SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1999
-------------
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 registrant as specified in its charter)
Pennsylvania 25-1674381
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
100 South Main Street
Slippery Rock, Pennsylvania 16057
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (724) 794-2210
Indicate by check mark whether the registrant (1) filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the preceding
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 June 30, 1999, there were 2,764,248 shares outstanding of the issuer's
class of common stock.
<PAGE>
Slippery Rock Financial Corporation
INDEX TO QUARTERLY REPORT ON FORM 10-Q
Part I Financial Information Page
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheet, June 30, 1999
And December 31, 1998 3
Consolidated Statements of Income for the
Three months ended June 30, 1999 and 1998
and for the Six months ended June 30, 1999 and 1998 4
Consolidated Statement of Changes in
Stockholders Equity for the
Six months ended June 30, 1999 and 1998 5
Consolidated Statement of Cash Flows for the
Six months ended June 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 14
Part II Other Information
Item 4. Submission of Matters to a Vote of Security Holders. 16
Item 6. Exhibits and Reports of Form 8-K 17
Signatures 18
2
<PAGE>
Slippery Rock Financial Corporation
CONSOLIDATED BALANCE SHEET
(Unaudited - $ in 000)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Cash and due from banks $ 9,147 $ 8,619
Interest-bearing deposits in other banks 182 8,015
Federal funds sold 3,000 6,400
Mortgage loans held for sale - 2,468
Investment securities:
Available for sale 28,349 18,197
Held to maturity (market value
$3,597 and $3,736) 3,557 3,644
Loans 172,412 160,854
Less allowance for loan losses 1,534 1,410
-------- --------
Net loans 170,878 159,444
Premises and equipment 4,843 4,405
Accrued interest and other assets 5,386 4,581
-------- --------
Total assets $ 225,342 $ 215,773
======== ========
LIABILITIES
Deposits:
Noninterest-bearing demand $ 32,572 $ 31,244
Interest-bearing demand 25,394 22,821
Savings 22,706 20,698
Money market 25,060 23,704
Time 91,364 91,682
-------- --------
Total deposits 197,096 190,149
Short-term borrowings 2,000 -
Other borrowings 551 333
Accrued interest and other liabilities 883 1,036
-------- --------
Total liabilities 200,530 191,518
-------- --------
STOCKHOLDERS' EQUITY
Common stock (par value $0.25; authorized
shares 12,000,000; issued and outstanding
2,764,248 and 2,763,648) 691 691
Surplus 10,459 10,448
Retained earnings 14,023 13,030
Accumulated other comprehensive income / (loss) (361) 86
-------- --------
Total stockholders' equity 24,812 24,255
-------- --------
Total liabilities and stockholders' equity $ 225,342 $ 215,773
======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
Slippery Rock Financial Corporation
CONSOLIDATED STATEMENT OF INCOME
(Unaudited - $ in 000 except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 3,505 $ 3,548 $ 7,100 $ 7,086
Interest-bearing deposits in other banks 83 1 188 1
Federal funds sold 80 127 201 320
Interest on investment securities:
Taxable 137 198 266 353
Exempt from federal income tax 188 116 344 239
Dividends 16 16 32 30
--------- --------- --------- ---------
Total interest income 4,009 4,006 8,131 8,029
--------- --------- --------- ---------
INTEREST EXPENSE
Deposits 1,675 1,709 3,372 3,471
Borrowed funds 7 10 12 21
--------- --------- --------- ---------
Total interest expense 1,682 1,719 3,384 3,492
--------- --------- --------- ---------
NET INTEREST INCOME 2,327 2,287 4,747 4,537
Provision for loan losses 105 68 210 137
--------- --------- --------- ---------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,222 2,219 4,537 4,400
--------- --------- --------- ---------
OTHER INCOME
Service charges on deposit accounts 149 140 293 287
Trust department income 32 30 78 44
Net gains on sales of loans 11 43 124 94
Other income 176 286 315 405
--------- --------- --------- ---------
Total other income 368 499 810 830
--------- --------- --------- ---------
OTHER EXPENSE
Salaries and employee benefits 753 699 1,540 1,423
Occupancy expense, net 92 5 188 85
Furniture and equipment expense 202 196 432 361
Data processing expense 60 87 111 140
Stationery, printing and supplies 34 36 76 68
Pennsylvania shares tax 56 51 111 102
Other 449 410 784 736
--------- --------- --------- ---------
Total other expense 1,646 1,484 3,242 2,915
--------- --------- --------- ---------
Income before income taxes 944 1,234 2,105 2,315
Income tax expense 266 383 614 703
--------- --------- --------- ---------
NET INCOME $ 678 $ 851 $ 1,491 $ 1,612
========= ========= ========= =========
PER SHARE DATA
Average shares for the period, basic 2,764,248 2,759,315 2,764,248 2,759,315
Average shares for the period, diluted 2,766,649 2,760,324 2,766,649 2,760,324
Earnings per share, basic $ 0.25 $ 0.31 $ 0.54 $ 0.58
Earnings per share, diluted $ 0.25 $ 0.31 $ 0.54 $ 0.58
Dividends paid $ 0.09 $ 0.08 $ 0.18 $ 0.16
</TABLE>
See accompanying notes to the consolidated financial statements
4
<PAGE>
<TABLE>
<CAPTION>
Slippery Rock Financial Corporation
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited - $ in 000)
Accumulated Other
Common Capital Retained Comprehensive Comprehensive
Stock Surplus Earnings Income / (Loss) Total Income
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 $ 691 $ 10,448 $ 13,030 $ 86 $ 24,255 $ -
Net Income 1,491 1,491 1,491
Net unrealized loss on securities (447) (447) (447)
Stock options exercised 11 11
Cash dividends ($0.18 per share) (498) (498)
-----------------------------------------------------------------------------
Balance, June 30, 1999 $ 691 $ 10,459 $ 14,023 $(361) $ 24,812 $ 1,044
=============================================================================
</TABLE>
See accompanying notes to the consolidated financial statements.
5
<PAGE>
Slippery Rock Financial Corporation
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited - $ in 000)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,491 $ 1,612
Adjustments to reconcile net
income to net cash provided by
operating activities:
Provision for loan losses 210 137
Depreciation and amortization 344 380
Deferred taxes (69) 2
Origination of loans held for sale (9,186) (8,866)
Proceeds from sale of loans held for sale 11,662 8,877
Gain on sale of loans (124) (94)
Decrease (increase) in accrued interest receivable (61) 12
Decrease in accrued interest payable (53) (113)
Other, net (336) (194)
-------- --------
Net cash provided by operating activities 3,878 1,753
-------- --------
INVESTING ACTIVITIES
Decrease in interest-bearing deposits in other banks, net 8,000 -
Investment securities available for sale:
Repayments 3,877 2,940
Purchases (14,714) (6,945)
Investment securities held to maturity:
Repayments 88 1,055
Increase in loans, net (11,736) (373)
Purchase of premises and equipment (777) (578)
------- --------
Net cash used for investing activities (15,262) (3,901)
-------- --------
FINANCING ACTIVITIES
Increase in deposits, net 6,947 2,184
Increase (decrease)in short term borrowings 2,000 (2,000)
Increase in borrowed funds 223 -
Payments on borrowed funds (5) (4)
Proceeds from stock options exercised 11 38
Cash dividends paid (498) (428)
-------- --------
Net cash provided by (used for) financing activities 8,678 (210)
-------- --------
Decrease in cash and cash
equivalents (2,706) (2,358)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 15,035 21,817
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,329 $ 19,459
======== ========
Cash payments for interest $ 3,437 $ 3,605
Cash payments for income taxes $ 767 $ 750
</TABLE>
See accompanying notes to the consolidated financial statements.
6
<PAGE>
Slippery Rock Financial Corporation
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-Q 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.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Comparison of the Three Months Ended June 30, 1999 and 1998
- -----------------------------------------------------------
Total interest income of $4,009,000 for the three month period ended June 30,
1999 compares to $4,006,000 for the same three month period in 1998, an
increase of $3,000. Increases in interest income on interest-bearing
deposits with others of $82,000 and an increase in income from tax-exempt
securities of $72,000 were offset by declines in income from loans of $43,000
and interest income from federal funds sold of $47,000. The changes in
interest income are brought about principally by changes in volume. Average
interest-bearing balances with others increased $6.8 million for the
three-month period ended June 30, 1999 compared to the same three-month
period in 1998. The increase is due to two $4.0 million short term
certificates of deposit held at the Federal Home Loan Bank, which matured
during June 1999, but were not held during the six month period ended June 30,
1998. Tax-exempt security income increased due to an increase in average
balances of $4.0 million for the three-month period. Average federal funds
sold for the three month period ended June 30, 1999 was $6.3 million, a
decrease from an average of $9.4 million for the same three month period in
1998. The reduction in interest income on loans was brought about not only
by volume activity, but by reductions in yield as well. Loan sales during
the first quarter of 1999 of $9.0 million offset growth within the loan
portfolio. However, for the three-month period ended June 30, 1999, average
loan growth was $4.3 million, with most of the growth ($3.1 million)
occurring within average loans secured by commercial real estate. The tax
equivalent yield on the loan portfolio was 8.70% at June 30, 1999 compared to
8.89% at June 30, 1998. In addition to lower rates offered on new
originations, the Bank's portfolio of adjustable rate loans also continued to
reprice downward.
Total interest expense of $1,682,000 for the three month period ended June
30, 1999 represents a decrease of $37,000 from the $1,719,000 reported for
the same three month period in 1998. The decrease in interest expense is due
to rate reductions in the fourth quarter 1998 and first quarter 1999.
Average total deposits increased $2.1 million for the three months ended June
30, 1999 from $192.9 million to $195.0 million. Average total deposits at
June 30, 1998 were $183.2 million. The Bank's cost of funds at June 30, 1999
was 4.17%, down from a level of 4.48% at June 30, 1998.
Net interest income of $2,327,000 for the three months ended June 30, 1999
compared to $2,287,000 for the same three month period in 1998, an increase
of $40,000.
Total other income for the three month period ended June 30, 1999 of $368,000
compared to $499,000 for the three month period ended June 30, 1998, a
decrease of $131,000. The decrease is derived from a decrease in gains on
the sales of loans of $32,000 and a decrease in "other" miscellaneous income
of $110,000. Loan sales to the Federal Home Loan Mortgage Corporation
("Freddie Mac") during the three-month period ended June 30, 1999 totaled
$2.6 million, with a net loss recorded of $15,000. Sales during the same
three-month period ended June 30, 1998 totaled $4.7 million, with net gains
recorded of $42,000. Income recognition pertaining to mortgage servicing
rights totaled $26,000 for the three-month period ended June 30, 1999. The
decline in "other" miscellaneous income is comprised of several items.
Increases in interchange fees earned on the Bank's debit card program of
$12,000 and increases in trust brokerage commission fees of $13,000 were offset
by the one time gain recognition of $145,000 in May 1998 pertaining to the
sale of the former Slippery Rock Plaza office. The increase in debit card
fees and trust brokerage commission fees were due to increased volumes
associated with both products. The sale of the former Plaza office was part
of the Bank's capital improvement project, which allowed for the construction
of a new full service Plaza office located directly across the street from
the former facility.
Total other expense of $1,646,000 for the three months ended June 30, 1999
compared to $1,484,000 for the same three-month period in 1998. This
represents an increase of $162,000 or 10.9%. Increases in salary and
employee benefits of $54,000, net occupancy expense of $87,000 and "other"
miscellaneous expense of $39,000 were offset by a reduction of $27,000 in data
processing expense. The increase in salary and employee benefits is
attributed to normal annual salary increases. Equipment expenses increased
due to acquisitions and increased depreciation expense. Net occupancy
expense increased due to a one time accrual benefit adjustment during the
second quarter of 1998 and due
8
<PAGE>
to an increase in building depreciation due to the construction of the new
Plaza office and remodeling of the Trust office in 1998.
Net income for the three-month period ended June 30, 1999 was $678,000, a
decrease of $173,000 from the $851,000 reported at June 30, 1998. Earnings
per share for the three-month period ended June 30, 1999 were $0.25, a
decrease of $0.06 from $0.31 per share earned during the same three-month
period in 1998.
Comparison of the Six Months Ended June 30, 1999 and 1998
- ---------------------------------------------------------
Total interest income for the six month period ended June 30, 1999 was
$8,131,000, an increase of $102,000 from the $8,029,000 reported for the same
six month period in 1998. Increases in interest income on interest bearing
deposits with others of $187,000 and an increase in income from tax-exempt
securities of $105,000 were offset by declines in income from taxable
securities of $87,000 and interest income from federal funds sold of
$119,000. Average interest-bearing balances with others increased $7.4
million for the six-month period ended June 30, 1999 compared to the same
six-month period in 1998. Tax-exempt security income increased due to an
increase in average balances of $5.1 million for the six-month period.
Average federal funds sold for the six month period ended June 30, 1999 was
$8.2 million, a decrease of $3.5 million from an average of $11.7 million for
the same six month period in 1998. Although average loans during the period
increased $3.2 million from $158.8 million at June 30, 1998 to $162.0 million
at June 30, 1999, the weighted average yield on the loan portfolio declined.
The tax equivalent yield on the loan portfolio was 8.70% at June 30, 1999
compared to 8.89% at June 30, 1998. The decline in yield was brought about
by lower interest rates on new originations and also by lower interest rates
on adjustable rate loans that repriced during the period. In addition, the
growth within the loan portfolio occurred primarily during the second quarter
of 1999.
Total interest expense of $3,384,000 for the six month period ended June 30,
1999 represents a decrease of $108,000 from the $3,492,000 reported for the
same six month period in 1998. The decrease in interest expense is due to
rate reductions discussed earlier. Average total deposits for the six-month
period ended June 30, 1999 were $195.0 million, an increase of $11.8 million
or 6.4% from $183.2 million for the six-month period ended June 30, 1998.
The Bank's cost of funds at June 30, 1999 was 4.17%, down from a level of
4.48% at June 30, 1998.
Total other income for the six-month period ended June 30, 1999 of $810,000
compared to $830,000 for the six- month period ended June 30, 1998, a
decrease of $20,000. Net increases in trust department fee income of $34,000
and an increase in net gains on the sales of loans of $30,000 were offset by
a net decline in "other" miscellaneous income of $90,000. The increase in
trust fee income was brought about by volume increases in trust assets under
management. Loan sales to Freddie Mac for the six-month period ended June
30, 1999 totaled $11.6 million with net gains recorded of $8,100, which
compared to sales of $8.8 million with net gains of $94,000 for the same
six-month period in 1998. Income pertaining to mortgage servicing rights on
the sold loans totaled $116,000 for the six-month period ended June 30, 1999.
The reduction in "other" miscellaneous income was due to the one-time income
recognition at June 1998 pertaining to the sale of the former Plaza office.
This reduction in income, however, was offset by net increases in mortgage loan
servicing fees, an increase in income from insurance commissions, an increase
in debit card interchange fees, and income generated from brokerage
commissions in the trust department. Mortgage loan servicing fees increased
$12,000 due to volume increases within the sold loan portfolio. Commissions
for life and accident and health insurance on loans increased $14,000 due to
volume increases as well as enhanced marketing efforts to sell those services
on originated loans. Debit card fee interchange income, which is a fee paid
to financial institutions by merchants that accept debit cards for purchases,
increased due to increased usage of the Bank's debit card product. Finally,
as a result of the Bank offering non-traditional banking products through its
Trust Department, trust brokerage commissions increased $15,000 for the
six-month period ended June 30, 1999.
Net income for the six-month period ended June 30, 1999 was $1,491,000, a
decrease of $121,000 from the $1,612,000 reported at June 30, 1998. Earnings
per share for the six-month period ended June 30, 1999 were $0.54, a decrease
of $0.04 from $0.58 per share earned during the same six-month period in 1998.
9
<PAGE>
Financial Condition
- -------------------
Total assets increased $9.5 million or 4.4% from $215.8 million at December
31, 1998 to $225.3 million at June 30, 1999. Available for sale securities
increased $10.2 million during the period, resulting from net purchases of
tax-free municipal bonds. Also, net loans increased $11.5 million from
$159.4 million at December 31, 1998 to $170.9 million at June 30, 1999.
Those increases were offset by a reduction in interest-bearing balances
in other banks of $7.8 million, and federal funds sold of $3.4 million.
Total deposits of $197.1 million at June 30, 1999 represented an increase of
$7.0 million or 3.7% from $190.1 million at December 31, 1998. With the
exception of time certificates of deposit, all deposit products had net
increases during the period. The largest increase was within the
interest-bearing demand accounts. Interest-bearing demand accounts increased
$2.6 million from $22.8 million at December 31, 1998 to $25.4 million
at June 30, 1999. Time certificates decreased $318,000 from $91.7 million at
December 31, 1998 to $91.4 million at June 30, 1999.
At June 30, 1999, the Bank serviced approximately $42.1 million in sold fixed
rate mortgages. Sales of fixed rate mortgages to "Freddie Mac" for the
six-month period ended June 30, 1999 totaled $11.6 million with a net gain of
$8,100. The Bank does not anticipate any sales during the third quarter of
1999, 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.
At June 30, 1999, 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 June 30, 1999:
<TABLE>
<CAPTION>
Actual
-------------------- Minimum Well
Amount Ratio Ratio Capitalized
-------------------- -------- ------------
<S> <C> <C> <C> <C>
Tier 1 risk - based capital $ 23,367 14.65% 4.00% 6.00%
Total risk - based capital 24,901 15.61 8.00 10.00
Leverage capital 23,367 10.64 4.00 5.00
</TABLE>
As the above table illustrates, the Company exceeds both the minimum and "well
capitalized" regulatory capital requirements at June 30, 1999. 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.
10
<PAGE>
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 interests bearing
liabilities. This ratio was 4.5% of total assets as of June 30, 1999
compared to 9.0% at December 31, 1998. The decrease is due to the maturity
of the $8.0 million in short term certificates of deposit with the Federal
Home Loan Bank. Management views this ratio to be at an adequate level.
Management also monitors its liquidity by the net loans to deposit ratio.
The net loans (including loans held for sale) to deposits ratio was 86.7% at
June 30, 1999 as compared to 85.1% at December 31, 1998 and 85.7% at June 30,
1998. The increase from December 1998 was brought about by net loan growth
of $11.4 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 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 June 30, 1999, the Company
continued to have one such matched funding loan outstanding totaling $318,000.
The Company continues to also have short-term borrowing availability through
FHLB ("RepoPlus") advances. "RepoPlus" advances are short-term borrowings
maturing within one year, bear a fixed rate of interest and are subject to
prepayment penalty. There was one $2.0 million advance outstanding for the
RepoPlus product at June 30, 1999 used for general liquidity purposes which
was repaid in July 1999.
In addition to borrowing from FHLB as a source of liquidity, as mentioned
earlier, the Company also continued activity in the secondary mortgage
market. Specifically, the Company continued 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 provide an
additional source of liquidity. Loan sales on the secondary market also
provide 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 six month period ended June 30, 1999
indicates a decrease in cash and cash equivalents of $2.7 million. Cash was
provided from the net increase in deposits of $6.9 million, an increase in
short term borrowings of $2.0 million and the sale of fixed rate mortgages of
$11.6 million. In addition, cash was provided from a decrease in
interest-bearing balances with others of $8.0 million and repayments of
investment securities available for sale of $3.9 million. Cash was used
during the period for the origination of loans held for sale of $9.1 million,
for the purchase of securities available for sale of $14.7 million and a net
increase in loans of $11.7 million. Dividends paid during the six-month
period ended June 30, 1999 totaled $498,000. Cash and cash equivalents
totaled $12.3 million at June 30, 1999, a decrease of $2.7 million from
$15.0 million at December 31, 1998.
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.
11
<PAGE>
YEAR 2000
State of Readiness
- ------------------
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, which could result
in entire system failures or disruptions of normal daily business operations.
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 was 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 occurred throughout 1998 and is continuing
in 1999.
Risk Assessment
- ---------------
Although the Company views the Y2K issue to pose little or no effect on its core
processing systems, the Company recognizes that computer systems are very much
interdependent. Accordingly, the Company, through the use of letters and
questionnaires, has communicated with third party vendors of ancillary
systems, suppliers and various utilities as to their Y2K preparedness. In
addition, the Company, through the use of questionnaires and Company
sponsored seminars, provided Y2K information to and solicited information
from its own significant loan and deposit customers as to their Y2K
preparedness. Management does not believe that any exposure to the Company
from its vendors or customers as they relate to Y2K issues pose any
significant risk to the Company.
Costs
- -----
Because Management views its core processing system to be Y2K ready, little
or no programming costs will be incurred for its core systems. Most costs
are related to planning and internal testing and validation, which will be
expensed as incurred. Exclusive of costs for planning and testing,
management anticipates direct billing costs of approximately $50,000 over the
course of the project. Direct billings of $21,000 had been expensed through
the period ended June 30, 1999 for costs pertaining to off site testing of
core processing applications. There can be no guarantee that these estimates
will be achieved and actual results could differ from forecasted.
Contingency Plan
- ----------------
Should any unforeseen problems arise, the Company continues to update and
modify its contingency plan for the Year 2000. The plan allows for
procedural methods and acceptable time frames for problem resolution within
both JHA and the Company.
12
<PAGE>
RISK ELEMENTS
The following schedule presents the non-performing assets for the last five
quarters:
<TABLE>
<CAPTION>
Jun Mar Dec Sept Jun
1999 1999 1998 1998 1998
------- ------- ------- ------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-performing and restructured loans
Loans past due 90 days or more $ 370 $ 47 $ 50 $ 79 $ 268
Non-accrual loans 1,356 1,156 1,871 1,574 1,266
Restructured loans - - - - -
------- ------- ------- ------- -------
Total non-performing
and restructured loans 1,726 1,203 1,921 1,653 1,534
------- ------- ------- ------- -------
Other non-performing assets
Other real estate owned 229 138 138 138 138
Repossessed assets 35 9 38 22 22
------- ------- ------- ------- -------
Total other non-performing assets 264 147 176 160 160
------- ------- ------- ------- -------
Total non-performing assets $ 1,990 $ 1,350 $ 2,097 $ 1,813 $ 1,694
======= ======= ======= ======= =======
Non-performing and restructured
loans as a percentage of total
loans(1) 1.00% 0.76% 1.19% 1.04% 0.97%
Non-performing assets and
restructured loans as a
percentage of total loans
and other non-performing
assets and restructured loans(1) 1.15% 0.85% 1.30% 1.14% 1.07%
</TABLE>
(1) Excludes loans held for sale.
The allowance for loan losses at June 30, 1999, totaled $1,534,000 or 0.89%
of total loans (including loans held for sale) as compared to $1,410,000 or
0.86% at December 31, 1998. Provisions for loan losses were $210,000 for the
six months ended June 30, 1999 and $137,000 for the six-month period ended
June 30, 1998.
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.
13
<PAGE>
Non-performing loans totaled $1,726,000 at June 30, 1999, an increase of
$523,000 from their level of $1,203,000 at March 31, 1999. The increase is
due an increase in loans past due 90 days or more of $323,000 and an increase
non-accrual loans of $200,000. Non-performing loans as a percent of total
loans were 1.00% at June 30, 1999 as compared to 0.76% at March 31, 1999 and
0.97% at June 30, 1998.
Other real estate owned of $229,000 at June 30, 1999 represented an increase
of $91,000 from March 31, 1999. The increase is due to the foreclosure of
two properties in the second quarter of 1999. Sales are pending on two of
the three properties held in other real estate owned. Management believes
none of the non-performing assets, including other real estate owned, at June
30, 1999, pose any significant risk to the operations, liquidity, or capital
position of the Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market risk for the Company is comprised primarily from interest rate risk
exposure and liquidity risk. Since virtually all of the interest-earning
assets and paying liabilities are at the Bank, virtually all of the interest
rate risk and liquidity risk lies at the Bank level. The Bank is not subject
to currency exchange risk or commodity price risk, and has no trading
portfolio, and therefore, is not subject to any trading risk. In addition,
the Bank does not participate in hedging transactions such as interest rate
swaps and caps. Changes in interest rates will impact both income and expense
recorded and also the market value of long-term interest-earning assets.
Interest rate risk and liquidity risk management is performed at the Bank
level. Although the Bank has a diversified loan portfolio, loans outstanding
to individuals and businesses are dependent upon the local economic
conditions in the immediate trade area.
One of the principal functions of the Company's asset/liability management
program is to monitor the level to which the balance sheet is subject to
interest rate risk. The goal of the asset/liability program is to manage the
relationship between interest rate sensitive assets and liabilities, thereby
minimizing the fluctuations in the net interest margin, which achieves
consistent growth of net interest income during periods of changing interest
rates.
Interest rate sensitivity is the result of differences in the amounts and
repricing dates of a bank's rate sensitive assets and rate sensitive
liabilities. These differences, or interest rate repricing "gap", provide an
indication of the extent that the Company's net interest income is effected
by future changes in interest rates. During a period of rising interest
rates, a positive gap, a position of more rate sensitive assets than rate
sensitive liabilities, is desired. During a falling interest rate
environment, a negative gap is desired, that is, a position in which rate
sensitive liabilities exceed rate sensitive assets.
The Company's gap analysis indicates that if interest rates were to rise 100
basis points (1.00%), the Company's net interest income would increase at the
one year horizon because the Company's rate sensitive assets would reprice
faster than rate sensitive liabilities. Conversely, if rates were to decline
100 basis points, the Company would earn less in net interest income.
Management also manages interest rate risk with the use of simulation
modeling which measure the sensitivity of future net interest income as a
result of changes in interest rates. The analysis is based on repricing
opportunities for variable rate assets and liabilities and upon contractual
maturities of fixed rate instruments.
The simulation also calculates net interest income based upon estimates of
the largest foreseeable rate increase or decrease, (+or- 200 basis points or
2.00%). The current analysis indicates that, given a 200 basis point
overnight movement in interest rates, the Bank would experience a potential
$220,000 or 2% change in net interest income. It is important to note,
however, that this exercise would be of a worst case scenario. It would be
more likely to have incremental changes in interest rates, rather than a single
significant increase or decrease. When management believes interest rate
movements will occur, it can restructure the balance sheet and thereby the
ratio of rate sensitive assets to rate sensitive liabilities which in turn
will effect the net interest income. It is important to note; however, not
all assets
14
<PAGE>
and liabilities with similar maturities and repricing opportunities will
reprice at the same time or to the same degree and therefore, could effect
forecasted results.
Much of the Bank's deposits have the ability to reprice immediately; however,
deposit rates are not tied to an external index. As a result, although
changing market interest rates impact repricing, the Bank retains much of the
control over repricing by determining itself the extent and timing of
repricing of deposit products. In addition, the Bank maintains a significant
portion of its investment portfolio as available for sale securities and also
has a significant variable rate loan portfolio which is used to offset rate
sensitive liabilities.
Changes in market interest rates can also affect the Bank's liquidity
position through the impact rate changes may have on the market value of the
available for sale portion of the investment portfolio. Increases in market
rates can adversely impact the market values and therefore, make it more
difficult for the Bank to sell available for sale securities needed for
general liquidity purposes without incurring a loss on the sale. This issue is
addressed with the use of borrowings from the Federal Home Loan Bank ("FHLB")
and the selling of fixed rate mortgages as a source of liquidity to the Bank.
The Company's liquidity plan allows for the use of long-term or short-term
lines of credit with the FHLB as a source of funds. Borrowing from FHLB not
only provides a source of liquidity for the Company, but also serves as a
tool to reduce interest 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.
In addition to borrowing from the FHLB as a source for liquidity, the company
also participates in the secondary mortgage market. Specifically, the
Company sells fixed rate residential real estate mortgages to the Federal
Home Loan Mortgage Corporation ("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 and an additional tool for management
to limit interest rate risk exposure. The Bank continues to service all
loans sold to Freddie Mac.
15
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
(none)
Item 2. Changes in Securities and Use of Proceeds
(none)
Item 3. Defaults Upon Senior Securities
(none)
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders of Slippery Rock Financial Corporation
took place on April 20, 1999. The following two (2) matters were voted upon:
1) Election of the three (3) persons listed in CLASS I of the Proxy Statement
dated March 31, 1999 whose terms expire in 2002.
CLASS I Directors:
-----------------
Mr. John W. Conway
Mr. William D. Kingery
Mr. Charles C. Stoops, Jr.
2) Such other business as may properly come before the meeting or any
adjournment thereof.
Continuing CLASS II directors whose terms expire in 2000 are:
Mr. Robert M. Greenberger
Mr. Paul M. Montgomery
Mr. William C. Sonntag
Mr. Norman P. Sundell
Continuing CLASS III directors whose terms expire in 2001 are:
Mr. Grady W. Cooper
Mr. Robert E. Gregg
Mr. S. P. Snyder
Mr. Kenneth D. Wimer
The following table presents the results of the vote tabulation:
Votes Votes
Issue Description For Against
----- ----------- ------- -------
1 Election of CLASS I Directors
Mr. John W. Conway 1,983,219 43,788
Mr. William D. Kingery 1,982,601 44,406
Mr. Charles C. Stoops, Jr. 1,983,219 43,788
2 No other issues were brought before the meeting.
Item 5. Other Information
(none)
16
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K:
Exhibit Number
2 N/A
3(i) Articles of Incorporation filed on March 6, 1992 as
Exhibit 3(i) to Registration Statement on Form S-4
(No. 33-46164) and incorporated herein by reference.
3(ii) By-laws filed on March 6, 1992 as Exhibit 3(ii) to
Registration Statement on Form S-4 (No. 33-46164) and
incorporated herein by reference.
4 N/A
10 N/A
11 N/A
15 N/A
18 N/A
19 N/A
22 N/A
23 N/A
24 N/A
27 Financial Data Table
(b) Reports on Form 8-K
None
17
<PAGE>
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.
Slippery Rock Financial Corporation
(Registrant)
Date: By:/s/ William C. Sonntag
-------------------------- -------------------------
William C. Sonntag
President & CEO
Date: By:/s/ Mark A. Volponi
-------------------------- ----------------------
Mark A. Volponi
Treasurer
18
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1999
<CASH> 9,147
<INT-BEARING-DEPOSITS> 182
<FED-FUNDS-SOLD> 3,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 28,349
<INVESTMENTS-CARRYING> 3,557
<INVESTMENTS-MARKET> 3,597
<LOANS> 172,412
<ALLOWANCE> 1,534
<TOTAL-ASSETS> 225,342
<DEPOSITS> 197,096
<SHORT-TERM> 2,000
<LIABILITIES-OTHER> 883
<LONG-TERM> 551
0
0
<COMMON> 691
<OTHER-SE> 24,121
<TOTAL-LIABILITIES-AND-EQUITY> 225,342
<INTEREST-LOAN> 7,100
<INTEREST-INVEST> 830
<INTEREST-OTHER> 201
<INTEREST-TOTAL> 8,131
<INTEREST-DEPOSIT> 3,372
<INTEREST-EXPENSE> 3,384
<INTEREST-INCOME-NET> 4,747
<LOAN-LOSSES> 210
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,242
<INCOME-PRETAX> 2,105
<INCOME-PRE-EXTRAORDINARY> 1,491
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,491
<EPS-BASIC> 0.54
<EPS-DILUTED> 0.54
<YIELD-ACTUAL> 8.83
<LOANS-NON> 1,356
<LOANS-PAST> 370
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,410
<CHARGE-OFFS> 117
<RECOVERIES> 31
<ALLOWANCE-CLOSE> 1,534
<ALLOWANCE-DOMESTIC> 886
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 648
</TABLE>
