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 September 30, 1999
------------------
OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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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 Number)
incorporation or organization)
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 September 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, September 30, 1999
And December 31, 1998 3
Consolidated Statements of Income for the
Three months and nine months ended
September 30, 1999 and 1998 4
Consolidated Statement of Changes in
Stockholders Equity for the
Nine months ended September 30, 1999 and 1998 5
Consolidated Statement of Cash Flows for the
Nine months ended September 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 6. Exhibits and Reports on Form 8-K 16
Signatures 17
2
<PAGE>
Slippery Rock Financial Corporation and Subsidiary
CONSOLIDATED BALANCE SHEET
(Unaudited - $ in 000)
September 30, December 31,
1999 1998
--------- ---------
ASSETS
Cash and due from banks $ 10,161 $ 8,619
Interest-bearing deposits in other banks 172 8,015
Federal funds sold 1,500 6,400
Mortgage loans held for sale 1,714 2,468
Investment securities:
Available for sale 28,314 18,197
Held to maturity (market value $3,294
and $3,736) 3,263 3,644
Loans 182,186 160,854
Less allowance for loan losses 1,612 1,410
--------- ---------
Net loans 180,574 159,444
Premises and equipment 4,827 4,405
Accrued interest and other assets 5,239 4,581
--------- ---------
Total assets $ 235,764 $ 215,773
========= =========
LIABILITIES
Deposits:
Noninterest-bearing demand $ 34,996 $ 31,244
Interest-bearing demand 25,345 22,821
Savings 24,213 20,698
Money market 29,366 23,704
Time 89,945 91,682
--------- ---------
Total deposits 203,865 190,149
Short-term borrowings 5,000 -
Other Borrowings 542 333
Accrued interest and other liabilities 971 1,036
--------- ---------
Total liabilities 210,378 191,518
--------- ---------
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 14,657 13,030
Accumulated other comprehensive
income / (loss) (421) 86
--------- ---------
Total stockholders' equity 25,386 24,255
--------- ---------
Total liabilities and stockholders'
equity $ 235,764 $ 215,773
========= =========
See accompanying notes to the unaudited consolidated financial statements.
3
<PAGE>
Slippery Rock Financial Corporation
CONSOLIDATED STATEMENT OF INCOME
(Unaudited - $ in 000 except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
----------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 3,754 $ 3,536 $ 10,854 $ 10,622
Interest-bearing deposits in other banks 2 0 190 2
Federal funds sold 46 198 247 518
Interest on investment securities:
Taxable 186 189 452 541
Exempt from federal income tax 212 110 556 349
Dividends 17 17 49 47
---------- ---------- ---------- ----------
Total interest income 4,217 4,050 12,348 12,079
---------- ---------- ---------- ----------
INTEREST EXPENSE
Deposits 1,664 1,733 5,036 5.204
Borrowed funds 16 8 28 29
---------- ---------- ---------- ----------
Total interest expense 1,680 1,741 5,064 5,233
---------- ---------- ---------- ----------
NET INTEREST INCOME 2,537 2,309 7,284 6,846
Provision for loan losses 105 69 315 206
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,432 2,240 6,969 6,640
---------- ---------- ---------- ----------
OTHER INCOME
Service charges on deposit accounts 167 156 460 443
Trust department income 26 20 104 64
Net gains on sales of loans - 105 124 199
Other income 168 128 483 533
---------- ---------- ---------- ----------
Total other income 361 409 1,171 1,239
---------- ---------- ---------- ----------
OTHER EXPENSE
Salaries and employee benefits 781 714 2,321 2,137
Occupancy expense, net 87 80 275 165
Furniture and equipment expense 183 191 615 552
Data processing expense 60 86 171 226
Stationery, printing and supplies 26 37 102 105
Pennsylvania shares tax 57 50 168 152
Other 356 404 1,140 1,140
---------- ---------- ---------- ----------
Total other expense 1,550 1,562 4,792 4,477
---------- ---------- ---------- ----------
Income before income taxes 1,243 1,087 3,348 3,402
Income tax expense 361 338 975 1,041
---------- ---------- ---------- ----------
NET INCOME $ 882 $ 749 $ 2,373 $ 2,361
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
PER SHARE DATA
Average shares for the period, Basic 2,764,248 2,759,959 2,764,248 2,759,959
Average shares for the period, Diluted 2,766,360 2,761,978 2,766,360 2,760,978
Earnings per share, Basic $ 0.32 $ 0.27 $ 0.86 $ 0.86
Earnings per share, Diluted $ 0.32 $ 0.27 $ 0.86 $ 0.86
Dividends paid $ 0.09 $ 0.09 $ 0.27 $ 0.24
</TABLE>
See accompanying notes to the unaudited consolidated financial statements
4
<PAGE>
Slippery Rock Financial Corporation and Subsidiary
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited - $ in 000)
<TABLE>
<CAPTION>
Accumulated Other
Common 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 2,373 2,373 2,373
Net unrealized loss on securities (507) (507) (507)
Stock options exercised 11 11
Cash dividends ($0.27 per share) (746) (746)
-------------------------------------------------------------------
Balance, September 30, 1999 $ 691 $10,459 $14,657 $(421) $25,386 $1,866
===================================================================
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
5
<PAGE>
Slippery Rock Financial Corporation and Subsidiary
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited - $ in 000)
Nine Months Ended
September 30,
1999 1998
OPERATING ACTIVITIES
Net income $ 2,373 $ 2,361
Adjustments to reconcile net
income to net cash provided by
operating activities:
Provision for loan losses 315 206
Depreciation and amortization 494 583
Deferred taxes (146) 6
Origination of loans held for sale (10,900) (11,895)
Proceeds from sale of loans held for sale 11,662 12,060
Gain on sale of loans (124) (199)
Decrease (Increase) in accrued
interest receivable (165) 35
Decrease in accrued interest payable (100) (47)
Other, net (15) (239)
------- -------
Net cash provided by operating activities 3,394 2,871
------- -------
INVESTING ACTIVITIES
Decrease in interest-bearing deposits in
other banks, net 8,000 -
Investment securities available for sale:
Repayments 4,020 4,272
Purchases (14,914) (8,045)
Investment securities held to maturity:
Repayments 382 2,342
Increase in loans, net (21,532) (2,141)
Purchase of premises and equipment (909) (977)
Proceeds from the sale of other real owned 166 -
------- -------
Net cash used for investing activities (24,787) (4,549)
------- -------
FINANCING ACTIVITIES
Increase in deposits, net 13,717 6,640
Increase (decrease) in short term borrowings 5,000 (2,000)
Increase in borrowed funds 223 -
Payments on borrowed funds (14) (7)
Proceeds from stock options exercised 11 38
Cash dividends paid (746) (662)
------- -------
Net cash provided by financing activities 18,191 4,009
------- -------
Increase (decrease) in cash and
cash equivalents (3,202) 2,331
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 15,035 21,817
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,833 $ 24,148
======= =======
Cash payments for interest $ 5,163 $ 5,280
Cash payments for income taxes $ 1,042 $ 1,143
See accompanying notes to the unaudited consolidated financial statements.
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-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
Forward Looking Statement
- -------------------------
The Private Securities Litigation Act of 1995 contains safe harbor provisions
regarding forward looking statements. When used in this discussion, the words
"believes," "anticipates," "contemplates," "expects," and similar expressions
are intended to identify forward-looking statements. Such statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those projected. Those risks and uncertainties include
changes in interest rates, the ability to control costs and expenses, and
general economic conditions. The Company undertakes no obligation to
publicly release the results of any revisions to those forward looking
statements, which may be made to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
Comparison of the Three Months Ended September 30, 1999 and 1998
- ----------------------------------------------------------------
Total interest income of $4,217,000 for the three-month period ended September
30, 1999 compares to $4,050,000 for the same three-month period in 1998, an
increase of $167,000. Increases in interest income from loans of $218,000 and
an increase in income from tax-exempt securities of $102,000 were offset by a
decline in interest income from federal funds sold of $152,000. The changes
in interest income are brought about principally by changes in volume as well
as a 33 basis point (0.33%) reduction in yield. Average loans increased
$18.2 million for the three-month period ended September 30, 1999 compared to
the same three-month period in 1998. Average federal funds sold for the
three-month period ended September 30, 1999 was $3.2 million, a decrease from
an average of $13.9 million for the same three-month period in 1998.
Total interest expense of $1,680,000 for the three-month period ended
September 30, 1999 represents a decrease of $61,000 from the $1,741,000
reported for the same three-month period in 1998. The decrease in interest
expense was due to rate reductions on savings and money market deposits that
occurred in the fourth quarter 1998 and to repricings of certificates of
deposit in 1999. Certificate repricings were driven by a short term,
promotional product in 1998 that repriced to current market rates at
maturity in 1999. The Bank's cost of funds for the three-month period
ended September 30, 1999 was 3.94%, down from a level of 4.46% for the
same three-month period in 1998. Average total deposits increased $16.5
million for the three months ended September 30, 1999 from $186.2 million
to $202.7 million.
Net interest income of $2,537,000 for the three months ended September 30,
1999 compared to $2,309,000 for the same three-month period in 1998, an
increase of $228,000.
Total other income for the three-month period ended September 30, 1999 of
$361,000 compared to $409,000 for the three-month period ended September 30,
1998, a decrease of $48,000. The decrease is derived from a decrease in gains
on the sales of loans of $105,000, which is offset by an increase in "other"
miscellaneous income of $40,000. There were no loan sales to the Federal
Home Loan Mortgage Corporation (Freddie Mac) during the three-month period ended
September 30, 1999. Sales during the same three-month period ended September
30, 1998 totaled $3.1 million, with net gains recorded of $105,000. The
increase in "other" miscellaneous income is comprised of several items.
Interchange fees earned on the Bank's debit card program increased $17,000,
insurance commissions increased $14,000, and trust brokerage commission fees
increased $8,000. The increases in each of these products were due to
increased volumes. 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.
Commissions for life and accident and health insurance on loans increased due
to volume increases as well as enhanced marketing efforts to sell those
services on originated loans. Finally, trust brokerage commissions increased
as a result of increased sales of non-traditional banking products through the
Bank's Trust Department.
Total other expense of $1,550,000 for the three months ended September 30,
1999 compared to $1,562,000 for the same three-month period in 1998. This
represented a decrease of $12,000. Decreases in data processing expense of
$26,000, stationery, printing and supplies of $11,000 and "other"
miscellaneous expense of $42,000 were offset by an increase in salary and
employee benefits of $67,000. The increase in salary and employee benefits is
attributed to normal annual salary increases and to staff additions for the
new Laurel and New Wilmington branch facilities.
Net income for the three-month period ended September 30, 1999 was $882,000,
an increase of $133,000 from the $749,000 reported for the three-month period
ended September 30, 1998. Earnings per share for the three-month period ended
September 30, 1999 of $0.32, compared to $0.27 per share at September 30,
1998.
8
<PAGE>
Comparison of the Nine Months Ended September 30, 1999 and 1998
- --------------------------------------------------------------
Total interest income for the nine-month period ended September 30, 1999 was
$12,348,000, an increase of $269,000 from the $12,079,000 reported for the
same nine-month period in 1998. Increases in interest and fees on loans of
$232,000, interest income on interest bearing deposits with others of $188,000
and an increase in income from tax-exempt securities of $207,000 were offset
by declines in income from taxable securities of $89,000 and interest income
from federal funds sold of $271,000. The changes in interest income are
brought about principally by changes in volume as well as a 25 basis point
(0.25%) reduction in yield. Average loans during the period increased $8.2
million from $158.6 million at September 30, 1998 to $166.8 million for the
nine-month period ended September 30, 1999. The increase in interest income
from interest-bearing balances with others and interest income from tax-exempt
securities were due to increases in average balances of $4.9 million and $6.6
million, respectively. These increases were offset by a decline in average
federal funds sold. Average federal funds sold for the nine-month period
ended September 30, 1999 was $6.5 million, a decrease of $6.0 million from an
average of $12.5 million for the same nine-month period in 1998.
Total interest expense of $5,064,000 for the nine-month period ended September
30, 1999 represented a decrease of $169,000 from the $5,233,000 reported for
the same nine-month period in 1998. The decrease in interest expense is due
to those items discussed earlier in the three-month comparison. Average total
deposits for the nine-month period ended September 30, 1999 were $196.9
million, an increase of $11.6 million or 6.3% from $185.3 million for the
nine-month period ended September 30, 1998. The Bank's cost of funds for the
nine-month period ended September 30, 1999 was 4.10%, down from a level of
4.48% at September 30, 1998.
Total other income for the nine-month period ended September 30, 1999 of
$1,171,000 compared to $1,239,000 for the nine-month period ended September
30, 1998, a decrease of $68,000. Net increases in trust department fee income
of $40,000 were offset by a decrease in net gains on the sales of loans of
$75,000 and a decline in "other" miscellaneous income of $50,000. The
increase in trust fee income was brought about by volume increases in trust
assets under management.
Loan sales to Freddie Mac for the nine-month period ended September 30, 1999
totaled $11.6 million with net gains recorded of $124,000, which compared to
sales of $11.9 million with net gains of $199,000 for the same nine-month
period in 1998.
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
$17,000 due to volume increases within the sold loan portfolio. Those items
discussed in the three-month comparison brought about the increases in
insurance commissions, debit card interchange fees and trust brokerage
commissions. Commissions for life and accident and health insurance increased
$27,000, debit card interchange fee income increased $39,000 and trust
brokerage commissions increased $23,000.
Total other expenses for the nine-month period ended September 30, 1999 of
$4,792,000 compared to $4,477,000 for the nine-month period ended September
30, 1998, an increase of $315,000. The increase is derived from an increase
of $184,000 in salaries and employee benefits and an increase in net occupancy
expense of $110,000. The increase in salary and employee benefits is
attributed to normal annual salary increases and staff additions. The net
occupancy expenses increase is due to the addition of the new Plaza office
and the Trust building remodeling in the fourth quarter 1998.
Net income for the nine-month period ended September 30, 1999 was $2,373,000,
an increase of $12,000 from the $2,361,000 reported at September 30, 1998.
Earnings per share for the nine-month period ended September 30, 1999 and 1998
were $0.86.
9
<PAGE>
Financial Condition
- -------------------
Total assets increased $20.0 million or 9.3% from $215.8 million at December
31, 1998 to $235.8 million at September 30, 1999. Available for sale
securities increased $10.1 million during the period, resulting from net
purchases of tax-free municipal bonds. Also, net loans increased $21.1
million from $159.4 million at December 31, 1998 to $180.5 million at
September 30, 1999. Those increases were offset by reductions in interest-
bearing balances in other banks of $7.8 million, and federal funds sold of
$4.9 million.
Total deposits of $203.9 million at September 30, 1999 represented an increase
of $13.8 million or 7.2% 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 money market
accounts. Money market accounts increased $5.7 million from $23.7 million at
December 31, 1998 to $29.4 million at September 30, 1999. Time certificates
decreased $1.8 million from $91.7 million at December 31, 1998 to $89.9 million
at September 30, 1999.
At September 30, 1999, the Bank serviced approximately $41.0 million in sold
fixed rate mortgages. Sales of fixed rate mortgages to "Freddie Mac" for the
nine-month period ended September 30, 1999 totaled $11.6 million with a net
gain of $124,000. The Bank anticipates $1.7 million in sales during the fourth
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 September 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 September 30, 1999:
Actual Minimum Well
------------------
Amount Ratio Ratio Capitalized
------------------ ------- -----------
Tier 1 risk - based capital $ 24,059 14.31% 4.00% 6.00%
Total risk - based capital 25,671 15.27 8.00 10.00
Leverage capital 24,059 10.54 4.00 5.00
As the above table illustrates, the Company exceeds both the minimum and "well
capitalized" regulatory capital requirements at September 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.
The Bank has expansion plans for the construction of two new branch offices
in Lawrence County, Pennsylvania. The estimated $1.6 million project
consists of de-novo branches in Hickory Township and New Wilmington Borough.
Management views Lawrence County to be a natural extension of the Bank's
market place. After receiving regulatory approval, construction of the New
Wilmington office began in fourth quarter 1999. Construction of the Hickory
Township office is anticipated to begin in late first quarter 2000,
subsequent to the completion of the New Wilmington office. It is not
anticipated that the project will have a material negative effect on the
Company's liquidity position or capital resources.
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 3.5% of total assets as of September 30, 1999
compared to 9.0% at December 31, 1998. The decrease is due to the maturity of
$8.0 million in short term certificates of deposit with the Federal Home Loan
Bank, the proceeds of which were used to fund loan growth and the purchase of
investment securities. Management views the liquidity 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 89.4% at
September 30, 1999 as compared to 85.1% at December 31, 1998 and 84.5% at
September 30, 1998. The increase from December 1998 was brought about by net
loan growth of $21.1 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 September 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 $5.0 million advance outstanding for the
RepoPlus product at September 30, 1999 used for general liquidity purposes. The
Company's total borrowing capacity with FHLB was $56.9 million at September
30, 1999.
In addition to borrowing from FHLB as a source of liquidity, as mentioned
earlier, the Company also continues 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 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 nine-month period ended September 30,
1999 indicates a decrease in cash and cash equivalents of $3.2 million. Cash
was provided from the net increase in deposits of $13.7 million, an increase
in short term borrowings of $5.0 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 $4.0 million. Cash was used
during the period for the origination of loans held for sale of $10.9
million, for the purchase of securities available for sale of $14.9 million
and a net increase in loans of $21.5 million. Dividends paid during the
nine-month period ended September 30, 1999 totaled $746,000. Cash and cash
equivalents totaled $11.8 million at September 30, 1999, a decrease of $3.2
million from $15.0 million at December 31, 1998.
Due to the year 2000, management has instituted a cash contingency plan in order
to meet the potential cash withdrawals of customers in December 1999. Such
plan may decrease the Company's investment in interest-earning assets and may
increase its investment in interest-bearing liabilities, which may cause the
Company's net income to slightly decrease in the fourth quarter of 1999.
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 1999 and also produced no
foreseeable problems.
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 September 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 developed a 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 for core
processing issues and also specifies procedures to be implemented for other
situations or emergencies that may disrupt normal operations.
Despite management's best efforts to address the year 2000 issue, the vast
number of external entities that have direct and indirect business relationships
with the Bank, such as customers, vendors, payment systems providers, utility
companies, and other financial institutions make it impossible to assure that
a failure to achieve compliance by one or more of these entities would not have
a material adverse impact on the Bank's business or on the Company's
consolidated financial statements.
12
<PAGE>
RISK ELEMENTS
The following schedule presents the non-performing assets for the last
five quarters:
<TABLE>
<CAPTION>
Sept June Mar Dec Sept
1999 1999 1999 1998 1998
-------- -------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-performing and restructured loans
Loans past due 90 days or more $ 52 $ 370 $ 47 $ 50 $ 79
Non-accrual loans 1,930 1,356 1,156 1,871 1,574
Restructured loans - - - - -
-------- -------- -------- -------- --------
Total non-performing
and restructured loans 1,982 1,726 1,203 1,921 1,653
-------- -------- -------- -------- --------
Other non-performing assets
Other real estate owned 70 229 138 138 138
Repossessed assets 38 35 9 38 22
-------- -------- -------- -------- --------
Total other non-performing assets 108 264 147 176 160
-------- -------- -------- -------- --------
Total non-performing assets $ 2,090 $ 1,990 $ 1,350 $ 2,097 $ 1,813
======== ======== ======== ======== ========
Non-performing and restructured loans
as a percentage of total loans(1) 1.09 % 1.00 % 0.76 % 1.19 % 1.04 %
Non-performing assets and restructured
loans as a percentage of total loans
and other non-performing Assets and
restructured loans(1) 1.15 % 1.15 % 0.85 % 1.30 % 1.14 %
</TABLE>
(1) Excludes loans held for sale.
The allowance for loan losses at September 30, 1999, totaled $1,612,000 or
0.88% 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 $315,000 for
the nine months ended September 30, 1999 and $206,000 for the nine-month
period ended September 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 $1,982,000 at September 30, 1999, an increase of
$256,000 from their level of $1,726,000 at June 30, 1999. The increase is due
an increase in non-accrual loans of $574,000 and a decrease in loans past due
90 days or more of $318,000. Non-performing loans as a percent of total loans
were 1.09% at September 30, 1999 as compared to 1.00% at June 30, 1999 and
1.04% at September 30, 1998.
Other real estate owned of $70,000 at September 30, 1999 represented a
decrease of $159,000 from June 30, 1999. The decrease is due to the sale of
two properties in the third quarter of 1999. Management believes none of the
non-performing assets, including other real estate owned, at September 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 affected 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 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.
14
<PAGE>
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
(none)
Item 5. Other Information
(none)
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
16
<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
17
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1999
<CASH> 10,161
<INT-BEARING-DEPOSITS> 172
<FED-FUNDS-SOLD> 1,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 28,314
<INVESTMENTS-CARRYING> 3,263
<INVESTMENTS-MARKET> 3,294
<LOANS> 182,900
<ALLOWANCE> 1,612
<TOTAL-ASSETS> 235,764
<DEPOSITS> 203,865
<SHORT-TERM> 5,000
<LIABILITIES-OTHER> 971
<LONG-TERM> 542
0
0
<COMMON> 691
<OTHER-SE> 24,695
<TOTAL-LIABILITIES-AND-EQUITY> 25,386
<INTEREST-LOAN> 10,854
<INTEREST-INVEST> 1,057
<INTEREST-OTHER> 437
<INTEREST-TOTAL> 12,348
<INTEREST-DEPOSIT> 5,036
<INTEREST-EXPENSE> 5,064
<INTEREST-INCOME-NET> 7,284
<LOAN-LOSSES> 315
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,792
<INCOME-PRETAX> 3,348
<INCOME-PRE-EXTRAORDINARY> 3,348
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,373
<EPS-BASIC> 0.86
<EPS-DILUTED> 0.86
<YIELD-ACTUAL> 8.37
<LOANS-NON> 1,930
<LOANS-PAST> 52
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,410
<CHARGE-OFFS> 177
<RECOVERIES> 64
<ALLOWANCE-CLOSE> 1,612
<ALLOWANCE-DOMESTIC> 1,052
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 559
</TABLE>
