tax and loan note 1,500 38 1,500 970 397
------- ------- ------- ------- -------
Total short-term borrowings $53,207 $13,780 $12,832 $22,106 $47,476
======= ======= ======= ======= =======
</TABLE>
CAPITAL RESOURCES
On June 8, 1999, PennRock announced that the Board of Directors had authorized
the purchase of up to 200,000 shares of PennRock'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. PennRock began open market repurchases of its
outstanding common stock in 1995. In 1999, PennRock purchased 130,710 shares for
$2.9 million and reissued 65,317 shares. In 1998, PennRock purchased 112,665
shares for $2.7 million and reissued 52,850 shares. PennRock purchased 100,083
shares for $784,000 and reissued 72,123 shares in 1997. There were 135,847
shares with a cost of $3.1 million as of December 31, 1999 and 70,454 shares
with a cost of $1.7 million as of December 31, 1998 held as treasury stock.
Total stockholders' equity decreased $7.7 million or 11.5% in 1999 compared with
an increase of $5.6 million or 9.2% in 1998. In 1999, stockholders' equity
increased by net income of $10.7 million less dividends of $3.7 million. The
change in net unrealized gains and losses on securities available for sale
decreased equity by $13.2 million. In 1998, stockholders' equity increased by
net income of $9.6 million less dividends of $3.6 million. The change in net
unrealized gains and losses on securities available for sale increased equity by
$1.1 million. The increase in 1997 was due to net income of $7.8 million less
dividends of $3.0 million and by the change in net unrealized loss on securities
available for sale which caused equity to increase by $2.3 million. The ratio of
average equity to average assets was 8.38% in 1999, compared with 9.38% for 1998
and 9.34% in 1997. The ratio of average equity to average assets net of the SFAS
115 adjustment was 8.12% in 1999, 9.11% in 1998 and 9.46% in 1997. Internal
capital generation is calculated by multiplying return on average equity by the
percentage of earnings retained. Internal capital generation amounted to 10.73%
in 1999, 9.26% in 1998 and 8.47% in 1997.
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
25
<PAGE> 26
capital is segregated into two components, tier 1 capital and tier 2 capital.
Tier 1 capital includes stockholders' equity reduced by certain intangibles and
excludes net unrealized holding gains and losses on AFS securities. Net
unrealized losses on marketable equity securities will continue to be deducted
from Tier 1 capital. Tier 2 capital includes the allowance for loan losses
(subject to limitations) and qualifying debt obligations. 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, 1999, 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,
--------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Leverage ratios:
Total capital to total average assets 9.01% 9.96% 10.46%
Tier 1 capital to total average assets 8.33% 9.22% 9.75%
Risk-based ratios:
Common stockholders' equity to risk
weighted assets 9.98% 14.42% 13.76%
Tier 1 capital to risk-weighted assets 11.84% 13.71% 13.26%
Total capital to risk-weighted assets 12.80% 14.77% 14.22%
</TABLE>
INTEREST RATE RISK
Information regarding interest rate risk may be found in Item 7A on pages 26
through 28 of this Annual Report under the caption "Quantitative and Qualitative
Disclosures about Market Risk."
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, Statement of Financial Accounting Standards No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities" was issued. As
amended by SFAS 137, SFAS 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. Earlier application of all the provisions
of this statement are encouraged, but piecemeal adoption of the statement is not
permitted. Among other things, it supersedes SFAS 80, "Accounting for Futures
Contracts," SFAS 105, "Disclosure of Information about Financial Instruments
with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of
Credit Risk," and SFAS 119, "Disclosures about Derivative Financial Instruments
and Fair Value of Financial Instruments." It amends SFAS 107, "Disclosures about
Fair Value of Financial Instruments," to include in SFAS 107 the disclosure
provisions about concentrations of credit risk from SFAS 105. 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.
PennRock has no plans to adopt the provisions of SFAS 133 prior to the effective
date. We have determined that we currently have no instruments or contracts that
meet the scope of SFAS 133. Accordingly, we expect that the adoption of this
statement will have no material impact on the financial statements of PennRock.
26
<PAGE> 27
YEAR 2000 READINESS DISCLOSURE
The year 2000 readiness issue arises from the inability of software or hardware
in computer information systems with date-sensitive functions to properly
recognize and accurately process date-sensitive information on and after January
1, 2000. This problem is expected to exist in computer programs that have
defined dates using a two-digit year. If PennRock, its customers, or third party
vendors and service providers failed to adequately address the year 2000 issue,
it could have adversely affected the viability of PennRock and its products,
services and competitive condition. As of the date of the preparation of this
report, several weeks have passed since the century date change and we have not
experienced any problems from Year 2000 issues either in our own data processing
or with any of our customers or third party vendors and service providers. A
summary of our efforts to address the potential problems from the Year 2000
issue follows.
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 PennRock 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 reported 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 performed Year
2000 examinations of the Plan and the Committee's progress in implementing the
plan.
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 and 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. 100% September,
Establish priorities, time frames and resource requirements. 1998
Establish contingency plans.
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 appropriate
contingency plans for failed systems and processes. 100% June,
1999
</TABLE>
As of the end of the second quarter of 1999, the Committee had met all of its
goals.
Because of the exposure to the operations of PennRock from the failure of large
customers negatively impacted by the 2000 problem, the Committee also
implemented a plan to assess the readiness of PennRock's largest business loan
and deposit customers. A questionnaire was prepared and completed for our
largest business customers.
27
<PAGE> 28
The Committee also opened communications with other significant third parties in
addition to large business customers. These third parities included vendors,
utilities, correspondent financial institutions and governmental agencies. The
Committee wanted to determine the extent to which these third parties were
vulnerable to failures to remediate their own potential Year 2000 problems. Our
plans included tasks to monitor Year 2000 remediation progress for third parties
throughout 1999 and to develop contingency plans for threatened failures.
We estimate that PennRock expended approximately $300,000 from the beginning of
the project in 1997 through the end of 1999 to upgrade hardware and software in
order to achieve Year 2000 compliance. Some of these upgrades were actually
routine maintenance enhancements or were otherwise planned and therefore only
indirectly the result of Year 2000 compliance efforts.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PennRock'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. PennRock's Asset Liability Management Committee ("the
ALCO") addresses this risk. The ALCO is comprised by the senior management team.
The ALCO monitors interest rate risk by modeling the estimated changes in market
value of portfolio equity ("MVPE") and net interest income under various
interest rate scenarios. The MVPE is the present value of expected future cash
flows from assets and liabilities. The ALCO attempts to manage the various
components of PennRock's balance sheet to minimize the impact of sudden and
sustained changes in interest rates on MVPE and net interest income. However,
the ALCO may sometimes structure the balance sheet to take advantage of expected
interest rate movements.
PennRock'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 PennRock's change in net
interest income and MVPE in the event of hypothetical changes in interest rates.
If potential changes to MVPE 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.
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, PennRock is asset sensitive. If more
liabilities mature or reprice, PennRock is liability sensitive. An asset
sensitive gap will benefit PennRock in a period of rising rates while a
liability sensitive gap will benefit PennRock 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 change the
characteristics of certain financial instruments and cause them to react
differently than expected. For example, a decrease in market rates could trigger
mortgage customers to refinance their mortgages while an increase in market
rates may induce customers to choose to redeem their certificates of deposit
prior to maturity. These and other changes would likely cause actual results to
deviate significantly from the assumptions used in calculating changes in net
interest income or MVPE. While ALCO continuously monitors and adjusts the gap
position to maximize profitability, the primary objective is to maintain net
interest income and MVPE 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,
1999. All interest rates are on a tax equivalent basis.
28
<PAGE> 29
INTEREST SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
In thousands DECEMBER 31, 1999
---------------------------------------------------------------------------------
INTEREST SENSITIVITY PERIOD
---------------------------------------------------------------------------------
MORE
THAN 3 MORE THAN MORE THAN
LESS THAN MONTHS TO 6 MONTHS 1 YEAR TO MORE THAN
3 MONTHS 6 MONTHS TO 1 YEAR 5 YEARS 5 YEARS TOTAL
------------ ------------ ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Earning assets:
Short-term investments $ 2,406 $ $ $ $ $ 2,406
Weighted average interest rate 5.25% 5.25%
Mortgages held for sale 295 295
Weighted average interest rate 6.56% 6.56%
Securities available for sale 77,635 1,664 5,744 28,553 204,917 318,513
Weighted average interest rate 6.90% 6.50% 5.66% 6.38% 7.49% 7.21%
Loans 130,794 28,795 60,873 225,619 13,984 460,065
Weighted average interest rate 8.66% 8.15% 8.31% 8.20% 7.99% 8.34%
-------- --------- --------- -------- -------- --------
Total interest earning assets $211,130 $ 30,459 $ 66,617 $254,172 $218,901 $781,279
======== ========= ========= ======== ======== ========
Interest bearing liabilities:
Interest bearing demand
deposits (1) $118,079 $ 476 $ 953 $ 7,621 $ 28,578 $155,707
Weighted average interest rate 4.55% 1.20% 1.20% 1.20% 1.20% 3.73%
Savings deposits (2) 719 719 1,439 11,509 43,157 57,543
Weighted average interest rate 1.97% 1.97% 1.97% 1.97% 1.97% 1.97%
Time deposits 108,424 73,745 70,766 77,394 51 330,380
Weighted average interest rate 5.06% 5.12% 5.38% 5.53% 5.23% 5.25%
Short-term borrowings 53,207 53,207
Weighted average interest rate 4.66% 4.66%
Long-term debt 25,000 50,000 15,000 90,000
Weighted average interest rate 6.01% 5.64% 5.55% 5.73%
-------- --------- --------- -------- -------- --------
Total interest bearing
liabilities $280,429 $ 99,940 $ 73,158 $146,524 $ 86,786 $686,837
======== ========= ========= ======== ======== ========
Interest sensitivity gap:
Period $(69,299) $ (69,481) $ (6,541) $107,648 $132,115
Cumulative (69,299) (138,780) (145,321) (37,673) 94,442
Interest sensitive assets to
interest sensitive liabilities
ratio:
Period 75.29% 30.48% 91.06% 173.47% 252.23%
Cumulative 75.29% 63.51% 67.96% 93.72% 113.75%
</TABLE>
(1) Assumes NOW account balances are withdrawn at 5% per year based on prior
experience.
(2) Assumes passbook and statement savings balances are withdrawn at 5% per
year.
While the preceding table helps provide some information about PennRock'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
PennRock's interest rate risk by computing estimated changes in MVPE 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. PennRock's Board of Directors
has adopted an interest rate risk policy which establishes maximum decrease in
the MVPE 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 PennRock's projected change in MVPE and net interest income for 100 and
200 basis point rate shocks as of December 31, 1999 and the Board's established
limit. MVPE 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 MVPE sensitivity.
29
<PAGE> 30
CHANGES IN NET PORTFOLIO VALUE
In thousands
<TABLE>
<CAPTION>
Market value of Computed Percent Board
Change in Interest Rates portfolio equity Change Change Limit
- ----------------------------- -------------------- ------------- --------- --------
<S> <C> <C> <C> <C>
200 basis point rise $23,697 $(35,536) (60.0)% (25.0)%
100 basis point rise 40,211 (19,022) (32.1)%
Base rate scenario 59,233
100 basis point decline 73,108 13,875 23.4%
200 basis point decline 76,679 17,445 29.5% (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 $25,511 $(2,403) (8.61)% (10.0)%
100 basis point rise 26,686 (1,228) (4.40)%
Base rate scenario 27,914
100 basis point decline 29,217 1,303 4.67%
200 basis point decline 29,152 1,238 4.43% (10.0)%
</TABLE>
The preceding tables indicates that as of December 31, 1999, in the event of a
sudden and sustained increase in prevailing market interest rates, both
PennRock's MVPE and its net interest income would be expected to decrease. At
December 31, 1999, PennRock's estimated change in MVPE given a 200 basis point
rise in interest rates was above the target established by the Board of Director
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.
30
<PAGE> 31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following audited consolidated financial statements are set forth in this
Annual Report of Form 10-K on the following pages:
PennRock Financial Services Corp. and Subsidiaries
Independent Auditors' Report........................................31
Consolidated Balance Sheets.........................................32
Consolidated Statements of Income...................................33
Consolidated Statements of Stockholders' Equity.....................34
Consolidated Statements of Cash Flows...............................35
Notes to Consolidated Financial Statements..........................36
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, 1999 and 1998, 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, 1999.
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, 1999 and
1998, and the consolidated results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1999 in conformity
with generally accepted accounting principles.
/s/ SIMON LEVER & COMPANY
January 31, 2000
Lancaster, Pennsylvania
31
<PAGE> 32
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
In thousands
December 31,
--------------------------
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Cash and due from banks $ 26,455 $ 19,747
Short-term investments 2,406 1,166
Mortgages held for sale 295 5,892
Securities available for sale (at fair value) 309,462 273,722
Loans 460,065 407,787
Allowance for loan losses (5,514) (4,897)
--------- ---------
Net loans 454,551 402,890
Premises and equipment 13,294 13,383
Accrued interest receivable 5,878 6,142
Bank owned life insurance 15,435
Other assets 14,670 7,589
--------- ---------
Total assets $ 842,446 $ 730,531
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 87,524 $ 88,061
Interest bearing 543,891 461,985
--------- ---------
Total deposits 631,415 550,046
Short-term borrowings 53,207 13,780
Long-term debt 90,000 90,700
Accrued interest payable 3,599 3,235
Other liabilities 4,992 5,859
--------- ---------
Total liabilities 783,213 663,620
Stockholders' Equity:
Common stock, par value $2.50 per share; authorized
20,000,000 shares; issued 6,077,614 and 6,077,299 shares 15,194 15,193
Surplus 11,114 11,106
Accumulated other comprehensive income, net of tax (10,616) 2,602
Retained earnings 46,609 39,694
Treasury stock at cost (135,847 and 70,454 shares) (3,068) (1,684)
--------- ---------
Total stockholders' equity 59,233 66,911
--------- ---------
Total liabilities and stockholders' equity $ 842,446 $ 730,531
========= =========
</TABLE>
See notes to consolidated financial statements.
32
<PAGE> 33
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
In thousands, except per share data
Year Ended December 31,
----------------------------------------------
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 36,290 $ 35,185 $ 32,218
Securities available for sale:
Taxable 12,897 9,004 8,282
Tax-exempt 5,197 6,147 3,427
Mortgages held for sale 202 159 64
Other 197 148 1,627
----------- ---------- ----------
Total interest income 54,783 50,643 45,618
Interest expense:
Deposits 21,466 18,389 17,632
Short-term borrowings 1,511 2,162 1,390
Long-term debt 5,160 4,907 2,856
----------- ---------- ----------
Total interest expense 28,137 25,458 21,878
----------- ---------- ----------
Net interest income 26,646 25,185 23,740
Provision for loan losses 1,026 1,225 258
----------- ---------- ----------
Net interest income after provision for loan losses 25,620 23,960 23,482
----------- ---------- ----------
Non-interest income:
Service charges on deposit accounts 1,607 1,431 1,337
Other service charges and fees 251 257 95
Fiduciary activities 1,201 958 804
Net realized gains on sales of available for sale 1,537 1,230 1,493
securities
Mortgage banking 259 662 491
Other 1,304 549 885
----------- ---------- ----------
Total non-interest income 6,159 5,087 5,105
----------- ---------- ----------
Non-interest expenses:
Salaries and benefits 11,130 9,916 8,961
Occupancy, net 1,287 1,288 1,279
Equipment depreciation and service 1,208 1,271 1,166
Computer software expense 730 599 1,668
Other 4,211 4,377 3,591
----------- ---------- ----------
Total non-interest expense 18,566 17,451 16,665
----------- ---------- ----------
Income from continuing operations before income taxes 13,213 11,596 11,922
Income taxes applicable to continuing operations 2,503 1,981 2,607
----------- ---------- ----------
Income from continuing operations 10,710 9,615 9,315
Discontinued operations:
Loss from operations of discontinued subsidiary (net of
income tax benefit of $777) (1,555)
----------- ---------- ----------
Net income $ 10,710 $ 9,615 $ 7,760
=========== ========== ==========
Earnings per common share:
Income from continuing operations (net of tax) $ 1.79 $ 1.59 $ 1.54
Loss from discontinued operations (net of tax) (.26)
----------- ---------- ----------
Net income $ 1.79 $ 1.59 $ 1.28
=========== ========== ==========
Weighted average number of shares outstanding 5,971,106 6,056,650 6,062,449
=========== ========== ==========
</TABLE>
Basic earnings per share and diluted earnings per share are the same for 1999,
1998 and 1997.
See notes to consolidated financial statements.
33
<PAGE> 34
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
In thousands Accumulated
Other
Common Retained Treasury Comprehensive
Stock Surplus Earnings Stock Income (Loss) Total
---------- ----------- ---------- ---------- ------------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance as of January 1, 1997 $15,193 $11,153 $28,939 $ (740) $ (816) $53,729
Comprehensive income:
Net income 7,760 7,760
Change in net unrealized loss on
securities available for sale, net of
reclassification adjustment and
tax effects 2,273 2,273
-------
Total comprehensive income 10,033
Purchase of treasury stock (784) (784)
Sale of treasury stock under
dividend reinvestment plan (35) (25) 1,319 1,259
Cash dividends declared
($.49 per share) (2,970) (2,970)
------- ------- ------- ------- -------- -------
Balance as of December 31, 1997 15,193 11,118 33,704 (205) 1,457 61,267
Comprehensive income:
Net income 9,615 9,615
Change in net unrealized gains on
securities available for sale, net of
reclassification adjustment and
tax effects 1,145 1,145
-------
Total comprehensive income 10,760
Purchase of treasury stock (2,699) (2,699)
Sale of treasury stock under
dividend reinvestment plan 1,162 1,162
Sale of treasury stock under Omnibus
Stock Option Plan (12) 50 38
Treasury stock issued as compensation 8 8
Cash dividends declared
($.60 per share) (3,625) (3,625)
------- ------- ------- ------- -------- -------
Balance as of December 31, 1998 15,193 11,106 39,694 (1,684) 2,602 66,911
Comprehensive income:
Net income 10,710 10,710
Change in net unrealized loss on
securities available for sale, net of
reclassification adjustment and
tax effects (13,218) (13,218)
-------
Total comprehensive loss (2,508)
Purchase of treasury stock (2,933) (2,933)
Sale of treasury stock under
dividend reinvestment plan (93) 1,529 1,436
Sale of treasury stock under Omnibus
Stock Option Plan (5) 18 13
Treasury stock issued as compensation 1 8 2 11
Cash dividends declared
($.62 per share) (3,697) (3,697)
------- ------- ------- ------- -------- -------
Balance as of December 31, 1999 $15,194 $11,114 $46,609 $(3,068) $(10,616) $59,233
======= ======= ======= ======= ======== =======
</TABLE>
See notes to consolidated financial statements.
34
<PAGE> 35
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
In thousands
Year Ended December 31,
-------------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Income from continuing operations $ 10,710 $ 9,615 $ 9,315
Adjustments to reconcile income from continuing operations
to net cash provided by operating activities:
Provision for loan losses 1,026 1,225 258
Depreciation and amortization 1,191 1,162 1,065
Amortization of deposit premium 100 100 105
Premium on deposits sold (300)
Accretion and amortization of securities (808) (1,535) (379)
Deferred income taxes (91) (264) 104
Net realized gains on sale of available for sale securities (1,537) (1,230) (1,493)
Proceeds from sales of mortgage loans 37,461 41,854 24,143
Originations of mortgages held for sale (32,237) (46,732) (24,139)
Loss on sale of mortgage loans, net 372 23 119
(Gain) loss on sale of equipment (3) 161
(Increase) decrease in interest receivable 263 (2,348) (465)
Increase in interest payable 363 77 400
Increase in cash surrender value of bank owned life insurance (435)
Other changes, net (1,315) 2,557 (2,742)
--------- --------- ---------
Net cash provided by operating activities of continuing operations 15,063 4,501 6,152
Net cash provided by discontinued operations 5,290
--------- --------- ---------
Net cash provided by operations 15,063 4,501 11,442
--------- --------- ---------
INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 79,648 83,449 119,243
Purchases of securities available for sale (173,559) (199,136) (172,934)
Maturities of securities available for sale 40,491 70,873 20,625
Proceeds from sale of other real estate 167 204 150
Purchase of bank owned life insurance (15,000)
Net increase in loans (52,687) (26,003) (63,064))
Purchases of premises and equipment (1,102) (1,932) (3,618)
Proceeds from sale of equipment 45 79
--------- --------- ---------
Net cash used in investing activities (122,042) (72,500) (99,519)
--------- --------- ---------
FINANCING ACTIVITIES:
Net increase (decrease) in non-interest bearing deposits (537) 10,955 11,569
Net increase in interest bearing deposits 81,906 46,297 29,759
Net increase (decrease) in short-term borrowings 39,427 948 (9,274)
Net increase (decrease) in long-term debt (700) 13,700 63,000
Issuance of common and treasury stock 1,461 1,207 1,257
Purchase of treasury stock (2,933) (2,699) (784)
Cash dividends (3,697) (3,625) (2,970)
--------- --------- ---------
Net cash provided by financing activities 114,927 66,783 92,557
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 7,948 (1,216) 4,480
Cash and cash equivalents at beginning of year 20,913 22,129 17,649
--------- --------- ---------
Cash and cash equivalents at end of year $ 28,861 $ 20,913 $ 22,129
========= ========= =========
Supplemental schedule of interest and income taxes paid:
Total interest paid $ 27,774 $ 25,381 $ 21,458
Total income taxes paid 2,200 2,500 1,200
</TABLE>
See notes to consolidated financial statements.
35
<PAGE> 36
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.
PennRock Insurance Group, Inc. ("PIGI"), a wholly owned subsidiary of the Bank,
was organized in 1998 to sell annuities and other types of insurance products.
PIGI began operations in the first quarter of 1999. 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.
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.
36
<PAGE> 37
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.
A loan is considered to be impaired 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. In such cases, the amount of impairment
and any subsequent changes are recorded as an adjustment to the allowance for
loan losses. This analysis 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.
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.
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 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.
37
<PAGE> 38
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
OTHER REAL ESTATE OWNED:
Other real estate owned represents properties acquired through customers' loan
defaults. When properties are acquired through foreclosure, any excess of the
loan balance at the time of foreclosure over the fair value of the real estate
held as collateral is recognized as a loss and charged to the allowance for loan
losses. After foreclosure, other real estate is reported at the lower of fair
value at acquisition date or fair value less estimated disposal costs. Fair
value is determined on the basis of current appraisals obtained from independent
sources. Subsequent write-downs are charged to an allowance for other real
estate established through provisions for other real estate expenses. Costs of
improvements to other real estate are capitalized while costs associated with
holding other real estate are charged to operations. Other real estate owned is
recorded as other assets in the Consolidated Balance Sheets.
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:
Mortgage loan servicing rights ("MSRs") are capitalized when acquired either
through the purchase or origination of mortgage loans that are subsequently sold
with servicing rights retained. PennRock recognizes MSRs retained for loans sold
by allocating total costs incurred between the loan and the servicing rights
based on their relative fair values. MSRs are amortized in proportion to, and
over the period of, estimated net servicing income. To determine the fair value
of MSRs, 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.
PennRock establishes a valuation allowance for the excess of the carrying amount
of capitalized MSRs 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 MSRs 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
MSRs increase or decrease over time. The cost of the MSRs is amortized over the
estimated period of net servicing revenues.
On January 1, 1997, PennRock 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.
38
<PAGE> 39
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SFAS 125 extends the "available for sale" or "trading" approach in SFAS 115,
"Accounting for Certain Investments in Debt and Equity Securities," to
non-security financial assets that can contractually be prepaid or otherwise
settled in such a way that the holder of the asset would not recover
substantially all of its recorded investment. Thus, non-security financial
assets (no matter how acquired) that are subject to prepayment risk that could
prevent recovery of substantially all of the recorded amount are to be reported
at fair value with the change in fair value accounted for depending on the
asset's classification as "available-for-sale" or "trading." SFAS 125 also
amends SFAS 115 to prevent a security from being classified as
"held-to-maturity" if the security can be prepaid or otherwise settled in such a
way that the holder of the security would not recover all of its recorded
investment.
SFAS 125 requires that a liability cease to be recognized if and only if either
(a) the debtor pays the creditor and is relieved of its obligation for the
liability or (b) the debtor is legally released from being the primary obligor
under the liability either judicially or by the creditor.
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 $509,000 and $608,000 of deposit
premiums as of December 31, 1999 and 1998, respectively. This premium is being
amortized using the straight-line method over 10 years.
LONG-LIVED ASSETS:
PennRock evaluates long-lived assets and certain intangibles to be held and used
for impairment whenever events or changes in circumstances indicate that the
related carrying amounts 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.
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.
39
<PAGE> 40
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STOCK-BASED COMPENSATION:
PennRock accounts for its stock options and stock-based compensation plans in
accordance with Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Based Compensation." Under this method, no compensation
expense is recognized for stock options when the exercise price equals fair
value at the date of grant. Under the provisions of Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation," the fair value of a stock option is recognized as compensation
expense over the service period (generally the vesting period). Since we have
chosen to continue to account for stock options and stock-based compensation
plans in accordance with APB 25, we must provide pro forma net income and
earnings per share information as if the fair value approach of SFAS 123 had
been adopted.
NET INCOME PER SHARE:
Effective December 31, 1997, PennRock adopted the provisions of 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. There has been 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 have been the same for all
periods presented.
COMPREHENSIVE INCOME:
On January 1, 1998, PennRock adopted the provisions of Statement of Financial
Accounting Standards No. 130 ("SFAS 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. Currently,
PennRock's only source of comprehensive income other than net income is the net
change in the unrealized gain or loss of securities available for sale.
SEGMENT DISCLOSURE:
On January 1, 1998, PennRock adopted Statement of Financial Accounting Standards
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. Currently, management measures the performance and
allocates the resources of PennRock as a single segment.
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: 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, 1999 was approximately $5.3 million.
Balances maintained at the Federal Reserve Bank are included in cash and due
from banks.
40
<PAGE> 41
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3: SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated fair value of securities available for sale are
as follows:
<TABLE>
<CAPTION>
In thousands DECEMBER 31, 1999
----------------------------------------------------
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 $113,657 $ 11 $ (7,328) $106,340
Obligations of states and political
subdivisions 100,525 106 (7,062) 93,569
U.S. agency mortgage-backed securities 27,171 141 (946) 26,366
Collateralized mortgage obligations 8,136 29 (197) 7,968
Corporate notes 49,626 34 (1,249) 48,411
-------- ------ -------- --------
Total debt securities available for sale 299,115 321 (16,782) 282,654
Equity securities 26,431 1,077 (700) 26,808
-------- ------ -------- --------
Total securities available for sale $325,546 $1,398 ($17,482) $309,462
======== ====== ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
-------------------------------------------------------
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 $ 79,319 $ 405 $ (245) $ 79,479
Obligations of states and political
subdivisions 122,813 3,196 (102) 125,907
U.S. agency mortgage-backed securities 35,515 449 (25) 35,939
Collateralized mortgage obligations 8,122 (40) 8,082
Other 4,332 30 4,362
-------- ------- ------- --------
Total debt securities available for sale 250,101 4,080 (412) 253,769
Equity securities 19,679 416 (142) 19,953
-------- ------- ------- --------
Total securities available for sale $269,780 $ 4,496 ($ 554) $273,722
======== ======= ======= ========
</TABLE>
The amortized cost and fair value of debt securities as of December 31, 1999, 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 and collateralized
mortgage obligations may be prepaid without any penalties.
<TABLE>
<CAPTION>
In thousands DECEMBER 31, 1999
-----------------------
AMORTIZED FAIR
COST VALUE
-------- --------
<S> <C> <C>
Due in one year or less $ 2,997 $ 2,956
Due after one year through five years 11,204 10,872
Due after five years through ten years 29,698 28,344
Due after ten years 219,909 206,148
-------- --------
263,808 248,320
Mortgage backed securities 27,171 26,366
Collateralized mortgage obligations 8,136 7,968
-------- --------
Total debt securities $299,115 $282,654
======== ========
</TABLE>
41
<PAGE> 42
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:
In thousands
1999 1998 1997
------- ------- -------
Debt securities
Gross gains $ 1,144 $ 781 $ 1,420
Gross losses (112) (149) (345)
------- ------- -------
Total debt securities 1,032 632 1,075
Equity securities, net 505 598 418
------- ------- -------
Total securities gains $ 1,537 $ 1,230 $ 1,493
======= ======= =======
Proceeds from sales of securities available for sale are as follows:
In thousands
1999 1998 1997
------- ------- --------
Debt securities $75,071 $78,574 $112,312
Equity securities 4,577 4,875 6,931
------- ------- --------
Total proceeds $79,648 $83,449 $119,243
======= ======= ========
Securities with a carrying value of $117.3 million and $27.3 million as of
December 31, 1999 and 1998 were pledged to secure public and trust deposits,
repurchase agreements as well as other purposes. Pledged security balances were
substantially higher in 1999 than 1998 due to securities being pledged to secure
sources of credit at the Federal Reserve Bank and the Federal Home Loan Bank of
Pittsburgh to ensure adequate liquidity in the event of an extraordinary demand
for cash by customers in the fourth quarter of 1999.
NOTE 4: LOANS
The loan portfolio net of unearned income and deferred loan fees, as of December
31, 1999 and 1998 is as follows:
In thousands
1999 1998
-------- --------
Commercial, financial and agricultural:
Commercial, secured by real estate $199,519 $167,931
Agricultural 7,408 8,999
Other 62,964 58,553
Real estate - construction 26,669 17,474
Real estate - mortgage 146,500 136,969
Consumer 17,005 17,861
-------- --------
Total loans $460,065 $407,787
======== ========
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, 1999, was as follows:
42
<PAGE> 43
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In thousands
Balance, January 1, 1999 $ 7,961
New loans 13,909
Repayments (7,096)
-------
Balance, December 31, 1999 $14,774
=======
Included in the loan portfolio are loans on which the Bank has ceased the
accrual of interest. Such loans amounted to $1.1 million and $143,000 as of
December 31, 1999 and 1998, respectively. If interest income had been recorded
on all non-accrual loans outstanding during the years 1999, 1998 and 1997,
interest income would have been increased as shown in the following table:
In thousands
1999 1998 1997
---- ---- ----
Interest which would have been recorded
under original terms $226 $26 $27
Interest income recorded during the year 8 0 0
---- --- ---
Net impact on interest income $218 $26 $27
==== === ===
As of December 31, 1999, PennRock's recorded investment in loans considered to
be impaired under Statement of Financial Accounting Standards No. 114 ("SFAS
114") was $1.6 million of which $1.1 million was on non-accrual status. Included
in this amount is $628,000 of impaired loans for which the related allowance is
$328,000 and $970,000 for which there is no related allowance. The average
recorded investment in impaired loans for 1999 was $1.2 million and the interest
recognized for the year was $98,000.
As of December 31, 1998, PennRock's recorded investment in loans considered to
be impaired under SFAS 114 was $889,000 of which $143,000 were on non-accrual
status. Included in this amount is $668,000 of impaired loans for which the
related allowance is $182,000 and $220,000 for which there is no related
allowance. The average recorded investment in impaired loans for 1998 was
$757,000 and the interest recognized for the year was $100,000.
NOTE 5: 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 were $170.8 million as of December
31, 1999 and $176.6 million as of December 31, 1998.
During 1999, $262,000 of originated mortgage servicing rights was capitalized
and $128,000 of amortization of mortgage servicing rights was recorded. In 1998,
$338,000 of originated mortgage servicing rights was capitalized and $80,000 of
amortization of mortgage servicing rights was recorded. The estimated fair value
of mortgage servicing rights was $652,000 as of December 31, 1999 and $479,000
as of December 31, 1998.
43
<PAGE> 44
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6: 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:
In thousands
1999 1998 1997
------- ------- -------
Balance at beginning of year $ 4,897 $ 4,247 $ 4,049
Provision charged to expense 1,026 1,225 258
Recoveries of loans charged-off 84 104 165
------- ------- -------
6,007 5,576 4,472
Loans charged off (493) (679) (305)
Transfer of valuation reserve from
discontinued subsidiary 80
------- ------- -------
Balance at end of year $ 5,514 $ 4,897 $ 4,247
======= ======= =======
NOTE 7: PREMISES AND EQUIPMENT
Details of premises and equipment as of December 31 are as follows:
In thousands
1999 1998
-------- --------
Land $ 2,097 $ 2,097
Premises 11,114 9,394
Furniture and equipment 11,136 10,617
Construction in progress 193 1,331
-------- --------
Total cost 25,540 23,439
Less accumulated depreciation (11,246) (10,056)
-------- --------
Net book value $ 13,294 $ 13,383
======== ========
Depreciation and amortization expense was $1.6 million in 1999, $1.2 million in
1998 and $1.1 million in 1997.
Future minimum rental payments that are related to non-cancelable operating
leases having initial terms in excess of one year are:
2000 $108,000
2001 121,000
2002 112,000
2003 80,000
2004 80,000
Thereafter 276,000
Total lease payments were $95,000, $117,000 and $145,000 in 1999, 1998 and 1997.
44
<PAGE> 45
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8: 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, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
In thousands
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Securities sold under agreements to repurchase $ 8,107 $ 7,192 $ 9,332
Overnight federal funds purchased 3,600 6,550
Federal Home Loan Bank borrowings 40,000 2,000
U. S. Treasury tax and loan note 1,500 38 1,500
------- ------- -------
Total short-term borrowings outstanding at year-end $53,207 $13,780 $12,832
======= ======= =======
Average interest rate at year-end 4.66% 4.37% 4.87%
Maximum outstanding at any month-end $58,700 $69,563 $70,225
Average amount outstanding $31,059 $40,271 $26,601
Weighted average interest rate 4.86% 5.37% 5.23%
</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 $160.4 million at the Federal Home Loan Bank of Pittsburgh (the
"FHLB").
NOTE 9: 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, 1999 December 31, 1998
- ------------------------------------------------------ ----------------------------------------------------
INTEREST Interest
AMOUNT MATURITY DATE RATE Amount Maturity Date Rate
- -------------- ----------------------- ------------ ------------ ---------------------- ------------
<S> <C> <C> <C> <C> <C>
$ 700 January 13, 1999 5.37%
$25,000 JUNE 5, 2000 6.01% 25,000 June 5, 2000 6.01
15,000 SEPTEMBER 17, 2002 5.74 35,000 March 24, 2002 5.46
35,000 DECEMBER 17, 2004 5.60 15,000 September 17, 2002 5.74
15,000 APRIL 25, 2005 5.55 15,000 April 25, 2005 5.55
------- -------
$90,000 $90,700
======= =======
</TABLE>
Certain of the outstanding advances have options that allow the FHLB to convert
the existing 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 prepaid
without penalty. During 1999, the FHLB exercised its option to convert one
advance totaling $35 million which we elected to prepay and replace with another
convertible advance of $35 million at an interest rate of 5.60%.
NOTE 10: CAPITAL TRANSACTIONS
On June 8, 1999, PennRock announced that the Board of Directors had authorized
the purchase of up to 200,000 shares of PennRock'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. PennRock began open market repurchases of its
outstanding common stock in 1995. In 1999, PennRock purchased 130,710 shares for
$2.9 million and reissued 65,317 shares. In 1998, PennRock purchased 112,665
shares for $2.7 million and reissued 52,850 shares. PennRock purchased 42,882
shares for $784,000 and
45
<PAGE> 46
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
reissued 72,123 shares in 1997. There were 135,847 shares with a cost of $3.1
million as of December 31, 1999 and 70,454 shares with a cost of $1.7 million as
of December 31, 1998 held as treasury stock.
NOTE 11: INCOME TAXES
An analysis of the provision for income taxes included in the Consolidated
Statements of Income is as follows:
<TABLE>
<CAPTION>
In thousands
1999 1998 1997
------- ------- ------
<S> <C> <C> <C>
Current expense $ 2,594 $ 2,245 $2,503
Deferred taxes (91) (264) 104
------- ------- ------
Provision for income taxes applicable to
continuing operations 2,503 1,981 2,607
Income tax benefit applicable to
discontinued operations (777)
------- ------- ------
Total income tax expense $ 2,503 $ 1,981 $1,830
======= ======= ======
</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>
1999 1998 1997
------ ------ ----
<S> <C> <C> <C>
Statutory federal income tax rate 34.0% 34.0% 34.0%
Tax exempt income (14.4) (17.0) (11.7)
Other, net (.7) .1 (.4)
----- ----- -----
Effective income tax rate 18.9% 17.1% 21.9%
===== ===== =====
</TABLE>
Deferred taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of PennRock's
deferred tax liabilities and assets as of December 31, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
In thousands
1999 1998
------ -----
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $1,773 $1,563
Alternative minimum tax credit carryforward 112
Net unrealized loss on securities available for sale 5,469
Other 131 91
------ ------
Total deferred tax assets 7,373 1,766
------ ------
Deferred tax liabilities:
Depreciation 284 295
Investment security discount 165 106
Net expense from limited partnership 58 58
Net unrealized gain on securities available for sale 1,340
------ ------
Total deferred tax liabilities 507 1,799
------ ------
Net deferred tax asset (liability) $6,866 $ (33)
====== ======
</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.
46
<PAGE> 47
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Management believes that it is more likely than not that the net deferred tax
asset of $6.9 million 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.
NOTE 12: 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
$906,000 in 1999, $802,000 in 1998 and $749,000 in 1997.
NOTE 13: 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 1,000 shares exercisable as of December 31, 1999. All options have
been adjusted to reflect stock splits since the date of grant.
Weighted
Average
Number of Exercise
Shares Price
-------- -------
Outstanding, January 1, 1999 13,500 $21.07
Granted 28,000 22.00
Exercised (750) 16.92
--------
Outstanding, December 31, 1999 40,750 $21.78
======== ======
Weighted average fair value of options
granted during 1999 $616,000
========
The pro forma disclosures that are required by SFAS 123 are not applicable due
to immateriality.
NOTE 14: 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.
47
<PAGE> 48
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of PennRock's commitments and contingent liabilities as of December
31, 1999 and 1998 are as follows:
In thousands
1999 1998
-------- -------
Commitments to extend credit $114,262 $99,127
Financial and performance standby letters of credit 23,290 11,829
Commitments to purchase securities 485
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 4. 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, 1999,
this limit was $6,496,000.
NOTE 15: 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 2000
without approval of the Comptroller of the Currency of approximately $13.2
million plus an additional amount equal to the Bank's net profit (as defined)
for 2000 up to the date of any such dividend declaration.
NOTE 16: COMPREHENSIVE INCOME
PennRock has elected to report its comprehensive income in the Consolidated
Statements of Stockholders' Equity. The only element of "other comprehensive
income" applicable to PennRock is the net unrealized gain or loss on available
for sale securities. The 1997 financial statements have been reclassified to
reflect these changes in reporting format.
48
<PAGE> 49
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of the change in unrealized gains (losses) on securities
available for sale are as follows:
<TABLE>
<CAPTION>
In thousands
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Net unrealized holding gains (losses) arising during the year ($18,490) $ 2,965 $ 4,937
Reclassification adjustment for gains realized in net income (1,537) (1,230) (1,493)
-------- ------- -------
Net unrealized holding gains (losses) before taxes (20,027) 1,735 3,444
Tax effect 6,809 (590) (1,171)
-------- ------- -------
Net change ($13,218) $ 1,145 $ 2,273
======== ======= =======
</TABLE>
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, 1999, that PennRock
meets all capital adequacy requirements to which it is subject.
As of December 31, 1999, 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>
To Be Well
Capitalized Under
Prompt Corrective For Capital
Actual Action Provisions Adequacy Purposes
------------------------- ------------------------- -------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Total capital
(to risk weighted assets) $74,887 12.80% $58,495 10.0% $46,796 8.0%
Tier 1 capital
(to risk weighted assets) $69,269 11.84% $35,097 6.0% $23,398 4.0%
Tier 1 capital
(to average assets) $69,269 8.33% $41,578 5.0% $33,262 4.0%
As of December 31, 1998:
Total capital
(to risk weighted assets) $68,504 14.77% $45,739 10.0% $36,591 8.0%
Tier 1 capital
(to risk weighted assets) $63,607 13.71% $27,443 6.0% $18,295 4.0%
Tier 1 capital
(to average assets) $63,607 9.22% $34,501 5.0% $27,601 4.0%
</TABLE>
49
<PAGE> 50
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. SFAS 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 PennRock.
We used the following methods and assumptions in estimating the fair value of
PennRock'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.
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.
50
<PAGE> 51
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Long-term debt:
The fair values of long-term debt are estimated using discounted cash flow
analyses, based on PennRock'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.
As of December 31, 1999 and 1998, the estimated fair values of financial
instruments based on disclosed assumptions are as follows:
<TABLE>
<CAPTION>
In thousands
1999 1998
--------------------------- -----------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 26,455 $ 26,455 $ 19,747 $ 19,747
Short-term investments 2,406 2,406 1,166 1,166
Mortgages held for sale 295 295 5,892 5,892
Securities available for sale 309,462 309,462 273,722 273,722
Loans:
Commercial, financial and agricultural 269,891 269,124 235,483 239,256
Real estate - construction 26,669 26,573 17,474 17,750
Real estate - mortgage 146,500 146,840 136,969 139,331
Consumer 17,005 17,185 17,861 18,173
Allowance for loan losses (5,514) (4,897)
--------- --------- -------- --------
Net loans 454,551 459,722 402,890 414,510
Accrued interest receivable 5,878 5,878 6,142 6,142
Financial liabilities:
Deposits:
Non-interest bearing demand 87,524 87,524 88,061 88,061
Interest bearing demand 156,021 156,016 119,979 119,057
Savings 57,545 57,418 56,534 56,519
Time deposits under $100,000 283,309 283,288 248,252 249,232
Time deposits over $100,000 47,016 46,956 37,220 37,280
--------- --------- -------- --------
Total deposits 631,415 631,202 550,046 550,149
Short-term borrowings 53,207 53,207 13,780 13,780
Long-term debt 90,000 89,913 90,700 91,643
Accrued interest payable 3,599 3,599 3,235 3,235
Off-balance sheet financial instruments:
Commitments to extend credit 114,262 114,262 99,127 99,127
Financial and performance standby letters
of credit 23,290 23,290 11,829 11,829
Commitments to purchase securities 0 0 485 485
</TABLE>
51
<PAGE> 52
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,
------------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS:
Short-term investments $ 99 $ 304
Securities available for sale 7,261 5,353
Due from subsidiary 765
Investment in subsidiary 53,102 61,825
Other assets 66 22
-------- --------
Total assets $ 60,528 $ 68,269
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Dividends payable $ 1,010 $ 1,262
Due to subsidiary 207
Accrued expenses and taxes 78 96
-------- --------
Total liabilities 1,295 1,358
-------- --------
Stockholders' equity:
Common stock 15,194 15,193
Surplus 11,114 11,106
Accumulated other comprehensive income (loss), net of tax (10,616) 2,602
Retained earnings 46,609 39,694
Treasury stock at cost (135,847 and 70,454 shares) (3,068) (1,684)
-------- --------
Total stockholders' equity 59,233 66,911
-------- --------
Total liabilities and stockholders' equity $ 60,528 $ 68,269
======== ========
</TABLE>
PENNROCK FINANCIAL SERVICES CORP. (PARENT COMPANY ONLY) STATEMENTS OF INCOME
<TABLE>
<CAPTION>
In thousands
December 31,
------------------------------------
1999 1998 1997
-------- ------ ------
<S> <C> <C> <C>
Income:
Dividends from bank subsidiary $ 6,200 $6,000 $4,200
Securities available for sale 223 153 106
Net realized gains on sales of available for sale
securities 505 598 363
-------- ------ ------
Total income 6,928 6,751 4,669
-------- ------ ------
General and administrative expenses 720 670 243
-------- ------ ------
Income before income taxes and undistributed net income
of subsidiaries 6,208 6,081 4,426
Income tax expense (benefit) (42) 12 68
-------- ------ ------
Income before equity in undistributed net income
of subsidiaries 6,250 6,069 4,358
Equity in undistributed net income of subsidiaries 4,460 3,546 3,402
-------- ------ ------
Net income $ 10,710 $9,615 $7,760
======== ====== ======
</TABLE>
52
<PAGE> 53
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,
--------------------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 10,710 $ 9,615 $ 7,760
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income from subsidiaries (4,460) (3,546) (3,402)
Net realized gain on sale of available for sale
securities (505) (598) (363)
(Increase) decrease in due from bank subsidiary 972 (384) 268
Other, net (299) 397 107
-------- ------- -------
Net cash provided by operating activities 6,418 5,484 4,370
-------- ------- -------
INVESTING ACTIVITIES
Proceeds from sale of securities available for sale 4,577 4,875 1,156
Purchases of securities available for sale (6,031) (5,007) (3,561)
-------- ------- -------
Net cash used in investing activities (1,454) (132) (2,405)
-------- ------- -------
FINANCING ACTIVITIES
Issuance of common and treasury stock 1,461 1,207 1,257
Acquisition of treasury stock (2,933) (2,700) (784)
Cash dividends paid (3,697) (3,625) (2,968)
-------- ------- -------
Net cash used in financing activities (5,169) (5,118) (2,495)
-------- ------- -------
Increase (decrease) in cash and cash equivalents (205) 234 (530)
Cash and cash equivalents at beginning of year 304 70 600
-------- ------- -------
Cash and cash equivalents at end of year $ 99 $ 304 $ 70
======== ======= =======
</TABLE>
53
<PAGE> 54
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
1999
-------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income $12,730 $13,130 $14,093 $14,830
Interest expense 6,413 6,504 7,309 7,911
------- ------- ------- -------
Net interest income 6,317 6,626 6,784 6,919
Provision for loan losses 222 224 277 303
Non-interest income 1,624 1,590 1,336 1,609
Non-interest expense 4,235 4,536 4,644 5,151
------- ------- ------- -------
Income before income taxes 3,484 3,456 3,199 3,074
Income taxes 778 622 644 459
------- ------- ------- -------
Net income $ 2,706 $ 2,834 $ 2,555 $ 2,615
======= ======= ======= =======
Net income per share $ 0.45 $ 0.47 $ 0.43 $ 0.44
======= ======= ======= =======
Dividends declared per share $ 0.15 $ 0.15 $ 0.15 $ 0.17
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
1998
-------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income $12,347 $12,552 $12,674 $13,070
Interest expense 6,105 6,439 6,414 6,500
------- ------- ------- -------
Net interest income 6,242 6,113 6,260 6,570
Provision for loan losses 148 214 311 552
Non-interest income 1,015 1,546 1,271 1,255
Non-interest expense 4,125 4,207 4,246 4,873
------- ------- ------- -------
Income before income taxes 2,984 3,238 2,974 2,400
Income taxes 622 613 661 85
------- ------- ------- -------
Net income $ 2,362 $ 2,625 $ 2,313 $ 2,315
======= ======= ======= =======
Net income per share $ 0.39 $ 0.43 $ 0.38 $ 0.38
======= ======= ======= =======
Dividends declared per share $ 0.13 $ 0.13 $ 0.13 $ 0.21
======= ======= ======= =======
</TABLE>
54
<PAGE> 55
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 25, 2000 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
25, 2000 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 25, 2000, 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 25, 2000.
55
<PAGE> 56
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) Articles of Incorporation of PennRock are incorporated by
reference to Exhibit 3(b) to Form 10-Q for the quarter ended
June 30, 1996.
(3)(b) Bylaws of PennRock are incorporated by reference to Exhibit
3(b) to Form 10-K for the year ended December 31, 1997.
(10)(a) Omnibus Stock Plan is incorporated by reference to Exhibit
10(a) to Form 10-K for the year ended December 31, 1997.
(10)(b) Executive Compensation Bonus Plan is incorporated by
reference to Exhibit 10(b) to Form 10-K for the year ended
December 31, 1997.
(10)(c) Executive Incentive Compensation Plan is incorporated by
reference to Exhibit 10(c) to Form 10-K for the year ended
December 31, 1994.
(10)(d) Melvin Pankuch Deferred Compensation Agreement Plan is
incorporated by reference to Exhibit 10(d) to Form 10-K for
the year ended December 31, 1995.
(10)(e) Melvin Pankuch Employment Agreement.
(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
1999.
56
<PAGE> 57
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 14, 2000 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 14th of March 2000.
<TABLE>
<CAPTION>
Signatures Title
- ---------------------------------------- ----------------------------------------------
<S> <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 Officer)
GEORGE B. CRISP
/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
/s/ Sandra J. Bricker Director
- ----------------------------------------
SANDRA J. BRICKER
</TABLE>
57
<PAGE> 1
EXHIBIT 10 (E)
PENNROCK FINANCIAL SERVICES CORP.
EMPLOYMENT AGREEMENT FOR MELVIN PANKUCH
THIS AGREEMENT, made this 17th day of December 1999 by and between
PennRock Financial Services Corp., a Pennsylvania business corporation with
corporate offices at 1060 Main Street, P.O. Box 580, Blue Ball, PA 17506, (the
"Company"), and Blue Ball National Bank, a national banking corporation with
offices at 1060 Main Street, P.O. Box 580, Blue Ball, PA 17506 (the "Bank"), and
Melvin Pankuch, an adult individual who resides at 58 Heister Avenue, New
Holland, PA 17557 ("Executive"),
WITNESSETH, that in consideration of the mutual covenants as
hereinafter set forth, and intending to be legally bound hereby, the parties
hereto agree as follows:
1. Background. The Company is engaged in the business of operating a
bank holding company. Bank is a wholly-owned subsidiary of Company. Executive
has extensive experience in the banking field and has, for a number of years,
served as an executive officer of Company and of Bank. The parties now desire to
formalize their contractual relationship.
2. Employment and Duties.
(a) Employment. The Company hereby engages Executive to serve as
Executive Vice President and Chief Executive Officer of Company. Bank hereby
engages Executive to serve as President and Chief Executive Officer of Bank.
Executive hereby accepts such engagements, on the terms and subject to the
conditions hereinafter set forth for the period specified in Section 5 below
(the "Employment Period"). As of the date hereof, Executive serves as a member
of the Boards of Directors of Company and Bank, and it is the intention of the
parties that Boards of Directors of, respectively, Company and Bank shall, from
time to time, propose Executive for reelection to such positions as long as
Executive continues to serve as Executive Vice President and Chief Executive
Officer of Company and President and Chief Executive Officer of Bank.
(b) Duties. During the Employment Period, Executive shall be
responsible for performing the functions of the offices for which he is engaged
and shall perform all duties and accept all responsibilities incidental to such
positions or as may be assigned by the Boards of Directors of, respectively, the
Company (the "Company Board") and the Bank (the "Bank Board") (the Company Board
and the Bank Board being referred to herein generically as, collectively, the
"Boards" and as, individually, a "Board"), and as prescribed from time to time
by the Board in a job description for Executive's position, and Executive shall
cooperate fully with the Boards.
(c) Full Time and Best Efforts. Executive agrees during the
Employment Period to devote his full time and best efforts to the businesses of
the Company and the Bank, as directed by the Boards, and further agrees that he
will not, directly or indirectly, engage in consulting or in any other trade or
business for his own account or for or on behalf of any other person, firm,
corporation or other business, professional or commercial entity.
3. Compensation and Benefits.
(a) Salary. Except as otherwise herein provided, all salary or other
compensation payable to Executive shall be payable by Bank. The Bank shall pay
to Executive a base salary (the "Base Salary") of not less than $265,000.00 per
year, payable in proportionate installments in accordance with the payroll
policies of the Bank from time to time in effect. The Executive shall receive no
additional compensation beyond his Base Salary for his services as a Director of
Company and/or of Bank. The Base Salary shall be subject to annual review during
the Employment Period in accordance with the personnel policies of the Bank as
from time to time in effect and shall in this connection be subject to such
adjustments as may in the judgment of the Bank be appropriate in view of
<PAGE> 2
Executive's performance, the financial condition and results of operations of
the Bank, and such other factors as the Bank Board or the Company Board
determines to be relevant. Bank shall review Executive's Base Salary no less
often than annually, annual reviews to be completed on or before March 31 of
each year and any Base Salary increase to be retroactive to the first pay period
of the year. Notwithstanding the foregoing, at no time during the Employment
Term shall Executive have the right to receive or continue to receive a Base
Salary in excess of the initial Base Salary for which provision is made herein,
except as provided in section 13 hereof.
(b) Vacation, Insurance, and Employee Benefits. Executive shall
during the Employment Period be entitled to: (i) not less than 22 business days
paid vacation each year, (ii) sick leave in accordance with the personnel
policies of the Bank as from time to time in effect, and (iii) benefits under
such profit sharing, group life insurance, accident and health insurance plans,
and other employee benefit plans as may from time to time be adopted by the Bank
for the benefit of its employees generally, as and to the extent determined by
the Bank and in accordance with the terms of any such plan.
(c) Reimbursement of Expenses. Bank shall reimburse Executive for
all ordinary and necessary out-of-pocket business expenses incurred by Executive
in connection with the discharge of Executive's duties and responsibilities
hereunder during the Employment Period in accordance with Bank's expense
approval and reporting procedures then in effect and upon presentation to Bank
of an itemized account and written proof of such expenses, as provided in such
procedures.
(d) Club Memberships. During the Employment Period, Bank shall
provide Executive with one or more memberships in such social, athletic, or
similar clubs or organizations, at Bank's expense, as the Bank Board deems
appropriate from time to time. Upon Termination of the Employment Period for any
reason, Executive shall have the right to continue such membership or
memberships at Executive's expense, provided that Executive shall reimburse Bank
in full for any initiation or equity payment made by Bank in consideration of
such membership or memberships, excluding annual membership dues or assessments.
(e) Disability. In the event that Executive becomes subject to the
provisions of Bank's short-term or long-term disability policy, Executive's
compensation shall be governed by the terms thereof during the term of the
short-term or long-term disability.
4. Additional Compensation.
(a) Additional Compensation. In addition to the Base Salary to be
paid to Executive during the Employment Period, the Bank shall determine
Executive's eligibility for incentive compensation under Bank's Bonus
Compensation Plan and PennRock Financial Services Corp. Executive Incentive
Compensation Plan (the "Additional Compensation") in respect of each calendar
year during the Employment Period under a formula approved by the Bank Board, as
may be amended from time to time, and shall pay any such Additional
Compensation, as so determined, to Executive. Benefits payable under the Bank's
Bonus Compensation Plan shall be payable at times and under terms specified by
the Board and by the plan. The PennRock Financial Services Corp. Executive
Incentive Compensation Plan benefits as calculated for any year shall be payable
not sooner than January 1 and not later than May 31 of the following year. The
Additional Compensation may be paid in whole or in part in cash or in stock of
Company.
(b) Effect of Termination of Employment Period.
(1) General Rule. Executive acknowledges and agrees that the
timing of the payment of the Additional Compensation is intended in part to
create an inducement for Executive to remain in the employ of the Bank.
Therefore, except as otherwise specifically provided in Section 4(b)(2),
Executive shall not be entitled to receive any Additional Compensation in
respect of a given calendar year unless he is employed by the Bank as of the
Additional Compensation Payment Date for the Additional Compensation, if any,
payable in respect of such calendar year.
<PAGE> 3
(2) Exceptions to General Rule. In the event that the Employment
Period terminates by reason of: (i) the exercise by the Bank of its right not to
renew pursuant to Section 5 below, (ii) Executive's disability or death, (iii)
the exercise by the Bank of its right to terminate the Employment Period without
cause pursuant to Section 8 below, or (iv) the exercise by Executive of his
right to terminate the Employment Period for Good Reason pursuant to Section 11
below, then in such event Executive shall be entitled to receive his Additional
Compensation, as follows:
(A) Prior Calendar Year Additional Compensation. If any
Additional Compensation is payable in respect of the calendar year preceding the
calendar year in which the termination of the Employment Period occurs but such
Additional Compensation remains unpaid as of the date of such termination, then
such Additional Compensation shall be paid in full upon the Additional
Compensation Payment Date.
(B) Current Calendar Year Additional Compensation. No
Additional Compensation shall be payable in such event in respect of the
calendar year in which the termination of the Employment Period occurs.
(c) Authority and Discretion of the Bank. Executive acknowledges
that management decisions relating to the operation of the business of the Bank,
including, without limitation, decisions relating to the incurring of expenses
(including the method of allocating to the Bank overhead expenses incurred by
Bank and/or Company) and the timing of income, will affect Adjusted Net Income
in a given calendar year and agrees that this Section 4 shall not be construed
to limit in any respect whatsoever the reasonable discretion of the Bank to make
such decisions and that all such decisions shall be made by the Bank in its sole
and absolute discretion.
5. Employment Period.
(a) Initial Period. The Employment Period shall begin on the date of
this Agreement and shall terminate upon the first to occur of the following:
(1) Expiration of Two Years. The close of business on December
31, 2002, unless the Employment Period is extended pursuant to Section 5(b)
below;
(2) Disability. Bank may elect to replace the Executive on a
permanent basis in the event that the Executive experiences a long-term
disability or recurring short-term disabilities, as defined by Bank's policies
and procedures from time to time. If, after Executive has received disability
benefits for a period consisting of 180 consecutive days, Executive remains
unable, in the opinion of Bank's Board of Directors and PennRock's Board of
Directors, to perform the essential functions of his positions on a full-time
basis, with or without a reasonable accommodation and without posing a threat to
himself or others, it is agreed that PennRock and Bank will suffer an undue
hardship by continuing the Executive's employment in his then-current position;
(3) Death. Executive's death;
(4) Termination by the Bank for Cause. Termination of the
Employment Period by the Bank for cause pursuant to Section 8 below;
(5) Termination by the Bank Without Cause. Termination of the
Employment Period by the Bank without cause pursuant to Section 9 below;
(6) Resignation. Termination of the Employment Period by reason
of Executive's resignation pursuant to Section 10 below; and
<PAGE> 4
(7) Termination by Executive for Good Reason. Termination of the
Employment Period by Executive for good reason pursuant to Section 11 below.
(b) Renewal Periods. This Agreement shall renew automatically and
the Employment Period shall be extended for successive additional periods of two
years each, unless Executive or the Bank, at least One Hundred Eighty (180) days
before the expiration of the Employment Period pursuant to Section 5(a)(1) above
or the expiration of any extension of the Employment Period pursuant to this
Section 5(b), gives written notice to the other of intention not to renew this
Agreement.
(c) Effects of Termination.
(1) Executive's right to receive any further compensation or
benefits under this Agreement shall expire and terminate absolutely
upon termination of the Employment Period, except that: (A) the Bank
shall pay the unpaid portion, if any, of the Base Salary earned by
Executive through the effective date of termination, (B) the Bank
shall pay the severance benefit, if any, to which Executive may be
entitled under Section 12 below, and (C) the Bank shall provide to
Executive such post-employment benefits, if any, as are provided for
under the employee benefit plans of the Bank in accordance with the
terms of any such plan.
(2) Upon termination of Executive's employment for any reason,
such termination shall constitute termination of Executive as a
Director of Company and of Bank, without notice, and management
shall be under no further obligation to propose Executive for
election or reelection as a Director of either Company or of Bank.
6. Termination by Reason of Nonrenewal. Either party shall have the
right to terminate the Employment Period pursuant to Section 5(b) above by
electing not to renew this Agreement, which election may be made with or without
cause for any reason whatsoever.
7. Termination by Reason of Disability or Death.
(a) Death. The Employment Period shall terminate upon the death of
Executive.
(b) Disability. The Employment Period shall terminate at the
election of the Board in the event that the Executive experiences a long-term
disability or recurring short-term disabilities, as defined by Bank's policies
and procedures from time to time, if the Executive has received disability
benefits for a period consisting of 180 consecutive days and, at such time,
Executive remains unable, in the opinion of Bank's Board of Directors and
PennRock's Board of Directors, to perform the essential functions of his
positions on a full-time basis, with or without a reasonable accommodation and
without posing a threat to himself or others. It is agreed that, in such event,
PennRock and Bank will suffer an undue hardship by continuing the Executive's
employment in his then-current position.
8. Termination by the Bank for Cause.
(a) Termination. The Bank shall have the right at any time upon
written notice to Executive to terminate the Employment Period for Cause.
(b) Cause. For purposes of this Agreement, the term "Cause" shall
mean: (i) serious and willful misconduct by Executive in the course of or
connected with his employment hereunder, including the failure to comply in any
material respect with the Bank's written policies and procedures, (ii) failure
by Executive to perform at a reasonably acceptable level, as reasonably
determined by the Bank's Board of Directors, the duties of his position in
accordance with the terms and conditions of this Agreement or the reasonable
directions of the Bank,
<PAGE> 5
(iii) a material breach on the part of Executive of any provision of this
Agreement, (iv) conduct on the part of Executive involving dishonesty or moral
turpitude or conduct which the Bank's Board of directors reasonably determines
may tend to bring discredit to or to injure the reputation or business of the
Bank, (v) the conviction of or plea of guilty or nolo contendere by Executive to
a felony, or (vi) Executive's intentional violation of any federal or state
securities or banking law or regulation.
9. Termination by the Bank Without Cause. The Bank shall have the right
at any time during the Employment Period upon 30 days written notice to
Executive to terminate the Employment Period without cause. The Bank may in its
discretion following delivery of its notice of termination elect immediately to
relieve Executive of all or any part of his duties under this Agreement and to
exclude Executive thereafter from the premises of the Bank.
10. Resignation. Executive shall have the right at any time during the
Employment Period upon One Hundred Eighty (180) days written notice to the Bank
to terminate the Employment Period, with or without cause. Such notice, when
given, shall be irrevocable. The Bank may in its discretion following delivery
by Executive of his notice of termination elect immediately to relieve Executive
of all or any part of his duties under this Agreement and to exclude Executive
thereafter from the premises of the Bank.
11. Termination by Executive for Good Reason.
(a) Termination. Executive shall have the right at any time
following a Change in Control (as defined below) upon Sixty (60) days written
notice to the Bank to terminate the Employment Period for Good Reason (as
defined below). Upon receipt of Executive's notice, the Bank may in its
discretion elect immediately to relieve Executive of all or any part of his
duties under this Agreement and to exclude Executive thereafter from the
premises of the Bank.
(b) Good Reason. For purposes of this Agreement, "Good Reason"
shall mean: (i) a material breach of or default under any term or provision of
this Agreement by the Bank, (ii) a reduction by the Bank, in any material
respect and without Executive's written consent, of the authority, duties,
compensation, benefits or other terms and conditions of Executive's employment
hereunder, or (iii) a determination by Executive in good faith and in his sole
and absolute discretion made within twelve (12) months following the occurrence
of a Change in Control (as herein defined) that he is unable to work
harmoniously and effectively with the new management of the Bank or that he is
otherwise unable effectively to carry out his duties and to discharge his
responsibilities to the Bank hereunder.
(c) Change in Control. For purposes of this Agreement, the term
"Change in Control" shall mean the occurrence of the following:
(1) There occurs a merger, consolidation, or other
reorganization involving the Bank and another entity or a sale,
exchange, transfer or other disposition of all or substantially all of
the stock or assets of the Bank to another entity or person, other than
Company or a person or entity which controls, is controlled by, or is
under common control with Company, or a merger, consolidation, or other
reorganization involving the Company and another entity or a sale,
exchange, transfer or other disposition of all or substantially all of
the stock or assets of the Company to another entity or person;
(2) Any "person" or "group" [as those terms are defined or used
in Section 13(d) of the Securities Exchange Act of 1934 (the "Exchange
Act"), as enacted and in force on the date hereof] is or becomes the
"beneficial owner" (as that term is defined in Rule 13d-3 under the
Exchange Act, as enacted and in force on the date hereof) of securities
of Company or Bank representing Fifty (50%) percent or more of the
combined voting power of, respectively, Company's or Bank's securities
then outstanding;
<PAGE> 6
(3) There occurs a change in control of a nature that would be
required to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A promulgated under the Exchange Act, as enacted and in
force on the date hereof, whether or not Bank or Company is then
subject to such reporting requirement.
For purposes of this Agreement, the entity resulting from any Change in Control
which is successor to Bank or Company is herein referred to as the Successor
Company.
12. Severance Benefit.
(a) General. The Bank shall provide to Executive the severance
benefit provided for in this Section 12 in the event that the Employment Period
is terminated by reason of: (i) an election by the Bank not to renew this
Agreement pursuant to Section 6 above, (ii) an election by the Bank to terminate
the Employment Period without cause pursuant to Section 9 above, or (iii) an
election by Executive to terminate the Employment Period for Good Reason
pursuant to Section 11(b)(i) or 11(b)(ii) above. Executive shall not be entitled
to receive the severance benefit provided for in this Section 12 if the
Employment Period is terminated for any reason other than those identified in
the preceding sentence.
(b) Salary Continuation. The Bank shall for a period of twelve (12)
months from the date of termination of the Employment Period continue to pay to
Executive the Base Salary in effect on the date of such termination. In the
event that Executive shall not have obtained Qualified Employment (as defined
below) at the expiration of such twelve-month period, the Bank shall continue to
pay such Base Salary to Executive for an additional twelve (12) months or until
Executive shall obtain Qualified Employment, whichever shall first occur. For
purposes of this Agreement the term "Qualified Employment" shall mean employment
or engagement as an officer, employee, consultant or independent contractor in a
comparable executive level position consistent with Executive's background and
experience.
(c) Medical Insurance Premium Reimbursement. If Executive and his
dependents who are qualified beneficiaries are eligible to elect continuation of
medical insurance benefits under the Consolidated Omnibus Budget Reconciliation
Act of 1995 ("COBRA") and if Executive elects to purchase such COBRA
continuation coverage for himself and/or for his qualified beneficiaries, then
in such event the Bank shall reimburse Executive in an amount equal to the
monthly premium paid by him to obtain such coverage, net of the amount which
employees of the Bank are required to contribute toward the purchase of medical
insurance benefits under the personnel policies of the Bank then in effect,
which reimbursement shall continue until the first of the following to occur:
(i) the expiration of the Salary continuation Period as set forth in section
12(b) hereof, and (ii) the qualification of Executive and his qualified
beneficiaries for substantially equivalent coverage under any medical insurance
policy maintained by any future employer of Executive. Reimbursement as provided
for herein shall be made by the Bank to Executive monthly within five (5)
business days following the presentation by Executive to the Bank of evidence of
payment by him of the periodic COBRA continuation coverage premium for that
month.
(d) Duty to Mitigate. Executive shall be obligated to mitigate the
obligation of the Bank to pay the severance benefit provided for in this Section
12 by using his best efforts to obtain Qualified Employment; provided, however,
that the salary continuation payments provided for in Section 12(b) above shall
not be reduced if Executive obtains Qualified Employment during the first twelve
(12) months following the date of termination of the Employment Period;
provided, further, that the obligation of the Bank to pay the salary
continuation payments provided for in Section 12(b) above after the expiration
of twelve (12) months from the date of termination of the Employment Period
shall terminate absolutely upon the first to occur of the following: (i) the
date on which Executive obtains Qualified Employment (even if the compensation
payable to Executive by reason of such Qualified Employment is less than the
Base Salary in effect on the date of termination of the Employment Period), and
(ii) the expiration of twenty-four (24) months from the date of termination of
the Employment Period.
<PAGE> 7
13. Severance Benefit-Change in Control.
(a) General. In the event of the occurrence of a Change in Control,
as defined in section 11 hereof, the Bank or, if Bank no longer exists, the
Successor Company shall provide to Executive the severance benefit provided for
in this Section 13 in the event that the Employment Period is terminated by
reason of an election by Executive to terminate the Employment Period for Good
Reason pursuant to Section 11(b)(iii) above or in the event that the Employment
Period is terminated by a Successor Company prior to the end of the Employment
Period by Successor Company for any reason other than for Cause, as described in
Section 8 hereof. Executive shall not be entitled to receive the severance
benefit provided for in this Section 13 if the Employment Period is terminated
for any reason other than those identified in the preceding sentence.
(b) Salary Settlement. No later than thirty (30) days following the
receipt by Bank of written notice from Executive that Executive is electing to
terminate his employment under the provisions of section 11(b)(iii) hereof, Bank
shall pay to Executive a sum equal to three (3) times the then-current annual
compensation being received by Executive on the date of such notice, reduced by
any applicable employment or withholding taxes. The then-current annual
compensation may be in excess of the Base Salary, as herein defined.
Notwithstanding the foregoing, in the event that the payment described in this
subsection, when added to all other amounts or benefits provided to or on behalf
of the Executive in connection with his termination of employment as a result of
or in connection with a Change in Control, would result in the imposition of an
excise tax under section 4999 of the Internal Revenue Code of 1996, as amended
(the "Code"), such payments shall be retroactively (if necessary) reduced to the
extent necessary to avoid such excise tax imposition. Upon written notice to
Executive, together with calculations of Bank's independent auditors, Executive
shall remit to Bank the amount of such reduction, plus such interest as may be
necessary to avoid the imposition of such excise tax. Notwithstanding the
foregoing or any other provision of this contract to the contrary, if any
portion of the amount herein payable to the Executive is determined to be
non-deductible pursuant to the regulations promulgated under Code Section 280G,
then Bank shall be required to pay to Executive only the amount determined to be
deductible under said Section 280G. Executive shall not be required to mitigate
the amount of any payment for which provision is made in this Section 13(b) by
seeking other employment or otherwise, nor shall the amount of any payment or
benefit for which provision is made in this Section 13(b) be reduced as a result
of any payment or benefit which Executive may receive from any subsequent
employer. Foregoing
(c) Medical Insurance Premium Reimbursement. If Executive and his
dependents who are qualified beneficiaries are eligible to elect continuation of
medical insurance benefits under the Consolidated Omnibus Budget Reconciliation
Act of 1995 ("COBRA") and if Executive elects to purchase such COBRA
continuation coverage for himself and/or for his qualified beneficiaries, then
in such event the Bank shall reimburse Executive in an amount equal to the
monthly premium paid by him to obtain such coverage, net of the amount which
employees of the Bank are required to contribute toward the purchase of medical
insurance benefits under the personnel policies of the Bank then in effect,
which reimbursement shall continue for a period of eighteen (18) months from the
date of Executive's written notice of his intention to exercise his rights under
the provisions of section 11(b)(iii) hereof. Reimbursement as provided for
herein shall be made by the Bank to Executive monthly within five (5) business
days following the presentation by Executive to the Bank of evidence of payment
by him of the periodic COBRA continuation coverage premium for that month.
14. Certain Covenants.
(a) Acknowledgment. Executive acknowledges that this Agreement
includes consideration which would not have been given but for the execution of
this Agreement by Executive.
(b) Covenant Not to Compete. Executive covenants and agrees that he
will not during the Employment Period and for a period of twelve (12) months
following termination of the Employment Period directly or indirectly (whether
as principal, agent, proprietor, shareholder, salesman, employee, consultant,
independent contractor, officer, director, investor or otherwise) participate in
the ownership, management,
<PAGE> 8
operation, or control of or have any interest of any nature whatsoever in any
corporation, partnership, firm, or other business entity which is engaged in or
which proposes to engage in an activity constituting the providing of Banking
Services (as herein defined) within the Territory (as defined in the next
sentence). For purposes of this Agreement, the term "Territory" shall mean any
area designated by Bank or Successor Company as being within the market area of
the institution for purposes of compliance with the Community Reinvestment Act,
as amended, and all regulations implemented pursuant thereto, as of the date of
the termination of Executive's employment. For purposes of this Agreement, each
of the following shall constitute a "Banking Service":
The acceptance of federally-insured deposit accounts, the providing of
trust services, the providing of safe deposit box services, the
providing of commercial, installment, personal, or mortgage loan
services, the sale of mutual funds, the operation of an in-premises or
free-standing automated teller machine, cash machine, or other
mechanical device providing Banking Services (other than point-of sale
machines utilized in processing credit sale transactions for goods or
services sold in the facility housing such machine or machines), the
sale or promotion of insurance products, the sale or promotion of
mutual fund products, or the sale or promotion of securities; the
providing of services, as an employee, director, officer, consultant,
independent contractor, or otherwise, to any Financial Institution,
which shall include, but not be limited to, federal or state chartered
or private banks, savings banks, or savings and loans associations,
consumer discount companies, mortgage banking companies, federal or
state chartered credit unions, federal or state chartered private trust
companies, secured dual-key or dual-controlled deposit or storage
facilities, or any other entity providing Banking Services.
Notwithstanding the foregoing, the provisions of this Section 14(b) shall not
apply following termination of the Employment Period in the event that the
Employment Period is terminated by reason of: (i) an election by the Bank not to
renew this Agreement pursuant to Section 6 above, (ii) an election by the Bank
to terminate the Employment Period without cause pursuant to Section 9 above, or
(iii) an election by Executive to terminate the Employment Period for Good
Reason pursuant to Section 11 above.
(c) Covenant Not to Solicit Employees. Without limitation of any
other provision of this Section 14, Executive covenants and agrees that he will
not during the Employment Period and for a period of Twenty-four (24) months
following termination of the Employment Period, directly or indirectly, employ
any person who is an employee of the Bank or solicit or otherwise attempt to
entice away from employment by the Bank any such employee.
(d) Covenant Not to Solicit Customers. Without limitation of any
other provision of this Section 14, Executive agrees that he will not for a
period of Twenty-four (24) months following termination of the Employment
Period, directly or indirectly, solicit or attempt to establish any business
relationship with: (i) any person or entity who applied for and/or obtained a
loan or other banking relationship from or through the Bank prior to the
expiration of the Employment Period, or (ii) any person or entity who solicited
loans or other banking relationships on behalf of the Bank or who referred or
sold loans to the Bank prior to the expiration of the Employment Period.
Notwithstanding the foregoing, the provisions of this Section 14(d) shall not
apply following termination of the Employment Period in the event that the
Employment Period is terminated by reason of: (i) an election by the Bank not to
renew this Agreement pursuant to Section 6 above, (ii) an election by the Bank
to terminate the Employment Period without cause pursuant to Section 9 above, or
(iii) an election by Executive to terminate the Employment Period for Good
Reason pursuant to Section 11 above.
(e) Covenant Not to Disclose or Use Confidential Information.
Executive recognizes and acknowledges that he will during the course of his
employment by the Bank have access to certain proprietary material and
confidential business information concerning the Bank's business, products,
operations, technical information, sales activities, procedures, promotion,
pricing techniques, customer lists, and credit and financial data which are a
valuable property of a confidential nature and which belong to the Bank. In
light of the highly competitive nature of the industry in which the business of
the Bank is conducted, Executive acknowledges and agrees that all such knowledge
and information not in the public domain shall be considered confidential
<PAGE> 9
information. Without limitation of any other provision of this Section 14,
Executive covenants and agrees in this connection that he will not during the
Employment Period or at any time thereafter disclose to any person for any
reason or purpose whatsoever (except in the regular course of the performance by
him of his duties hereunder) use for his own purposes, use for the benefit of
any other person or entity (other than the Bank) or use in competition with the
Bank any such proprietary material or confidential business information.
(f) Specific Performance and Related Matters:
(1) Specific Performance: Executive acknowledges and agrees
that any breach of the covenants set forth in this Section 14 will
result in irreparable damage to the Bank, for which it will have no
adequate remedy at law. Executive therefore agrees that, in the event
of any such breach, the Bank shall be entitled, without limitation of
any other rights or remedies otherwise available to it at law or in
equity and without the posting of any bond, to obtain an injunction or
other form of equitable relief from any court of competent
jurisdiction.
(2) Extension: In the event that the Bank commences litigation
against Executive for purposes of enforcing the covenants set forth in
Sections 14(b), 14(c) and/or 14(d) above, the twelve (12) month
restriction period shall be extended and shall continue throughout the
period during which such litigation is pending. In addition, in the
event that Executive is found by a court to have breached any of the
covenants set forth in Sections 14(b), 14(c) and/or 14(d) above, the
twelve (12) month restriction period shall be extended and shall
continue until the expiration of twelve (12) months from the date upon
which judgment is entered on the records of the court.
15. Governing Law and Related Matters.
(a) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the Commonwealth of Pennsylvania,
without reference to its law on the choice of laws.
(b) Exclusive Jurisdiction. The Bank and Executive agree that the
Court of Common Pleas of Lancaster County, Pennsylvania shall have exclusive
jurisdiction with respect to any action arising out of or relating to this
Agreement and each hereby irrevocably submits to the jurisdiction of such court
and waives any objection to jurisdiction or venue.
(c) Waiver of Certain Damages. The Bank and Executive each hereby
waive to the fullest extent permitted by law the right to assert against the
other any claim for punitive and/or exemplary damages. Without limitation of the
foregoing, Executive further agrees that, in the event that he should assert any
claim against the Bank for wrongful termination or other breach of this
Agreement prior to the occurrence of a Change in Control, the relief to which he
is entitled shall be limited to the recovery from the Bank of monetary damages
in an amount equal to his Lost Compensation (as defined in the next sentence).
For purposes of this Agreement, the term "Lost Compensation" shall mean the
difference between the Base Salary and Additional Compensation actually received
by Executive and the Base Salary and Additional Compensation which he would have
received under this Agreement, but for its termination prior to the end of the
Employment Period; Executive shall not be entitled to any other form of relief,
including, without limitation: (i) damages for tortious conduct, emotional
distress, pain and suffering, or injury to reputation, (ii) pay beyond the end
of the Employment Period, (iii) specific performance of any provision of this
Agreement, or (iv) reinstatement of employment. Bank, Company, and Executive
each waives any and all rights such party may have to a jury trial in connection
with any litigation commenced by or against any of the parties to this Agreement
with respect to rights and obligations of the parties hereto under this
Agreement.
16. Miscellaneous Provisions.
(a) Parties in Interest. This Agreement shall be binding upon,
inure to the benefit of, and be enforceable by Executive (his heirs,
representatives, executors, and administrators) and Bank (or its successors and
<PAGE> 10
assigns, subject to the limitations set forth in this section). This Agreement
shall be assignable by Bank and/or Company, subject to the limitations set forth
in this section. This Agreement may not be assigned by Bank or Company without
the prior written consent of Executive if:
(1) The entity to which this Agreement is to be assigned will
not, after such assignment, be conducting all or substantially all of
the types of business conducted by Bank prior to such assignment; and
(2) Bank will, after such assignment, continue to exist as an
entity separate and apart from the assignee of this Agreement and to
conduct all or substantially all of the types of business conducted by
Bank prior to such assignment.
Executive may not assign this Agreement or any of his rights hereunder, except
as expressly herein provided.
(b) Severability. The covenants and other undertakings set forth in
this Agreement (including, without limitation, the provisions of Sections 14(b)
and 14(c) above) are severable and if any covenant or portion thereof is held to
be invalid or unenforceable for any reason, such covenant or portion thereof
shall be modified to the extent necessary to cure such invalidity or
unenforceability and all other covenants and provisions of this Agreement shall
remain valid and enforceable.
(c) Payments in the Event of Executive's Death. In the case of any
payment required under this Agreement to be made by the Bank to Executive after
his death, such payment shall be made to Executive's spouse if she survives him
or to Executive's estate if she does not survive him.
(d) Notices. All notices and other communications required to be
given or made hereunder shall be in writing and shall be deemed to have been
given or made when hand delivered or when mailed, certified mail, return receipt
requested, to the Bank or to Executive, as the case may be, at their respective
addresses set forth on the first page of this Agreement or to such other address
as the Bank or Executive may subsequently designate in writing and deliver as
provided in this Section 16(d).
(e) Waiver. The waiver by any party of a breach by the other party
or of compliance with any condition or provision of this Agreement shall not
operate as or be construed to be a waiver of any subsequent breach or right to
require compliance with any condition or provision of this Agreement.
(f) Captions. The captions of the several Sections and Subsections
of this Agreement are inserted for convenience of reference only, constitute no
part of this Agreement and are not to be considered in the construction hereof.
(g) Entire Agreement. This Agreement constitutes the entire
Agreement between the Bank and Executive concerning the subject matter hereof
and supersedes all prior written or oral agreements and understandings between
them.
(h) Amendment. No term or provision of this Agreement may be
changed, waived, amended, terminated or otherwise modified, except by written
instrument duly executed by the Bank and by Executive.
<PAGE> 11
IN WITNESS WHEREOF, this Agreement is executed the day and year first
above written.
ATTEST: PENNROCK FINANCIAL SERVICES CORP.
/s/ Robert K. Weaver, Secretary By: /s/ Glenn H. Weaver, President
- ------------------------------------ ---------------------------------
ATTEST: BLUE BALL NATIONAL BANK
/s/ Robert K. Weaver, Secretary By: /s/ Norman Hahn, Chairman
- ------------------------------------ ---------------------------------
WITNESS:
/s/ Joyce E. Redcap /s/ Melvin Pankuch (SEAL)
- ------------------------------------ ----------------------------------
MELVIN PANKUCH
<PAGE> 1
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 two direct wholly-owned subsidiaries. One
subsidiary, Atlantic Regional Mortgage Corporation ("ARMCO"), is incorporated
under the laws of Pennsylvania for the purpose of originating and selling
residential mortgage loans in the secondary market. ARMCO was liquidated in 1997
under a formal liquidation plan adopted on September 30, 1997, and is currently
inactive. The other subsidiary, PennRock Insurance Group, Inc. ("PIGI"), is a
Pennsylvania corporation organized for the sale of annuities and other types of
insurance products. PIGI began operations in the first quarter of 1999.
<PAGE> 1
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 31, 2000 on the consolidated financial statements of PennRock
Financial Services Corp. and subsidiaries appearing in and incorporated
by reference in this Annual Report on Form 10-K.
/s/ SIMON LEVER & COMPANY
Lancaster, Pennsylvania
February 23, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 26,455
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,406
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 309,462
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 460,065
<ALLOWANCE> 5,514
<TOTAL-ASSETS> 842,446
<DEPOSITS> 631,415
<SHORT-TERM> 53,207
<LIABILITIES-OTHER> 8,591
<LONG-TERM> 90,000
0
0
<COMMON> 15,194
<OTHER-SE> 44,039
<TOTAL-LIABILITIES-AND-EQUITY> 842,446
<INTEREST-LOAN> 36,290
<INTEREST-INVEST> 18,094
<INTEREST-OTHER> 399
<INTEREST-TOTAL> 54,783
<INTEREST-DEPOSIT> 21,466
<INTEREST-EXPENSE> 28,137
<INTEREST-INCOME-NET> 26,646
<LOAN-LOSSES> 1,026
<SECURITIES-GAINS> 1,537
<EXPENSE-OTHER> 18,566
<INCOME-PRETAX> 13,213
<INCOME-PRE-EXTRAORDINARY> 10,710
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,710
<EPS-BASIC> 1.79
<EPS-DILUTED> 1.79
<YIELD-ACTUAL> 4.02
<LOANS-NON> 1,114
<LOANS-PAST> 853
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,897
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</TABLE>
