<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
------------------
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________ to _____________
Commission file Number: 0-21720
-------
SLIPPERY ROCK FINANCIAL CORPORATION
(Exact Name of small business issuer as specified in its charter)
PENNSYLVANIA 25 - 1674381
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
100 SOUTH MAIN STREET
SLIPPERY ROCK, PENNSYLVANIA 16057 - 1245
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (724) 794-2210
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirement for the past 90 days. YES X NO
--- ---
As of September 30, 1998, there were 1,380,624 shares outstanding of the
issuer's class of common stock.
<PAGE>
SLIPPERY ROCK FINANCIAL CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-QSB
PART I FINANCIAL INFORMATION Page
----
ITEM 1. Financial Statements (unaudited)
Consolidated Balance Sheet, September 30, 1998 3
Consolidated Statements of Income
Three months ended September 30, 1998 and 1997
and Nine months ended September 30, 1998 and 1997 4
Consolidated Statement of Changes in
Stockholders' Equity
Nine months ended September 30, 1998 5
Consolidated Statement of Cash Flows
Nine months ended September 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II OTHER INFORMATION 13
SIGNATURES 14
<PAGE>
SLIPPERY ROCK FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(UNAUDITED - $ in 000)
Sept 30,
1998
-------
ASSETS
Cash and due from banks $ 7,927
Interest-bearing deposits in other banks 22
Federal funds sold 16,200
Mortgage loans held for sale 862
Investment securities:
Available for sale 16,925
Held to maturity (market value $4,703) 4,609
Loans (net of unearned income of $0.3) 159,406
Less allowance for loan losses 1,408
---------
Net loans 157,998
Premises and equipment 4,233
Accrued interest and other assets 4,625
---------
Total assets $ 213,401
=========
LIABILITIES
Deposits:
Noninterest-bearing demand $ 31,757
Interest-bearing demand 25,030
Savings 21,434
Money market 21,819
Time 87,826
---------
Total deposits 187,866
Long-term debt 545
Accrued interest and other liabilities 1,020
---------
Total liabilities 189,431
---------
STOCKHOLDERS' EQUITY
Common stock (par value $0.25; authorized
12,000,000 shares, 1,380,624 issued) 345
Surplus 10,748
Retained earnings 12,751
Net unrealized gain on securities 126
---------
Total stockholders' equity 23,970
---------
Total liabilities and $ 213,401
stockholders' equity =========
See accompanying notes to the consolidated financial statements.
Page 3
<PAGE>
SLIPPERY ROCK FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED - $ IN 000 EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept 30, Sept 30,
1998 1997 1998 1997
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 3,536 $ 3,382 $ 10,622 $ 9,847
Interest-bearing deposits in other banks - 2 - 7
Federal funds sold 198 130 518 195
Interest on investment securities:
Taxable 189 174 543 528
Exempt from federal income tax 110 149 349 608
Dividends 17 15 47 42
---------- ---------- --------- ---------
Total interest income 4,050 3,852 12,079 11,227
---------- ---------- --------- ---------
INTEREST EXPENSE
Deposits 1,733 1,645 5,204 4,740
Borrowed funds 8 11 29 64
---------- ---------- --------- ---------
Total interest expense 1,741 1,656 5,233 4,804
---------- ---------- --------- ---------
NET INTEREST INCOME 2,309 2,196 6,846 6,423
Provision for loan losses 69 50 206 150
---------- ---------- --------- ---------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,240 2,146 6,640 6,273
---------- ---------- --------- ---------
OTHER INCOME
Service charges on deposit accounts 156 156 443 403
Trust department income 20 36 64 68
Net gain on sales of loans 105 33 199 20
Net loss on sales of investments - - - (15)
Other income 132 95 537 263
---------- ---------- --------- ---------
Total other income 413 320 1,243 739
---------- ---------- --------- ---------
OTHER EXPENSE
Salaries and employee benefits 714 666 2,137 1,930
Occupancy expense, net 80 84 165 271
Furniture and equipment expense 191 158 552 475
Data processing expense 86 48 226 127
Stationery, printing and supplies 37 45 105 119
Pennsylvania shares tax 50 46 152 137
Other 408 286 1,144 916
---------- ---------- --------- ---------
Total other expense 1,566 1,333 4,481 3,975
---------- ---------- --------- ---------
Income before income taxes 1,087 1,133 3,402 3,037
Income tax expense 338 332 1,041 825
---------- ---------- --------- ---------
NET INCOME $ 749 $ 801 $ 2,361 $ 2,212
========== ========== ========= =========
PER SHARE DATA
Average shares for the period 1,379,807 1,378,124 1,379,807 1,378,124
Earnings per share $ 0.54 $ 0.58 $ 1.71 $ 1.61
Dividends paid $ 0.17 $ 0.15 $ 0.48 $ 0.45
</TABLE>
See accompanying notes to the consolidated financial statements.
Page 4
<PAGE>
<TABLE>
<CAPTION>
SLIPPERY ROCK FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED - $ IN 000)
NET UNREALIZED
GAIN/(LOSS)
COMMON CAPITAL RETAINED ON AVAILABLE FOR COMPREHENSIVE
STOCK SURPLUS EARNINGS SALE SECURITIES TOTAL INCOME
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 $345 $10,711 $11,052 $ 67 $22,175
Net Income 2,361 2,361 $2,361
Net unrealized gain on securities 59 59 59
Stock options exercised 37 37
Cash dividends ($0.48 per share) (662) (662)
--------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1998 $345 $10,748 $12,751 $126 $23,970 $2,420
============================================================================================
</TABLE>
See accompanying notes to the consolidated financial statements.
Page 5
<PAGE>
SLIPPERY ROCK FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED - $ IN 000)
Nine Months Ended
September 30,
1998 1997
---------- ----------
OPERATING ACTIVITIES
Net income $ 2,361 $ 2,212
Adjustments to reconcile net
income to net cash provided by
operating activities:
Provision for loan losses 206 150
Depreciation and amortization 583 579
Deferred taxes 6 76
Origination of loans held for sale (11,895) (6,659)
Proceeds from sales of loans held for sale 12,060 6,416
Loss (gain) on sale of loans (129) (20)
Loss on sale of investment securities - 15
Decrease in accrued interest receivable 35 110
(Decrease) increase in accrued interest payable (47) 172
Other, net (309) 5
---------- ----------
Net cash provided by operating activities 2,871 3,056
---------- ----------
INVESTING ACTIVITIES
Decrease in interest-bearing deposits
in other banks - net - 99
Investment securities available for sale:
Proceeds from sales - 11,522
Repayments 4,273 728
Purchases (8,045) (651)
Investment securities held to maturity:
Repayments 2,342 2,090
Purchases - (324)
Increase in loans, net (2,141) (11,438)
Purchase of premises and equipment (977) (180)
Net proceeds from branch acquisition - 3,220
Other investing activities - 135
---------- ----------
Net cash provided by (used for) investing
activities (4,548) 5,201
---------- ----------
FINANCING ACTIVITIES
Increase in deposits, net 6,640 11,165
Payments on short term borrowings (2,000) (9,000)
Payments on borrowed funds (7) (6)
Proceeds from stock options exercised 37 -
Cash dividends paid (662) (621)
---------- ----------
Net cash provided by financing activities 4,008 1,538
---------- ----------
Increase in cash and
cash equivalents 2,331 9,795
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 21,817 8,670
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 24,148 $ 18,465
========== ==========
Cash payment for interest $ 5,280 $ 4,633
Cash payments for income taxes $ 1,143 $ 633
See accompanying notes to the consolidated financial statements.
Page 6
<PAGE>
SLIPPERY ROCK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB and, therefore, do
not necessarily include all information which would be included in audited
financial statements. The information furnished reflects all normal recurring
adjustments which are, in the opinion of management, necessary for fair
statement of the results of the period. The results of operations for the
interim periods are not necessarily indicative of the results to be expected
for the full year.
NOTE 2 - EARNINGS PER SHARE
There are no convertible securities which would affect the net income required
to be used in calculating basic and diluted earnings per share, as such, net
income as presented on the consolidated statement of income is used for
computation purposes.
The average shares outstanding for both basic and diluted earnings per share
are 1,379,807 at September 30, 1998 and 1,378,124 at September 30, 1997.
NOTE 3 - COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income". In adopting Statement
No. 130, the Company is required to present comprehensive income and its
components in a full set of general purpose financial statements. The Company
has elected to report the effects of Statement No. 130 as part of the
statement of stockholders' equity.
Page 7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ---------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
- ----------------------------------------------------------------
Total interest income of $4,050,000 for the three month period ended September
30, 1998 compares to $3,852,000 for the same three month period in 1997, an
increase of $198,000 or 5.14%. The overall increase in total interest income
is attributed to an increase in interest and fees on loans of $154,000 and to
an increase in interest income on federal funds sold of $68,000. The increase
in interest and fees on loans is due primarily to increased volume in the loan
portfolio. Total net loans at September 30, 1998 were $157,998,000, an
increase of $6.5 million or 4.30% from $151,483,000 at September 30, 1997.
Although, the increase in the loan portfolio was represented across all loan
products, the most significant increase occurred in the nonfarm nonresidential
area which grew $3.3 million or 15.3% from their level of $21.6 million at
September 30, 1997. The |increase in interest on federal funds sold was due
to volume increases. Federal Funds Sold increased $6.3 million during the
period. These items were funded by deposit growth of $8.1 million or 4.5%,
which included approximately $3.7 million in deposits acquired during the
third quarter of 1997 as a result of the First Western Bank, F.S.B. Slippery
Rock office acquisition.
Total interest expense of $1,741,000 for the three month period ended
September 30, 1998 represents an increase of $85,000 from the $1,656,000
reported for the same three month period in 1997. The increase in interest
expense is due to increases in deposit volumes due to normal growth within
existing deposit products. Overall, average total deposits increased $13.6
million or 7.9% from a level of $171.7 million at September 30, 1997 to $185.3
million at September 30, 1998. The branch acquisition, referred to above,
represents approximately $3.7 million of the overall growth. Average time
certificates had the largest increase with growth of $7.7 million or 9.5%.
The Bank's cost of funds at September 30, 1998 was 4.48%, up from a level of
4.39% at September 30, 1997.
Net interest income of $2,309,000 for the three months ended September 30,
1998 compares to $2,196,000 for the same three month period in 1997, an
increase of $113,000.
Total other income for the three month period ended September 30, 1998 of
$413,000 compared to $320,000 for the three month period ended September 30,
1997, an increase of $93,000. The increase is derived from an increase in
gains on the sale of loans of $72,000 and an increase in "other" miscellaneous
income of $37,000. The increase in gains on the sale of loans was primarily
due to a $70,000 recognition of income pertaining to mortgage servicing
rights. The increase in "other" miscellaneous income is derived from an
increase of $15,000 in ATM surcharge income and fee income generated from the
Bank's debit card program of $18,000. In August of 1997, the Bank instituted
a surcharge of non-Bank customers using the Bank's ATMs in an effort to
offset expenses incurred in offering the service. In December 1997, the Bank
began offering a debit card product to its customers. The product offers
greater acceptance and convenience to Bank customers while also providing
transaction fee income to the Bank.
Total other expense of $1,566,000 for the three months ended September 30,
1998 compares to $1,333,000 for the same three month period in 1997. This
represents an increase of $233,000 or 17.5%. The increase is derived from an
increase in salaries and employee benefits expense of $48,000, equipment
expense of $33,000, data processing expense of $38,000 and "other"
miscellaneous expense of $122,000. The increase in salary and employee
benefits is attributed to normal annual salary increases and to staff
additions in the loan processing and trust areas as a result of growth within
those departments. Equipment expense increased due to acquisitions and
increased depreciation expense. Data processing increased primarily due to
one time fee assessments of $45,000 pertaining to the debit card program. The
increase in "other" miscellaneous expense is derived principally from a loss
of $54,000 on disbanded computer equipment resulting from a computer hardware
upgrade.
Net income for the three month period ended September 30, 1998 was $749,000, a
decrease of $52,000 from the $801,000 reported at September 30, 1997.
Earnings per share for the three month period ended September 30, 1998 were
$0.54, a decrease of $0.04 from $0.58 per share earned during the same three
month period in 1997.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
- ---------------------------------------------------------------
Total interest income of $12,079,000 for the nine month period ended September
30, 1998 compared to $11,227,000 for the same nine month period in 1997, an
increase of $852,000 or 7.6%. As in the three month comparison, the overall
increase in total interest income is attributed to an increase in interest and
fees on loans of $775,000 and to an increase in interest on federal funds sold
of $323,000. These increases were offset by a reduction in income from
tax-exempt securities of $259,000 which resulted from volume reductions within
the portfolio.
Total interest expense of $5,233,000 for the nine month period ended September
30, 1998 represents an increase of $429,000 from the $4,804,000 reported for
the same nine month period in 1997. The increase in interest expense is
attributed to the volume increases discussed earlier in the three month
comparison.
Page 8
<PAGE>
Net interest income of $6,846,000 at September 30, 1998 compared to $6,423,000
at September 30, 1997, an increase of $423,000. The increase is due to volume
increases during the period. Average earning assets increased $13.8 million
or 7.7% from $179.8 million on September 30, 1997 to $193.6 million in 1998,
principally due to an increase in average loans of $12.6 million or 8.7%.
Interest expense increased $429,000 or 8.9% due to volume increases. Average
deposits increased $13.5 million or 7.9% during the period primarily due to
increases in time certificates of $7.7 million or 9.6%.
Total other income of $1,243,000 for the nine months ended September 30, 1998
compares to $739,000 for the same nine month period in 1997, an increase of
$504,000. The increase is due to an increase in gains recorded on loan sales
of $179,000 and an increase in miscellaneous income of $274,000. Sales of
$11.9 million of fixed rate, 1-4 family residential mortgages during the nine
month period ended September 30, 1998 resulted in gains of $129,000. Loan
sales for the nine month period ended September 30, 1997 were $6.4 million
with a net gain of $20,000. Mortgage servicing rights income for the nine
months ended September 30, 1998 was $70,000. The increase in miscellaneous
income is due to the $145,000 gain recorded on the sale of the existing Plaza
office. The Bank entered into an agreement to sell the land and current
facility and relocate across the street from its present location. In
addition, an increase in ATM surcharge income of $43,000 and an increase in
debit card fees of $48,000 contributed to the overall increase in
miscellaneous income.
Total other expense of $4,481,000 at September 30,1998 compares to $3,975,000
at September 30, 1997, an increase of $506,000 or 12.7%. The major
contributors of the increase are salary and employee benefits of $207,000,
equipment expense of $77,000, data processing expense of $99,000 and "other"
miscellaneous expense of $228,000. The increases in salary and employee
benefits, equipment expense and data processing expense are attributed to the
items discussed in the three month comparison. The increase in "other"
miscellaneous expense is due to the loss of $54,000 on disbanded computer
equipment that was discussed in the three month comparison. Also a
contributor, was a charge to operations of $55,000 pertaining to foreclosure
proceedings on a single parcel during the second quarter of 1998.
Net income for the nine month period ended September 30, 1998 of $2,361,000 or
$1.71 per share compared to $2,212,000 or $1.61 per share for the same nine
month period ended September 30, 1997. This represents an increase of
$149,000 or $0.10 per share.
Dividends paid during the nine month period ended September 30, 1998 were
$0.48 per share, an increase of $0.03 per share from the $0.45 per share paid
during the same nine month period in 1997.
FINANCIAL CONDITION
- -------------------
Total assets increased $6.2 million or 3.02% from $207.1 million at December
31, 1997 to $213.4 million at September 30, 1998. Available for sale
securities increased $3.8 million during the period, resulting from net
purchases of U.S. Government Agency securities. Also, federal funds sold
increased $7.4 million from $8.8 million at December 31, 1997 to $16.2 million
at September 30, 1998. Those increases were offset by a reduction in cash and
due from banks of $5.0 million, and a $2.3 million decrease in held to
maturity securities.
Total deposits of $187.9 million at September 30, 1998 represented an increase
of $6.6 million or 3.7% from $181.2 million at December 31, 1997. All
deposit products had net increases during the period except time deposits.
Time deposits at September 30, 1998 were $87.8 million, a decrease of $2.5
million from $90.3 million at December 31, 1997. The reduction is due
primarily to a net reduction in time certificates greater than $100,000 which
declined during the period.
At September 30, 1998, the Bank serviced approximately $35 million in sold
fixed rate mortgages. Sales of fixed rate mortgages to "Freddie Mac" during
the third quarter of 1998 totaled $3.1 million with a net gain of $35,000.
Although the Bank does anticipate the sale of an additional $862,000 during
the fourth quarter of 1998, it had no unfunded commitments to sell at
September 30, 1998. Management does anticipate future sales of fixed rate
mortgages; however, the extent to which the Bank participates in the secondary
market will be dependent upon demand for fixed rate mortgages in the market
place, liquidity needs of the Bank and interest rate risk exposure.
Management will continue to obtain the necessary documentation to allow loans
to be sold in the secondary market, so that if liquidity or market conditions
dictate, management will be able to respond to these conditions.
Page 9
<PAGE>
At September 30, 1998, management has calculated and monitored risk-based and
leverage capital ratios in order to assess compliance with regulatory
guidelines. The following schedule presents certain regulatory capital ratio
requirements along with the Company's position at September 30, 1998:
Actual
---------------- Minimum Well
Amount Ratio Ratio Capitalized
-------- ----- ------ --------
Tier 1 risk - based capital $ 21,865 14.70 % 4.00 % 6.00 %
Total risk - based capital 23,273 15.64 8.00 10.00
Leverage capital 21,865 10.44 3.00 5.00
As the above table illustrates, the Company exceeds both the minimum and "well
capitalized" regulatory capital requirements at September 30, 1998. Management
does not anticipate any future activity that would have a negative impact on
any of these ratios. Also, management is not aware of any current
recommendations by the regulatory agencies that will have a material effect on
future earnings, liquidity or capital of the Company.
LIQUIDITY
The principal functions of the Bank's asset/liability management program are
to provide adequate liquidity and to monitor interest rate sensitivity.
Liquidity represents the ability to meet the cash flow requirements of both
depositors and customers requesting bank credit. Asset liquidity is provided
by repayments and the management of maturity distributions for loans and
securities. An important aspect of asset liquidity lies in maintaining
adequate levels of adjustable rate, short term, or relatively risk free
interest earning assets. One measure that the Bank uses to monitor liquidity
is the liquidity ratio which assesses the relationship between certain earning
assets, customer deposits and short-term interest bearing liabilities. This
ratio was 10.5% of total assets as of September 30, 1998 compared to 7.3% at
December 31, 1997. The increase is due to higher balance levels in federal
funds sold which increased $7.4 million. Management views this ratio to be at
an adequate level.
Management also monitors its liquidity by the net loans to deposits ratio.
The net loans (including loans held for sale) to deposits ratio was at 84.5%
at September 30, 1998 as compared to 86.7% at December 31, 1997 and 85.1% at
September 30, 1997. The decrease from December 1997 was brought about by
deposit growth exceeding loan growth by $4.8 million. The Bank's liquidity
plan allows for the use of long-term advances or short-term lines of credit
with the Federal Home Loan Bank ("FHLB") as a source of funds. Borrowing from
the FHLB not only provides a source of liquidity for the Company, but also
serves as a tool to reduce interest rate risk as well. The Company may
structure borrowings from FHLB to match those of customer credit requests, and
therefore, lock in interest rate spreads over the lives of the loans. At
September 30, 1998, the Company continued to have one such matched funding
loan outstanding totaling $527,000.
The Company continues to also have short-term borrowing availability through
FHLB which are of two types, "RepoPlus" advances and "Flexline". "RepoPlus"
advances are short-term borrowings maturing within one year, bear a fixed rate
of interest and are subject to prepayment penalty. "Flexline" advances also
mature within one year and bear a variable rate of interest that reprices
daily. There are no repayment penalties for these borrowings. There were no
advances outstanding for either of these products at September 30, 1998.
In addition to borrowing from the FHLB as a source for liquidity, as mentioned
earlier, the Company also continued activity in the secondary mortgage market.
Specifically, the Company continues to sell fixed rate residential real estate
mortgages to Freddie Mac. The sales to Freddie Mac not only provide an
opportunity for the Bank to remain competitive in the market place by allowing
it to offer a fixed rate mortgage product, but also provides an additional
source of liquidity. Loan sales on the secondary market also provides
management an additional tool to use in managing interest rate risk exposure
within the balance sheet. The Bank continues to service all loans sold to
Freddie Mac.
The Statement of Cash Flows, for the nine month period ended September 30,
1998, indicates an increase in cash and cash equivalents of $2.3 million.
Cash was provided during the period from the net increase in deposits of $6.6
million, the sale of fixed rate mortgages of $12.1 million and repayments of
investment securities of $6.6 million. Cash was used during the period for
the origination of loans held for sale of $11.9 million and for the purchase
of securities available for sale of $8.0 million. In addition, cash was also
used to repay $2.0 million "RepoPlus" advances. Dividends paid during the
nine month period ended September 30, 1998 totaled $662,000. Cash and cash
equivalents totaled $24.1 million at September 30, 1998, an increase of $2.3
million from $21.8 million at December 31, 1997.
Management is not aware of any conditions, including any regulatory
recommendations or requirements, which would adversely affect its liquidity or
ability to meet its funding needs in the normal course of business.
Page 10
<PAGE>
YEAR 2000
Many older computer systems use two digits to identify the year. These
systems, if not adapted to accurately identify years beyond 1999, could fail
or produce erroneous results for the year 2000 and beyond. The Company's
primary computer processing system was purchased from and is maintained by a
national computer software vendor, Jack Henry & Associates, ("JHA"). During
the second quarter of 1998, JHA issued a Y2K certification letter for its
products. In addition, JHA also issued a software warranty to all banks that
have a valid license agreement and support/maintenance agreement. The Company
has such valid agreements with JHA. Despite the certification and software
warranty, the Company is still required to perform Y2K testing, accordingly,
during the third quarter of 1998, the Company performed its testing of its
mission critical core processing applications with results producing no
foreseeable Year 2000 problems. Testing of ancillary applications will
continue throughout the remainder of 1998.
In compliance with regulatory guidelines, the Company is developing a
contingency plan for the Year 2000. Because the Company's mission critical
core processing applications are deemed to be Y2K ready, the contingency plan
is more of a procedural plan and course of action should any unforeseen
problems arise. Depending upon the nature and severity of any potential
failures, the plan would allow for acceptable time frames for problem
resolution and a hierarchy of contacts within both JHA and the Company.
Manual or personal computer processing would substitute for any failures of
non-mission critical applications.
In addition to evaluating the Company's own Y2K preparedness, it also has
evaluated the readiness of its vendors and customers. The Company sent
letters and questionnaires to its various vendors for evidence of their Year
2000 preparedness. In addition, the Company, through the use of
questionnaires and Company sponsored seminars, solicited information about
Year 2000 preparedness from its own loan and deposit customers. Management
does not believe that any exposure to the Company from its vendors or
customers as they relate to Year 2000 issues pose any significant risk to the
Company.
Management anticipates costs of approximately $50,000 over the course of the
project. These costs do not include costs for reallocation of existing
resources toward the resolution of the issue.
Given the results of testing performed to date, management does not anticipate
the Year 2000 issue to have a material effect upon the future earnings,
capital or liquidity of the Company.
RISK ELEMENTS
The following schedule presents the non-performing assets for the last five
quarters:
<TABLE>
<CAPTION>
Sept Jun Mar Dec Sept
1998 1998 1998 1997 1997
------ ------ ------ ------ ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
NON-PERFORMING AND RESTRUCTURED LOANS
Loans past due 90 days or more $ 79 $ 268 $ 31 $ 18 $ 104
Non-accrual loans 1,574 1,266 1,182 1,335 1,192
Restructured loans 0 0 0 0 0
------ ------ ------ ------ ------
Total non-performing
and restructured loans 1,653 1,534 1,213 1,353 1,296
------ ------ ------ ------ ------
OTHER NON-PERFORMING ASSETS
Other real estate owned 138 138 48 1 20
Repossessed assets 4 22 26 24 31
------ ------ ------ ------ ------
Total other non-performing assets 142 160 74 25 51
------ ------ ------ ------ ------
TOTAL NON-PERFORMING ASSETS $1,795 $1,694 $1,287 $1,378 $1,347
====== ====== ====== ====== ======
Non-performing and restructured loans
as a percentage of total loans (1) 1.04 % 0.97 % 0.76 % 0.86 % 0.85 %
Non-performing assets and
restructured loans as a
percentage of total loans
and other non-performing
assets and restructured loans(1) 1.13 % 1.07 % 0.81 % 0.87 % 0.88 %
(1) Excludes loans held for sale.
</TABLE>
Page 11
<PAGE>
The allowance for loan losses at September 30, 1998, totaled $1,408,000 or
0.88% of total loans (including loans held for sale) as compared to
$1,299,000 or 0.82% at December 31, 1997. Provisions for loan losses were
$206,000 for the nine months ended September 30, 1998 and $150,000 for the
period ended September 30, 1997.
Management performs a quarterly evaluation of the allowance for loan losses.
The evaluation incorporates internal loan review, actual historical losses, as
well as any negative economic trends in the local market. The evaluation is
presented to and approved by the Board of Directors of the Bank. Management,
through the use of the quarterly evaluation, believes that the allowance is
maintained at an adequate level.
At September 30, 1998, the Company had impaired loans of $593,000, all of
which were restructured. At September 30, 1997, the impaired loans totaled
$737,000 all of which were restructured. The average investment in impaired
loans during the period ended September 30, 1998 was $593,000. Impaired loans
had a general loan loss reserve allocation of $90,000 at September 30, 1998.
A loan is considered impaired when, based upon current information and events,
it is probable that the Company will be unable to collect all principal and
interest amounts due according to the contractual terms of the loan agreement.
The Company had other real estate owned at September 30, 1998 of $138,000
which is comprised of one foreclosed property.
Non-performing loans totaled $1,653,000 at September 30, 1998, an increase of
$119,000 from their level of $1,534,000 at June 30, 1998. The increase is
primarily due to an increase in non-accrual loans of $308,000 during the
period. That increase is offset by a $189,000 decrease in loans past due 90
days or more. Non-performing loans as a percent of total loans were 1.04% at
September 30, 1998 as compared to 0.86% at December 31, 1997 and 0.85% at
September 30, 1997.
Other real estate owned at September 30, 1998 was $138,000, which is the
result of foreclosure activity during the second quarter on a single
commercial property. Management believes none of the non-performing assets,
including other real estate owned, at September 30, 1998, pose any significant
risk to the operations, liquidity or capital position of the Company.
Page 12
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
(none)
ITEM 2. CHANGES IN SECURITIES
(none)
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(none)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(none)
ITEM 5. OTHER INFORMATION
(none)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(none)
Page 13
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Slippery Rock Financial Corporation
(Registrant)
Date: November 02, 1998 By: /s/ William C. Sonntag
----------------- ----------------------
William C. Sonntag,
President & CEO
Date: November 02, 1998 By: /s/ Mark A. Volponi
----------------- -------------------
Mark A. Volponi
Treasurer
Page 14
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 7,927
<INT-BEARING-DEPOSITS> 22
<FED-FUNDS-SOLD> 16,200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 16,925
<INVESTMENTS-CARRYING> 4,609
<INVESTMENTS-MARKET> 4,703
<LOANS> 160,268
<ALLOWANCE> 1,408
<TOTAL-ASSETS> 213,401
<DEPOSITS> 187,866
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,020
<LONG-TERM> 545
0
0
<COMMON> 345
<OTHER-SE> 23,625
<TOTAL-LIABILITIES-AND-EQUITY> 213,401
<INTEREST-LOAN> 10,622
<INTEREST-INVEST> 939
<INTEREST-OTHER> 518
<INTEREST-TOTAL> 12,079
<INTEREST-DEPOSIT> 5,204
<INTEREST-EXPENSE> 29
<INTEREST-INCOME-NET> 6,846
<LOAN-LOSSES> 206
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,481
<INCOME-PRETAX> 3,402
<INCOME-PRE-EXTRAORDINARY> 3,402
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,361
<EPS-PRIMARY> 1.71
<EPS-DILUTED> 1.71
<YIELD-ACTUAL> 8.32
<LOANS-NON> 1,574
<LOANS-PAST> 79
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,299
<CHARGE-OFFS> 135
<RECOVERIES> 38
<ALLOWANCE-CLOSE> 1,408
<ALLOWANCE-DOMESTIC> 1,408
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 803
</TABLE>
