<PAGE>
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 March 31, 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
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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
incorporation or organization) Identification Number)
100 South Main Street
Slippery Rock, Pennsylvania 16057 - 1245
(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 March 31, 1999, there were 2,764,248 shares outstanding of the issuer's
class of common stock.
1
<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, March 31, 1999 3
and December 31, 1998
Consolidated Statements of Income
Three months ended March 31, 1999 and 1998 4
Consolidated Statement of Changes in
Stockholders' Equity
Three months ended March 31, 1999 5
Consolidated Statement of Cash Flows
Three months ended March 31, 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. 12
Part II Other Information 13
Item 4 Submission of Matters to a Vote
of security Holders. 13
Item 6 Exhibits and Reports on Form 8-K 14
Signatures 15
2
<PAGE>
Slippery Rock Financial Corporation and Subsidiary
CONSOLIDATED BALANCE SHEET
(Unaudited - $ in 000)
March 31, December 31
1999 1998
-------- --------
ASSETS
Cash and due from banks $ 8,985 $ 8,619
Interest-bearing deposits in other banks 8,128 8,015
Federal funds sold 10,800 6,400
Mortgage loans held for sale 2,047 2,468
Investment securities:
Available for sale 20,300 18,197
Held to maturity (market value
$3,720 and $3,736) 3,640 3,644
Loans 158,660 160,854
Less allowance for loan losses 1,469 1,410
-------- --------
Net loans 157,191 159,444
Premises and equipment 4,453 4,405
Accrued interest and other assets 4,792 4,581
-------- --------
Total assets $ 220,336 $ 215,773
======== ========
LIABILITIES
Deposits:
Noninterest-bearing demand $ 31,502 $ 31,244
Interest-bearing demand 24,671 22,821
Savings 21,368 20,698
Money market 24,116 23,704
Time 92,451 91,682
-------- --------
Total deposits 194,108 190,149
Long-term debt 331 333
Accrued interest and other liabilities 1,157 1,036
-------- --------
Total liabilities 195,596 191,518
-------- --------
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 13,594 13,030
Accumulated other comprehensive income/(loss) (4) 86
-------- --------
Total stockholders' equity 24,740 24,255
-------- --------
Total liabilities and
stockholders' equity $220,336 $215,773
======== ========
See accompanying notes to the consolidated financial statements.
3
<PAGE>
Slippery Rock Financial Corporation and Subsidiary
CONSOLIDATED STATEMENT OF INCOME
(Unaudited - $ in 000 except per share amounts)
Three Months Ended
March 31,
1999 1998
--------- ---------
INTEREST INCOME
Loans, including fees $ 3,595 $ 3,538
Interest-bearing deposits in other banks 105 1
Federal funds sold 121 193
Interest on investment securities:
Taxable 129 154
Exempt from federal income tax 156 123
Dividends 16 14
--------- ---------
Total interest income 4,122 4,023
--------- ---------
INTEREST EXPENSE
Deposits 1,697 1,762
Borrowed funds 5 11
--------- ---------
Total interest expense 1,702 1,773
--------- ---------
NET INTEREST INCOME 2,420 2,250
Provision for loan losses 105 69
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,315 2,181
--------- ---------
OTHER INCOME
Service charges on deposit accounts 144 147
Trust department income 47 14
Net gain on sales of loans 113 51
Net loss on sales of investments - -
Other income 138 119
--------- ---------
Total other income 442 331
--------- ---------
OTHER EXPENSE
Salaries and employee benefits 787 724
Occupancy expense, net 96 80
Furniture and equipment expense 230 165
Data processing expense 51 53
Stationery, printing and supplies 42 32
Pennsylvania shares tax 55 51
Other 335 326
--------- ---------
Total other expense 1,596 1,431
--------- ---------
Income before income taxes 1,161 1,081
Income tax expense 348 320
--------- ---------
NET INCOME $ 813 $ 761
========= =========
PER SHARE DATA
Average shares for the period 2,764,248 2,758,775
Earnings per share $ 0.29 $ 0.28
Dividends paid $ 0.09 $ 0.08
See accompanying notes to the consolidated financial statements.
4
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<TABLE>
<CAPTION>
Slippery Rock Financial Corporation and Subsidiary
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 813 813 $813
Net unrealized loss on securities (90) (90) (90)
Stock options exercised 11 11
Cash dividends ($0.09 per share) (249) (249)
------------------------------------------------------------------------
Balance, March 31, 1999 $691 $10,459 $13,594 ($4) $24,740 $723
========================================================================
See accompanying notes to the consolidated financial statements.
</TABLE>
5
<PAGE>
Slippery Rock Financial Corporation and Subsidiary
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited - $ in 000)
Three Months Ended
March 31,
1999 1998
-------- --------
OPERATING ACTIVITIES
Net income $ 813 $ 761
Adjustments to reconcile net
income to net cash provided by
operating activities:
Provision for loan losses 105 69
Depreciation and amortization 238 184
Deferred taxes (19) (3)
Origination of loans held for sale (8,498) (4,663)
Proceeds from sales of loans held for sale 9,032 4,163
Gain on sale of loans (113) (51)
Decrease in accrued interest receivable 85 22
Increase (decrease) in accrued interest payable (29) 12
Other, net (144) 301
-------- --------
Net cash provided by operating activities 1,470 795
-------- --------
INVESTING ACTIVITIES
Investment securities available for sale:
Repayments 1,800 1,848
Purchases (4,044) (5,844)
Investment securities held to maturity:
Repayments 4 716
Decrease (increase) in loans, net 2,148 (1,837)
Purchase of premises and equipment (220) (134)
Other investing activities - (48)
-------- --------
Net cash used for investing activities (312) (5,299)
-------- --------
FINANCING ACTIVITIES
Increase in deposits, net 3,960 4,134
Payments on short term borrowings - (2,000)
Payments on borrowed funds (2) (2)
Proceeds from stock options exercised 11 3
Cash dividends paid (249) (207)
-------- --------
Net cash provided by financing activities 3,720 1,928
-------- --------
Increase (decrease) in cash and
cash equivalents 4,878 (2,576)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 15,035 21,817
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 19,913 $ 19,241
======== ========
Cash payment for interest $ 1,731 $ 1,761
Cash payments for income taxes $ 25 $ 100
See accompanying notes to the 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.
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 2,764,248 at March 31, 1999 and 2,758,775 at March 31, 1998.
7
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Comparison of the Three Months Ended March 31, 1999 and 1998
- ------------------------------------------------------------
Total interest income of $4,122,000 for the three month period ended March 31,
1999 compares to $4,023,000 for the same three month period in 1998, an
increase of $99,000 or 2.46%. The overall increase in total interest income
is attributed to an increase in interest-bearing deposits in other banks of
$104,000. The increase from interest-bearing deposits in other banks is due
to two short-term certificates at the Federal Home Loan Bank of Pittsburgh.
Total interest expense of $1,702,000 for the three month period ended March
31, 1999 represents a decrease of $71,000 from the $1,773,000 reported for the
same three month period in 1998. The decrease in interest expense is due to
repricings in the fourth quarter of 1998. Total deposits increased $8,749,000
from $185,359,000 for the period ended March 31, 1998 to $194,108,000 during
the same period in 1999. The Bank's cost of funds at March 31, 1999 was
4.19%, down from a level of 4.47% at March 31, 1998.
Net interest income of $2,420,000 for the three months ended March 31, 1999
compares to $2,250,000 for the same three month period in 1998, an increase of
$170,000.
Total other income for the three month period ended March 31, 1999 of $442,000
compared to $331,000 for the three month period ended March 31, 1998, an
increase of $111,000. The increase is derived from an increase in gains on
the sale of loans of $62,000 and an increase in trust department income of
$32,000. The increase in gains on the sale of loans was primarily due to a
$90,000 recognition of income pertaining to mortgage servicing rights. In the
first quarter of 1999 the amount of loans sold was $9.0 million with a net
gain of $23,000 compared to the $4.0 million sold in the first quarter 1998
with a gain of $51,000. The increase in trust department income is derived
from an increase in the volume of trust assets.
Total other expense of $1,596,000 for the three months ended March 31, 1999
compares to $1,431,000 for the same three month period in 1998. This
represents an increase of $165,000 or 11.53%. The increase is derived from an
increase in salaries and employee benefits expense of $63,000, equipment
expense of $65,000, and net occupancy expense of $16,000. 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. Net occupancy expense
increased primarily due 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 March 31, 1999 was $813,000, an
increase of $52,000 from the $761,000 reported at March 31, 1998. Earnings
per share for the three month period ended March 31, 1999 were $0.29, an
increase of $0.01 from $0.28 per share earned during the same three month
period in 1998.
Financial Condition
- -------------------
Total assets increased $4.6 million or 2.11% from $215.8 million at December
31, 1998 to $220.3 million at March 31, 1999. Available for sale securities
increased $2.1 million during the period, resulting from net purchases of
tax-free municipal bonds. Also, federal funds sold increased $4.4 million
from $6.4 million at December 31, 1998 to $10.8 million at March 31, 1999.
Those increases were offset by a reduction in net loans of $2.3 million, and a
$421,000 decrease in mortgage loans held for sale.
Total deposits of $194.1 million at March 31, 1999 represented an increase of
$4.0 million or 2.1% from $190.1 million at December 31, 1998. All deposit
products had net increases during the period. The largest increase was within
the interest-bearing demand accounts. Interest-bearing demand accounts
increased $1.8 million from $22.8 million at December 31, 1998 to $24.7
million at March 31, 1999. Time certificates increased $769,000 from $91.7
million at December 31, 1998 to $92.5 million at March 31, 1999.
At March 31, 1999, the Bank serviced approximately $40.8 million in sold fixed
rate mortgages. Sales of fixed rate mortgages to "Freddie Mac" during the
first quarter of 1999 totaled $9.0 million with a net gain of $23,000.
Although the Bank does anticipate the sale of an additional $2.0 million
during the second quarter of 1999, it had no unfunded commitments to sell at
March 31, 1999. 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.
8
<PAGE>
At March 31, 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 March 31, 1999:
Actual Minimum Well
----------------
Amount Ratio Ratio Capitalized
------- ------ -------- -----------
Tier 1 risk - based capital $ 22,882 15.31 % 4.00 % 6.00 %
Total risk - based capital 24,351 16.30 8.00 10.00
Leverage capital 22,882 10.55 4.00 5.00
As the above table illustrates, the Company exceeds both the minimum and "well
capitalized" regulatory capital requirements at March 31, 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.
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 12.0% of total assets as of March 31, 1999 compared to 9.0% at
December 31, 1998. The increase is due to higher balance levels in federal
funds sold which increased $4.4 million during the period. 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 82.0%
at March 31, 1999 as compared to 85.1% at December 31, 1998 and 86.0% at March
31, 1998. The decrease from December 1998 was brought about by deposit growth
of $4.0 million and a decrease in loan growth of $2.7 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 March 31, 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 were no advances outstanding for the RepoPlus
product at March 31, 1999.
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 three month period ended March 31, 1999,
indicates an increase in cash and cash equivalents of $4.9 million. Cash was
provided from the net increase in deposits of $4.0 million, the sale of fixed
rate mortgages of $9.0 million and repayments of investment securities
available for sale of $1.8 million. Cash was used during the period for the
origination of loans held for sale of $8.5 million and for the purchase of
securities available for sale of $4.0 million. Dividends paid during the
three month period ended March 31, 1999 totaled $249,000. Cash and cash
equivalents totaled $19.9 million at March 31, 1999, an increase of $4.9
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.
9
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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 through out 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 $18,000 had been expensed through the period
ended March 31, 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. Primarily, manual or personal
computer processing would substitute for application failures. The plan
allows for procedural methods and acceptable time frames for problem
resolution within both JHA and the Company.
10
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RISK ELEMENTS
<TABLE>
<CAPTION>
The following schedule presents the non-performing assets for the last five quarters:
Mar Dec Sept Jun Mar
1999 1998 1998 1998 1998
------ ------ ------ ------ ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-performing and restructured loans
Loans past due 90 days or more $ 47 $ 50 $ 79 $ 268 $ 31
Non-accrual loans 1,156 1,871 1,574 1,266 1,182
Restructured loans - - - - -
------- ------- ------- ------- -------
Total non-performing
and restructured loans 1,203 1,921 1,653 1,534 1,213
------- ------- ------- ------- -------
Other non-performing assets
Other real estate owned 138 138 138 138 48
Repossessed assets 9 38 22 22 26
------- ------- ------- ------- -------
Total other non-performing assets 147 176 160 160 74
------- ------- ------- ------- -------
Total non-performing assets $ 1,350 $ 2,097 $ 1,813 $ 1,694 $ 1,287
======= ======= ======= ======= =======
Non-performing and restructured
loans as a percentage of total
loans(1) 0.76 % 1.19 % 1.04 % 0.97 % 0.76 %
Non-performing assets and
restructured loans as a
percentage of total loans
and other non-performing
assets and restructured loans(1) 0.85 % 1.30 % 1.14 % 1.07 % 0.81 %
(1) Excludes loans held for sale.
</TABLE>
The allowance for loan losses at March 31, 1999, totaled $1,469,000 or 0.91%
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 $105,000 for the
three months ended March 31, 1999 and $69,000 for the period ended March 31,
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.
11
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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.
At December 31, 1998, the Company had impaired loans of $593,000 and at March
31, 1999 there were no impaired loans.
Impaired loans at December 31, 1998 consisted of loans to a single borrower
which were also classified as nonaccrual. However, as a result of the sale of
the borrower's business enterprise during the first quarter of 1999, the Bank
not only received payment in full on all outstanding principal, but also
recovered all forgone interest as well as miscellaneous expenses incurred by
the Bank. Management does not consider any of the remaining non-performing
loans to pose any significant risk to the capital position or future earnings
of the Company.
Non-performing loans totaled $1,203,000 at March 31, 1999, a decrease of
$718,000 from their level of $1,921,000 at December 31, 1998. The decrease is
due primarily to the decline in impaired loans discussed above.
Non-performing loans as a percent of total loans were 0.76% at March 31, 1999
as compared to 1.19% at December 31, 1998 and 0.76% at March 31, 1998.
Other real estate owned of $138,000 at March 31, 1999 continued to represent a
single property acquired through foreclosure in the second quarter of 1998.
Management believes that a sale is pending, and the property will be sold
during the second quarter of 1999. Management believes none of the
non-performing assets, including other real estate owned, at March 31, 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 decline at the
one year horizon because the Company's rate sensitive liabilities would
reprice faster than rate sensitive assets. Conversely, if rates were to fall
100 basis points, the Company would earn more in net interest income.
Management also manages interest rate risk with the use of simulation modeling
which measures 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 rate, 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.
12
<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 by the
Bank 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 advances 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.
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
13
<PAGE>
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)
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
14
<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: May 12, 1999 By: /s/ William C. Sonntag
------------ --------------------------
William C. Sonntag,
President & CEO
Date: May 12, 1999 By: /s/ Mark A. Volponi
------------ -----------------------
Mark A. Volponi,
Treasurer
15
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