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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 2002 Commission File Number 0-15040
------------- -------
PennRock Financial Services Corp.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2400021
------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1060 Main St.
Blue Ball, Pennsylvania 17506
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(Address of principal executive offices) (Zip code)
(717) 354-4541
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Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes /X/ No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Class Outstanding at August 12, 2002
------------------------------ --------------------------------
Common Stock ($2.50 par value) 6,945,861 Shares
2
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
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FORM 10-Q
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For the Quarter Ended June 30, 2002
Contents
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PART I. FINANCIAL INFORMATION
- -----------------------------
Item 1. Financial Statements
Consolidated balance sheets - June 30, 2002,
December 31, 2001 and June 30, 2001.
Consolidated statements of income - Three months and six months ended
June 30, 2002 and 2001.
Consolidated statements of comprehensive income - Three months and
six months ended June 30, 2002 and 2001.
Consolidated statements of cash flows - Six months ended
June 30, 2002 and 2001.
Notes to consolidated financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II. OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
- ----------
3
PART I. FINANCIAL INFORMATION
For the Quarter Ended June 30, 2002
Item 1. Financial Statements
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31, June 30,
(Amounts in thousands) 2002 2001 2001
------------ ----------- -------------
(Unaudited) (Unaudited)
ASSETS
Cash and due from banks $ 28,927 $ 23,242 $ 20,495
Short-term investments 2,794 4,787 19,255
Mortgages held for sale 639 2,420 1,571
Securities available for sale 302,727 303,334 300,586
Loans:
Loans, net of unearned income 569,885 558,369 513,112
Allowance for loan losses (7,776) (7,262) (6,711)
--------- --------- ---------
Net loans 562,109 551,107 506,401
Bank premises and equipment 15,473 14,428 14,074
Accrued interest receivable 4,304 3,890 6,305
Bank owned life insurance 25,860 25,248 16,619
Other assets 22,096 20,482 18,947
--------- --------- ---------
Total assets $964,929 $948,938 $904,253
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $114,490 $108,529 $ 99,299
Interest bearing 600,719 555,165 569,923
--------- --------- ---------
Total deposits 715,209 663,694 669,222
Short-term borrowings 32,179 76,754 27,026
Long-term debt 121,000 121,000 121,000
Accrued interest payable 2,793 2,960 4,767
Other liabilities 9,138 6,126 6,843
--------- --------- ---------
Total liabilities 880,319 870,534 828,858
Stockholders' Equity:
Common stock, par value $2.50 per share;
authorized - 20,000,000 shares;
issued _ 7,016,986 shares 15,952 15,952 15,944
Surplus 16,416 16,446 16,666
Accumulated other comprehensive
loss, net of tax (2,832) (5,165) (4,144)
Retained earnings 56,633 52,780 49,055
Less treasury stock, at cost (71,125,
84,436 and 111,413 shares) (1,559) (1,609) (2,126)
--------- --------- ---------
Total stockholders' equity 84,610 78,404 75,395
--------- --------- ---------
Total liabilities and
stockholders' equity $964,929 $948,938 $904,253
========= ========= =========
4
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Six Months Ended
(Amounts in thousands) June 30, June 30,
-------------------- ---------------------
2002 2001 2002 2001
------ ------ ------ -------
Interest income:
Interest and fees on loans $10,550 $11,012 $21,218 $21,898
Securities:
Taxable 2,966 3,404 6,256 7,492
Tax-exempt 639 1,205 1,285 2,404
Other 52 177 134 302
------- ------- ------- -------
Total interest income 14,207 15,798 28,893 32,096
Interest expense:
Deposits 3,915 6,704 7,941 13,871
Borrowed funds 2,039 2,013 4,137 4,284
------- ------- ------- -------
Total interest expense 5,954 8,717 12,078 18,155
------- ------- ------- -------
Net interest income 8,253 7,081 16,815 13,941
Provision for loan losses 375 376 819 819
------- ------- ------- -------
Net interest income after
provision for loan losses 7,878 6,705 15,996 13,122
Other income:
Service charges on deposit
accounts 694 604 1,371 1,170
Other service charges and fees 81 74 150 139
Fiduciary activities 423 375 811 751
Investment management and
benefit plan administration 597 575 1,251 575
Security gains (losses), net 12 283 (107) 1,269
Mortgage banking 70 26 142 96
Increase in cash surrender value
of bank owned life insurance 328 212 636 426
Other 438 389 844 740
------- ------- ------- -------
Total other income 2,643 2,538 5,098 5,166
------- ------- ------- -------
Non-interest expenses:
Salaries and benefits 4,069 3,739 8,039 7,003
Occupancy, net 432 373 813 742
Equipment expenses 288 313 661 658
Other 1,983 1,580 3,782 2,998
------- ------- ------- -------
Total non-interest expense 6,772 6,005 13,295 11,401
------- ------- ------- -------
Income before income taxes 3,749 3,238 7,799 6,887
Income taxes 605 233 1,310 861
------- ------- ------- -------
Net Income $3,144 $3,005 $6,489 $6,026
======= ======= ======= =======
Per share information:
Basic earnings $ 0.45 $ 0.44 $ 0.94 $ 0.87
Diluted earnings 0.45 0.43 0.92 0.86
Cash dividend 0.19 0.15 0.38 0.30
======= ======= ======= =======
Weighted average shares
outstanding 6,936,164 6,902,541 6,936,164 6,902,541
========= ========= ========= =========
5
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended Six Months Ended
(Amounts in thousands) June 30, June 30,
------------------ -------------------
2002 2001 2002 2001
------- ------- ------- -------
Net income $3,144 $3,005 $6,489 $6,026
Other comprehensive income (loss),
net of tax:
Unrealized gains (losses) on
securities available for sale:
Gain (loss) arising during the
period, net of tax (benefit) 3,608 (859) 2,262 (729)
Reclassification adjustment
for (gains) losses included
in net income, net of (tax)
benefit (8) (187) 71 (838)
------- ------- ------- -------
Other comprehensive income (loss) 3,600 (1,046) 2,333 (1,567)
------- ------- ------- -------
Comprehensive income $6,744 $1,959 $8,822 $4,459
======= ======= ======= =======
6
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
June 30,
(Amounts in thousands) -----------------------
2002 2001
--------- ---------
Net cash provided by operations $ 4,905 $ 5,370
Investing activities:
Proceeds from sales of securities available
for sale 49,742 118,436
Purchases of securities available for sale (80,966) (136,465)
Maturities of securities available for sale 34,930 40,407
Net increase in loans (7,666) (14,310)
Purchase of The National Advisory Group, Inc. (6,966)
Purchases of premises and equipment (1,667) (1,257)
Sale of other real estate owned 90
-------- --------
Net cash used in investing activities (5,537) (155)
Financing activities:
Net increase in non-interest bearing deposits 5,961 5,298
Net increase (decrease) in interest
bearing deposits 45,554 (19,070)
Net decrease in short-term borrowings (44,575) (27,149)
Increase in long-term debt 30,000
Issuance of treasury stock 1,190 918
Acquisition of treasury stock (1,153) (250)
Cash dividends (2,653) (2,271)
-------- --------
Net cash provided by (used in) financing
activities 4,324 (12,523)
-------- --------
Increase (decrease) in cash
and cash equivalents 3,692 (7,308)
Cash and cash equivalents,
beginning of year 28,029 47,059
-------- --------
Cash and cash equivalents, end of period $31,721 $39,750
======== ========
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2002
NOTE 1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
PennRock Financial Services Corp. and its subsidiaries. All material
intercompany balances and transactions have been eliminated in consolidation.
The information contained in the financial statements is unaudited. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation of the results of
interim periods have been made. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements.
Operating results for the six months ended June 30, 2002 are not necessarily
indicative of the results that may be expected for the year ended December
31, 2002.
The accounting policies of PennRock Financial Services Corp. and
Subsidiaries, as applied in the consolidated interim financial statements
presented, are substantially the same as those followed on an annual basis as
presented in the 2001 Annual Report to shareholders except as discussed in
Note 5.
NOTE 2. BUSINESS
PennRock Financial Services Corp. ("PennRock") is a bank holding company
incorporated in 1986 under the laws of Pennsylvania. Blue Ball National Bank
("the Bank") and The National Advisory Group, Inc. ("National") are wholly
owned subsidiaries of PennRock. The Bank 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., a wholly owned subsidiary of the Bank, began operations
in the first quarter of 1999 to offer and sell annuity products. National,
established in 1984, is the parent company for four corporations: National
Actuarial Consultants, Ltd. which provides consulting, actuarial and
administrative services to retirement and employee benefit plans; National
Financial Advisors, Inc. which offers investment, advisory and asset
management services to retirement plan sponsors and participants, and serves
as an investment advisor to the Dresher Family of Funds; NFA Brokerage
Services, Inc. which is a mutual-funds-only broker dealer; and National
Shareholder Services, Inc. which provides transfer agency services for the
Dresher Family of Funds. The Dresher Family of Funds is an open-end
diversified management investment company (mutual fund) which consists of two
portfolios: The Dresher Comprehensive Growth Fund and The Dresher Classic
Retirement Fund.
8
NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES
The financial statements do not reflect various commitments and contingent
liabilities, such as commitments to extend credit, letters of credit,
guarantees, and liability for assets held in Trust, which arise in the normal
course of business. Commitments under outstanding letters of credit amounted
to $37.8 million and commitments to extend credit totaled $138.5 million as
of June 30, 2002. Management does not anticipate any significant loss as a
result of these transactions.
NOTE 4. STOCKHOLDERS' EQUITY
On July 9, 2002, the Board of Directors declared a 10% stock dividend payable
on August 13, 2002 to shareholders of record on July 23, 2002. All per-share
amounts in the accompanying financial statements have been restated for the
10% stock dividend and for a 5% stock dividend that was paid on August 10,
2001.
On June 25, 2002, the Board of Directors authorized the repurchase of up to
400,000 shares of common stock to be held as treasury shares to be used in
connection with future stock dividends and stock splits, employee benefit
plans, executive compensation plans, the Dividend Reinvestment Plan and other
corporate purposes.
NOTE 5. NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Nos. 141, "Business Combinations," and 142,
"Goodwill and Other Intangible Assets." SFAS No. 141 requires companies to
use the purchase method of accounting for all business combinations initiated
after June 30, 2001 and addresses the initial recognition and measurement of
goodwill and other intangibles acquired in a business combination. SFAS No.
142 addresses the recognition and measurement of goodwill and other
intangible assets subsequent to acquisition. Under the new standard,
goodwill is no longer amortized. Instead, it is tested for impairment at
least annually. Other intangible assets continue to be amortized over their
useful lives. PennRock adopted the provisions of SFAS No. 142 on January 1,
2002. The adoption of SFAS 142 will eliminate annual goodwill amortization
of approximately $403,000 per year. Management does not expect the goodwill
impairment tests to have a material effect on PennRock's financial condition
or results of operations.
9
The following table summarizes PennRock's intangible assets as of June 30,
2002:
Balance
(Amounts in thousands) June 30,
Type of Acquisition -------------------
Description Asset Date 2002 2001
- --------------------------------- ---------- ------------- --------- ---------
Branch acquisition (1) January, 1995 $ 258 $ 358
The National Advisory Group, Inc. Goodwill March, 2001 7,811 8,069
(1) Unidentified intangible asset as defined by Statement of Financial
Accounting Standards No. 72, "Accounting for Certain Acquisitions of Banking or
Thrift Institutions." This intangible asset will continue to be amortized
since it is excluded from the provisions of SFAS No. 142.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This section presents management's discussion and analysis of the financial
condition and results of operations of PennRock Financial Services Corp.
(PennRock or the Company) and subsidiaries. This discussion should be read
in conjunction with the financial statements which appear elsewhere in this
report.
FORWARD LOOKING STATEMENTS
In this report, we may have included certain forward looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products and similar matters. The
Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward looking statements. In order to comply with the terms of the safe
harbor, we must inform you that a variety of factors could cause the
Company's actual results and experiences to differ materially from the
anticipated results or other expectations expressed in these forward looking
statements. Our ability to predict the results or the effect of future plans
and strategies is inherently uncertain. Factors that could affect future
results include changes in market interest rates, local and national economic
trends and conditions, competition for products and services, changes in
customer preferences, legislative and regulatory changes, delinquency rates
on loans, changes in accounting principles, policies or guidelines, or the
failure of major customers, vendors or suppliers. You should consider these
factors in evaluating any forward looking statements and not place undue
reliance on such statements. We are not obligated to publicly update any
forward looking statements we may make in this report to reflect the impact
of subsequent events.
10
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Total assets of PennRock increased $60.7 million or 6.7% since June 30 last
year and by $16.0 million or 1.7% from year-end 2001. Loans grew $56.8
million or 11.0% from June last year. For the first six months of 2002,
loans increased $11.5 million or 2.1% with most of that growth coming in the
first quarter of 2002. Securities available for sale remained substantially
unchanged from last year and since year-end 2001. Deposits increased $46.0
million or 6.9% from last year and by $51.5 million or 7.8% from year-end.
Short-term borrowings increased $5.2 million or 19.1% from last year but
decreased $44.6 million or 58.1% from year-end. Long-term debt remained
unchanged.
Net income for the current quarter was $3.1 million or $.45 per share
compared with $3.0 million or $.44 per share for the second quarter of 2001,
an increase of $139,000 or 4.6%. Dividends paid in the second quarter of
2002 totaled $1.3 million or $.19 per share and $1.1 million or $.15 per
share for the second quarter of 2001.
For the first six months of 2001, net income totaled $6.5 million or $.94 per
share compared with $6.0 million or $.87 per share for the first six months
of 2001, an increase of 7.7%. Net interest income increased $2.9 million,
non-interest income excluding security gains increased $1.2 million and non-
interest expenses increased $1.9 million. Dividends of $2.7 million or $.38
per share were paid in the first half of 2002 compared with $2.3 million or
$.30 per share in 2001. The dividend payout ratio was 41% in 2002 and 38% in
2001.
NET INTEREST INCOME
Net interest income is the product of the volume of average earning assets
and the average rates earned on them, less the volume of average interest
bearing liabilities and the average rates paid on them. The amount of net
interest income is affected by changes in interest rates, volumes and the mix
of earning assets and paying liabilities. For analytical purposes, net
interest income is adjusted to a taxable equivalent basis. This adjustment
allows for a more accurate comparison among taxable and tax-exempt assets by
increasing tax-exempt income by an amount equivalent to the federal income
tax that would have been paid if this income were taxable at the statutory
rate of 34%.
Table 1 presents net interest income on a fully taxable equivalent basis for
the second quarter and first half of 2002 and 2001. For the second quarter
of 2002, net interest income on a fully taxable equivalent basis totaled $8.8
million, an increase of $968,000 or 12.3% from $7.8 million earned for the
same period of 2001. For the first six months of 2002 and 2001, net interest
income on a fully taxable equivalent basis totaled $17.9 million and $15.4
million, respectively.
11
TABLE 1 - NET INTEREST INCOME
Three Months Ended Six Months Ended
(Amounts in thousands) June 30, June 30,
-------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- --------
Total interest income $14,207 $15,798 $28,893 $32,096
Total interest expense 5,954 8,717 12,078 18,155
------- ------- -------- --------
Net interest income 8,253 7,081 16,815 13,941
Tax equivalent adjustment 555 759 1,086 1,476
------- ------- -------- --------
Net interest income
(fully taxable equivalent) $ 8,808 $ 7,840 $17,901 $15,417
======= ======= ======== ========
Table 2 presents the average balances, taxable equivalent interest income and
expense and rates for PennRock's assets and liabilities for the three and six
months ended June 30, 2002 and 2001.
Net interest income for the second quarter and first six months of 2002
benefited from increases in both the interest rate spread and margin relative
to the same period last year. Although the yield on earning assets declined
in 2002 compared with 2001, the drop in PennRock's cost of funds was greater.
However, both the interest rate spread and margin declined during the second
quarter of 2002 as the yield on earning assets declined more than the cost of
funds.
12
TABLE 2 - AVERAGE BALANCES, RATES, AND INTEREST INCOME AND EXPENSE
(Taxable equivalent basis)
Three Months Ended June 30,
(Amounts in thousands) -----------------------------------------==---------
2002 2001
------------------------ -------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
-------- -------- ------- -------- -------- ------
ASSETS
Interest earning assets:
Short-term investments $ 3,222 $ 13 1.62% $ 9,714 $ 95 3.92%
Mortgages held for sale 1,770 39 8.84% 4,117 82 7.99%
Securities available for sale 311,835 4,124 5.30% 307,512 5,332 6.95%
Loans:
Mortgage 327,049 6,312 7.74% 280,753 6,052 8.65%
Commercial 158,535 2,657 6.72% 142,131 3,144 8.87%
Consumer 80,311 1,617 8.08% 83,051 1,853 8.95%
-------- ------- -------- -------
Total loans 565,895 10,586 7.50% 505,935 11,049 8.76%
-------- ------- -------- -------
Total earning assets 882,722 14,762 6.71% 827,278 16,557 8.03%
Other assets 87,085 ------- 69,146 -------
-------- --------
$969,807 $896,424
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing deposits:
Demand $213,892 951 1.78% $132,466 1,050 3.18%
Savings 71,913 263 1.47% 55,833 276 1.98%
Time 306,266 1,617 3.54% 385,585 5,378 5.59%
-------- ------- -------- -------
Total interest bearing deposits 592,071 3,915 2.65% 573,884 6,704 4.69%
Short-term borrowings 54,124 215 1.59% 22,332 189 3.39%
Long-term debt 121,000 1,824 6.05% 121,000 1,824 6.05%
-------- ------- -------- -------
Total interest bearing liabilities 767,195 5,954 3.11% 717,216 8,717 4.87%
Non-interest bearing deposits 111,596 ------- 93,212 -------
Other liabilities 10,695 10,487
Stockholders' equity 80,321 75,509
-------- -------
Total liabilities and stockholders'
equity $969,807 $896,424
======== ========
Net interest income $ 8,808 $ 7,840
======= =======
Interest rate spread 3.59% 3.15%
====== ======
Net interest margin 4.00% 3.80%
====== ======
13
TABLE 2 - AVERAGE BALANCES, RATES, AND INTEREST INCOME AND EXPENSE (Continued)
(Taxable equivalent basis)
Six Months Ended June 30,
(Amounts in thousands) ----------------------------------------------------
2002 2001
------------------------ -------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
-------- -------- ------- -------- -------- ------
ASSETS
Interest earning assets:
Short-term investments $ 2,760 $ 28 2.05% $ 8,593 $ 200 4.69%
Mortgages held for sale 2,632 106 8.12% 2,408 102 8.54%
Securities available for sale 308,236 8,555 5.60% 318,215 11,298 7.16%
Loans:
Mortgage 325,365 12,777 7.92% 279,916 11,922 8.59%
Commercial 157,886 5,268 6.73% 140,325 6,290 9.04%
Consumer 80,409 3,244 8.14% 83,759 3,761 9.05%
-------- ------- -------- -------
Total loans 563,660 21,289 7.62% 504,000 21,973 8.79%
-------- ------- -------- -------
Total earning assets 877,288 29,979 6.89% 833,216 33,572 8.13%
Other assets 83,750 ------- 65,009 -------
-------- --------
$961,038 $898,225
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing deposits:
Demand $210,288 2,035 1.95% $130,469 2,100 3.25%
Savings 68,940 501 1.47% 54,896 539 1.98%
Time 300,597 5,405 3.63% 391,082 11,231 5.79%
-------- ------- -------- -------
Total interest bearing deposits 579,825 7,941 2.76% 576,447 13,870 4.85%
Short-term borrowings 63,111 509 1.63% 39,023 923 4.77%
Long-term debt 121,000 3,628 6.05% 107,574 3,362 6.30%
-------- ------- -------- -------
763,936 12,078 3.19% 723,044 18,155 5.06%
Non-interest bearing deposits 107,180 ------- 90,500 -------
Other liabilities 9,926 9,942
Stockholders' equity 79,996 74,739
-------- --------
Total liabilities and stockholders'
equity $961,038 $898,225
======== ========
Net interest income $17,901 $15,417
======= =======
Interest rate spread 3.70% 3.06%
====== ======
Net interest margin 4.11% 3.73%
====== ======
14
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses charged to earnings was $375,000 for the second
quarter of 2002 compared with $376,000 for the second quarter of last year.
The provision was $819,000 for the first six months of 2002 and 2001. The
provision is based on management's estimate of the amount needed to maintain
an adequate allowance for loan losses. The adequacy of the allowance will be
examined in light of past loan loss experience, current economic conditions,
volume of non-performing and delinquent loans and other relevant factors.
The allowance is established at a level considered by management to be
adequate to absorb potential future losses contained in the portfolio and is
monitored on a continuous basis with independent formal reviews conducted
semiannually. The allowance is increased by provisions charged to expense
and decreased by net charge-offs. Table 3 reflects an analysis of the
allowance for loan losses for the second quarter and first six months of 2002
and 2001.
TABLE 3 - ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
Three Months Ended Six Months Ended
(Amounts in thousands) June 30, June 30,
------------------- ------------------
2002 2001 2002 2001
-------- -------- -------- --------
Balance, beginning of period $7,568 $6,511 $7,262 $5,973
Provision charged to operating expense 375 376 819 819
Total loans charged off (186) (202) (352) (339)
Total recoveries 19 26 47 258
------- ------- ------- -------
Net charge-offs (167) (176) (305) (81)
------- ------- ------- -------
Balance, end of period $7,776 $6,711 $7,776 $6,711
======= ======= ======= =======
Total loans:
Average $570,093 $509,144 $567,389 $507,559
Period-end 569,885 513,112 569,885 513,112
Ratios:
Net charge-offs to
average loans (annualized) 0.12% 0.14% 0.11% 0.03%
Allowance for loan losses to
period-end loans 1.36% 1.31% 1.36% 1.31%
15
NON-PERFORMING ASSETS
Table 4 reflects PennRock's non-performing assets at June 30, 2002, December
31, 2001 and June 30, 2001. PennRock's policy is to discontinue the accrual
of interest on loans for which the principal or interest is past due 90 days
or more unless the loan is well secured and corrective action has begun or
the loan is in the process of collection. When a loan is placed on non-
accrual status, any unpaid interest is charged against income. Other real
estate owned represents property acquired through foreclosure.
TABLE 4 - NON-PERFORMING ASSETS
June 30, December 31, June 30,
(Amounts in thousands) 2002 2001 2001
---------- --------- -----------
Non-accrual loans $ 4,155 $ 692 $1,420
Loans accruing but 90 days past due
as to principal or interest 857 476 241
---------- --------- ----------
Total non-performing loans 5,012 1,168 1,661
Other real estate owned 372 208 145
--------- --------- ---------
Total non-performing assets $5,384 $1,376 $1,806
========= ========= =========
Ratios:
Non-accrual loans to total loans 0.88% 0.21% 0.32%
Non-accrual loans to total loans and
other real estate owned 0.94% 0.25% 0.35%
Allowance for loan losses to
non-performing loans 155.15% 621.75% 404.03%
Total non-performing loans increased $3.4 million from June 30 last year and
by $3.8 million from year end. The large increase in non-accrual loans since
year-end 2001 primarily represents the balance owed on a commercial equipment
lease to a lessee that declared bankruptcy in the first quarter of 2002. The
leased equipment has been recovered and is being refurbished for sale. The
amount of recovery that PennRock may realize is not known.
16
LIQUIDITY
The purpose of liquidity management is to ensure that there are sufficient
cash flows available to meet a variety of needs. These include financial
commitments such as satisfying the credit needs of our borrowers and
withdrawals by our depositors, the ability to capitalize on investment and
business opportunities as they occur, and the funding of PennRock's own
operations. Liquidity is provided by maturities and sales of investment
securities, loan payments and maturities and liquidating money market
investments such as federal funds sold. Liquidity is also provided by short-
term lines of credit with various correspondents and fixed and variable rate
advances from the Federal Home Loan Bank of Pittsburgh and other
correspondent banks. However, PennRock's primary source of liquidity lies in
PennRock's ability to renew, replace and expand its base of core deposits
(consisting of demand, NOW, money market, savings and time deposits less than
$100,000).
Total deposits increased $46.0 million or 6.9% since last year and by $51.5
million or 7.8% from last year. Most of the deposit growth has been in non-
maturity deposits (which consists of all deposits other than time deposits).
Non-maturity deposits increased $95.6 million from June 30 last year and by
$23.3 million from year-end 2001. Time deposits declined by $49.6 million
from last year and increased $28.2 million from year-end. Since time
deposits generally carry higher rates than non-maturity deposits, the faster
growth of non-maturity deposits has had a positive impact on PennRock's cost
of funds.
Table 5 reflects the changes in the major classifications of deposits and
borrowed funds by comparing the balances at the end of the second quarter of
2002 with year-end and the second quarter of 2001.
TABLE 5 - DEPOSITS AND BORROWED FUNDS BY MAJOR CLASSIFICATION
(Amounts in thousands)
June 30, December 31, June 30,
2002 2001 2001
----------- ----------- -----------
Non-interest bearing $114,490 $108,529 $ 99,299
NOW accounts 42,314 40,936 35,155
Money market deposit accounts 166,064 160,590 109,298
Savings accounts 74,480 63,966 57,967
Time deposits under $100,000 303,180 253,757 340,900
--------- --------- ---------
Total core deposits 700,528 627,778 642,619
Time deposits of $100,000 or more 14,681 35,916 26,603
--------- --------- ---------
Total deposits 715,209 663,694 669,222
Short-term borrowings 32,179 76,754 27,026
Long-term debt 121,000 121,000 121,000
--------- --------- ---------
Total deposits and borrowed funds $868,388 $861,448 $817,248
========= ========= =========
17
CAPITAL RESOURCES
Total stockholders' equity increased $9.2 million or 12.2% from June 30, 2001
and by $6.2 million or 7.9% since year end. Stockholders' equity is impacted
by changes in the unrealized market gains and losses of the securities
available for sale portfolio, net of deferred taxes and is shown on the
consolidated balance sheets as a component of stockholders' equity as
accumulated other comprehensive loss, net of tax. This portfolio had net
unrealized losses in each period presented. The net unrealized loss declined
by $1.3 million from June 30, 2001 and by $2.3 million from year-end 2001.
The net unrealized gains and losses of the securities available for sale
portfolio are excluded from computations of regulatory ratios.
Table 6 shows PennRock's capital resources as of June 30, 2002, December 31
and June 30, 2001. PennRock and its subsidiary bank exceed all minimum
capital guidelines.
TABLE 6 - CAPITAL RESOURCES
June 30, December 31, June 30,
2002 2001 2001
------------- ----------- -------------
Leverage ratio:
Total capital to total
average assets 8.88% 9.21% 8.44%
Tier 1 capital to total
average assets 8.07% 8.40% 7.68%
Risk-based capital ratios:
Tier 1 capital to risk weighted
assets 10.87% 10.68% 9.92%
Total capital to risk weighted
assets 11.96% 11.71% 10.89%
18
PART II. OTHER INFORMATION
---------------------------
For the Quarter ended June 30, 2002
Item 1. Legal Proceedings
Various legal actions or proceedings are pending involving PennRock or its
subsidiaries. Management believes that the aggregate liability or loss, if
any, will not be material.
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders (the "Meeting") of PennRock Financial
Services Corp. was held on April 23, 2002. Notice of the Meeting was mailed
to shareholders on or about April 1, 2002, together with proxy materials
prepared in accordance with Section 14(a) of the Securities Exchange Act of
1934, as amended, and the regulation promulgated thereunder.
The Meeting was held for the purpose of electing three Class B directors to
hold office for three years from the date of the election and until their
successors are elected and have qualified.
There were no solicitations in opposition to the nominees of the Board of
Directors for the election to the Board. All nominees of the Board of
Directors were elected. The number of votes cast for or withheld, as well as
election to the Board of Directors, were as follows:
Votes Abstentions and
Nominee Votes for Withheld Broker Nonvotes
----------------- ----------- ----------- -----------------
Aaron S. Kurtz 4,363,114 35,507 1,920,741
Robert K. Weaver 4,359,537 39,084 1,920,741
Lewis M. Good 4,363,114 35,507 1,920,741
In addition, a proposal to consider a Stock Incentive Plan of 2002 was
approved by a vote of 3,710,436 in favor versus 165,734 votes against the
plan with 100,502 abstentions.
19
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The following list of exhibits required by Item 601 of
Regulation S-K are filed herewith or incorporated by reference.
(b) Reports on Form 8-K: From April 1, 2002 to the date of this Report,
PennRock filed two Current Reports on Form 8-K.
A current report on Form 8-K dated June 25, 2002 was filed with the
Securities and Exchange Commission on or about June 26, 2002. The report
was filed under Item 5 _ "Other Events" and disclosed a press release
dated June 25, 2002, related to the authorization for PennRock to
repurchase up to 400,000 shares of common stock in open market and
privately negotiated transactions.
A current report on Form 8-K dated July 9, 2002 was filed with the
Securities and Exchange Commission on or about July 10, 2002. The report
was filed under Item 5 _ "Other Events" and disclosed that on July 9,
2002 the Company had declared a 10% stock dividend to all shareholders of
record on July 23, 2002 payable on August 13, 2002.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PennRock Financial Services Corp.
---------------------------------
(Registrant)
Date: August 13, 2002 By: /s/Melvin Pankuch
- ----------------------- -----------------------------------------------
Melvin Pankuch
Executive Vice President and
Chief Executive Officer
Date: August 13, 2002 By: /s/George B. Crisp
- ------------------------ -----------------------------------------------
George B. Crisp
Vice President and Treasurer
(Principal Financial and Accounting Officer)
20
Exhibit Index
----------------
Exhibit Number Description
-------------- ---------------------------------------------------------
(3)(a) Articles of Incorporation of PennRock, incorporated by
reference to Exhibit 3(a) of PennRock's Annual Report on
Form 10-K for the year ended December 31, 2000.
(3)(b) Bylaws of PennRock, incorporated by reference to Exhibit
99 of PennRock's Current Report on Form 8-K dated
November 13, 2001.
(10)(a) Omnibus Stock Plan, incorporated by reference to Exhibit
4.1 to PennRock's Registration Statement Number 33-53022
of Form S-8 dated October 8, 1992.
(10)(b) Executive Incentive Compensation Plan, incorporated by
reference to Exhibit 10(b) of PennRock's Annual Report
on Form 10-K for the year ended December 31,
2000.
(10)(c) Melvin Pankuch Deferred Compensation Agreement Plan,
incorporated by reference to Exhibit 10(c) of PennRock's
Annual Report on Form 10-K for the year ended December
31, 2000.
(10)(d) Melvin Pankuch Employment Agreement, incorporated by
reference to Exhibit 10(d) of PennRock's Annual Report
on Form 10-K for the year ended December 31,
2000.
(10)(e) Employment Agreement with Certain Executive Officers,
incorporated by reference to Exhibit 10(e) of PennRock's
Annual Report on Form 10-K for the year ended December
31, 2000.
(10)(f) Stock Incentive Plan of 2002 incorporated by reference
to Exhibit 10(f) of PennRock's Quarterly Report on Form
10-Q for the quarter ended March 31, 2002.
(99)(a) Certification of Chief Executive Officer and Chief
Financial Officer adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.