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, 2000
-------------
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 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 August 10, 2000, there were 2,769,381 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, 2000
And December 31, 1999 3
Consolidated Statements of Income for the
Three months ended June 30, 2000 and 1999
and for the Six months ended June 30, 2000
and 1999 4
Consolidated Statement of Changes in
Stockholders Equity for the
Six months ended June 30, 2000 and 1999 5
Consolidated Statement of Cash Flows for the
Six months ended June 30, 2000 and 1999 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 AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(UNAUDITED - $ IN 000)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------- ---------
<S> <C> <C>
ASSETS
Cash and due from banks $ 11,092 $ 10,068
Interest-bearing deposits in other banks 115 38
Federal funds sold 400 1,200
Mortgage loans held for sale 1,404 -
Investment securities:
Available for sale 25,006 26,600
Held to maturity (market value $2,935 and $2,986) 2,931 2,973
Loans 210,136 183,142
Less allowance for loan losses 1,787 1,681
--------- ---------
Net loans 208,349 181,461
Premises and equipment 5,981 5,177
Accrued interest and other assets 5,352 5,502
--------- ---------
Total assets $ 260,630 $ 233,019
========= =========
LIABILITIES
Deposits:
Noninterest-bearing demand $ 34,579 $ 32,469
Interest-bearing demand 25,673 24,547
Savings 24,161 22,187
Money market 22,061 27,349
Time 102,265 90,571
--------- ---------
Total deposits 208,739 197,123
Short-term borrowings 23,000 9,000
Other Borrowings 461 304
Accrued interest and other liabilities 1,475 983
--------- ---------
Total liabilities 233,675 207,410
--------- ---------
STOCKHOLDERS' EQUITY
Common stock (par value $0.25; authorized shares
12,000,000; issued and outstanding 2,769,381 692 692
Surplus 10,551 10,547
Retained earnings 16,214 14,937
Accumulated other comprehensive loss (502) (567)
--------- ---------
Total stockholders' equity 26,955 25,609
--------- ---------
Total liabilities and stockholders' equity $ 260,630 $ 233,019
========= =========
</TABLE>
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 Six Months Ended
June 30, June 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 4,416 $ 3,505 $ 8,438 $ 7,100
Interest-bearing deposits in other banks 1 83 1 188
Federal funds sold 35 80 60 201
Interest on investment securities:
Taxable 153 137 312 266
Exempt from federal income tax 207 188 414 344
Dividends 21 16 38 32
-------- -------- -------- --------
Total interest income 4,833 4,009 9,263 8,131
-------- -------- -------- --------
INTEREST EXPENSE
Deposits 1,789 1,675 3,483 3,372
Borrowed funds 290 7 405 12
-------- -------- -------- --------
Total interest expense 2,079 1,682 3,888 3,384
-------- -------- -------- --------
NET INTEREST INCOME 2,754 2,327 5,375 4,747
Provision for loan losses 119 105 224 210
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,635 2,222 5,151 4,537
-------- -------- -------- --------
OTHER INCOME
Service charges on deposit accounts 218 149 419 293
Trust department income 33 32 80 78
Net gains on sales of loans 28 11 28 124
Other income 182 176 363 315
-------- -------- -------- --------
Total other income 461 368 890 810
-------- -------- -------- --------
OTHER EXPENSE
Salaries and employee benefits 841 753 1,695 1,540
Occupancy expense, net 101 92 202 188
Furniture and equipment expense 198 202 397 432
Data processing expense 60 60 118 111
Stationery, printing and supplies 56 34 107 76
Pennsylvania shares tax 63 56 120 111
Other 449 449 811 784
-------- -------- -------- --------
Total other expense 1,768 1,646 3,450 3,242
-------- -------- -------- --------
Income before income taxes 1,328 944 2,591 2,105
Income tax expense 392 266 760 614
-------- -------- -------- --------
NET INCOME $ 936 $ 678 $ 1,831 $ 1,491
======== ======== ======== ========
PER SHARE DATA
Average shares for the period, basic 2,769,132 2,764,248 2,769,090 2,764,248
Average shares for the period, diluted 2,769,132 2,766,360 2,770,829 2,766,649
Earnings per share, basic $ 0.34 $ 0.25 $ 0.66 $ 0.54
Earnings per share, diluted $ 0.34 $ 0.25 $ 0.66 $ 0.54
Dividends paid $ 0.10 $ 0.09 $ 0.20 $ 0.18
</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, 1999 $ 692 $ 10,547 $ 14,937 $ (567) $ 25,609 $ -
Net Income 1,831 1,831 1,831
Net unrealized gain on securities 65 65 65
Stock options exercised 4 4
Cash dividends ($0.20 per share) (554) (554)
--------------------------------------------------------------------------------
Balance, June 30, 2000 $ 692 $ 10,551 $ 16,214 $ (502) $ 26,955 $ 1,896
================================================================================
</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)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
2000 1999
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,831 $ 1,491
Adjustments to reconcile net
income to net cash provided by
operating activities:
Provision for loan losses 224 210
Depreciation and amortization 292 344
Deferred taxes 5 (69)
Origination of loans held for sale (4,407) (9,186)
Proceeds from sale of loans held for sale 3,001 11,662
Gain on sale of loans (28) (124)
Increase in accrued interest receivable (58) (61)
(Decrease) increase in accrued interest payable 111 (53)
Other, net 582 (336)
--------- ---------
Net cash provided by operating activities 1,553 3,878
--------- ---------
INVESTING ACTIVITIES
Decrease in interest-bearing deposits in other banks, net - 8,000
Investment securities available for sale:
Repayments 1,985 3,877
Purchases (287) (14,714)
Investment securities held to maturity:
Repayments 141 88
Purchases (100) -
Increase in loans, net (27,105) (11,736)
Purchase of premises and equipment (1,108) (777)
Other - -
--------- ---------
Net cash used for investing activities (26,474) (15,262)
--------- ---------
FINANCING ACTIVITIES
Increase in deposits, net 11,615 6,947
Increase in short term borrowings, net 14,000 2,000
Increase in borrowed funds 186 223
Payments on borrowed funds (29) (5)
Proceeds from stock options exercised 4 11
Cash dividends paid (554) (498)
--------- ---------
Net cash provided by financing activities 25,222 8,678
--------- ---------
Increase (Decrease) in cash and cash equivalents 301 (2,706)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 11,306 15,035
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,607 $ 12,329
========= =========
Cash payments for interest $ 3,765 $ 3,437
Cash payments for income taxes $ 705 $ 767
</TABLE>
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 JUNE 30, 2000 AND 1999
-----------------------------------------------------------
Total interest income of $4,833,000 for the three- month period ended June 30,
2000 compared to $4,009,000 for the same three-month period in 1999, an
increase of $824,000 or 20.6%. The overall increase in total interest income
is attributed to an increase in interest and fees on loans of $911,000 or
26.0%. Income from interest and fees on loans increased due to volume
increases within the loan portfolio. Average loans, including loans available
for sale, at June 30, 2000 were $194.0 million, an increase of $32 million or
19.8% from $162.0 million at June 30, 1999.
Although virtually all major segments within the loan portfolio reflected net
increases in average balances, the most significant growth occurred within the
1-4 family real estate and commercial real estate segments. Average 1-4
family real estate loans increased $18.4 million or 26.2% and average
commercial real estate loans increased $14.3 million or 33.8%. The increase
within the loan portfolio was brought about by general market activity without
any concentrated efforts on management's part.
Total interest expense of $2,079,000 for the three-month period ended June 30,
2000 represented an increase of $397,000 from the $1,682,000 reported for the
same three-month period in 1999. The increase in interest expense was
comprised of increases in interest expense on deposits of $114,000 and on
borrowed funds of $283,000. The increase in interest on both deposits and
borrowed funds was due to an increase in average borrowings outstanding during
the three-month period ended June 30, 2000. Average deposits increased $11.6
million and average borrowed funds increased $12.2 million compared to the
same period in 1999. The advances are used for general liquidity purposes.
8
<PAGE>
Net interest income of $2,754,000 for the three months ended June 30, 2000
compared to $2,372,000 for the same three-month period in 1999, an increase of
$427,000.
Total other income for the three-month period ended June 30, 2000 of $461,000
compared to $368,000 for the three-month period ended June 30, 1999, an
increase of $93,000. An increase in service charges on deposit accounts of
$69,000 and an increase in gains on the sale of loans of $17,000 account for
this increase. The increase in service charges on deposit accounts increased
due to volume activity and to price restructurings during third quarter 1999.
Total other expense of $1,768,000 for the three-months ended June 30, 2000
compared to $1,646,000 for the same three-month period in 1999. This
represented an increase of $122,000 or 7.4%. The increase is primarily
derived from an increase in salaries and employee benefits expense of $88,000,
and an increase stationary, printing, and supplies of $22,000. The increase
in salary and benefits is attributed to staff additions pertaining to the
Lawrence County, Pennsylvania expansions. The New Wilmington, Pennsylvania
branch office celebrated its "Grand Opening" on March 10, 2000. The Company
anticipates opening its Laurel Office in Hickory Township, Lawrence County
during the fourth quarter of 2000. In addition, the Company will open its new
supermarket branch in Slippery Rock during the third quarter 2000.
Net income for the three-month period ended June 30, 2000 was $936,000, an
increase of $258,000 from the $678,000 reported at June 30, 1999. Earnings
per share for the three-month period ended June 30, 2000 was $0.34, an
increase of $0.09 from $0.25 per share earned during the same three-month
period in 1999.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
---------------------------------------------------------
Total interest income of $9,263,000 for the six-month period ended June 30,
2000 compared to $8,131,000 for the same six-month period in 1999, an increase
of $1,132,000 or 13.9%. The primary increase in total interest income is
attributed to an increase in interest and fees on loans of $1,338,000 or
18.80%. Income from interest and fees on loans increased due to volume
increases within the loan portfolio, as discussed above.
Total interest expense of $3,888,000 for the six-month period ended June 30,
2000 represented an increase of $504,000 from the $3,384,000 reported for the
same six-month period in 1999. The increase in interest expense was comprised
of increases in interest expense on deposits of $111,000 and on borrowed funds
of $393,000. The increase in interest on both deposits and borrowed funds was
due to an increase in average borrowings outstanding during the six-month
period ended June 30, 2000.
Net interest income of $5,375,000 for the six months ended June 30, 2000
compared to $4,747000 for the same six-month period in 1999, an increase of
$628,000.
9
<PAGE>
Total other income for the six-month period ended June 30, 2000 of $890,000
compared to $810,000 for the six-month period ended June 30, 1999, an increase
of $80,000. An increase in service charges on deposit accounts of $126,000
and an increase in other income of $48,000 was offset by a decline in gain on
the sale of loans of $96,000. The increase in service charges on deposit
accounts increased due to volume activity and to price restructurings during
third quarter 1999. The increase in "other" miscellaneous income was due to
three items; an increase in insurance commissions, an increase in debit card
interchange fees, and an increase in trust brokerage commission fees.
Insurance commissions increased $16,000 resulting from the sale of life and
accident and health insurance on new loan originations. Debit card
interchange fees, which are fees paid by merchants that accept debit cards for
purchases, increased $30,000 due to increased activity. Trust brokerage
commissions increased $12,000 due to increased sales of non-traditional
deposit products within the Bank's Trust Division.
Total other expense of $3,450,000 for the six-months ended June 30, 2000
compared to $3,242,000 for the same six-month period in 1999. This
represented an increase of $208,000 or 6.4%. The increase is primarily
derived from an increase in salaries and employee benefits expense of
$155,000, and an increase stationary, printing, and supplies of $31,000. The
increase in salary and benefits is attributed to staff additions pertaining to
the Lawrence County, Pennsylvania expansions. The New Wilmington,
Pennsylvania branch office celebrated its "Grand Opening" on March 10, 2000.
The Company anticipates opening its Laurel Office in Hickory Township,
Lawrence County during the fourth quarter of 2000. In addition, the Company
will open its new supermarket branch in Slippery Rock during the third quarter
2000.
Net income for the six-month period ended June 30, 2000 was $1,831,000, an
increase of $340,000 from the $1,491,000 reported at June 30, 1999. Earnings
per share for the six-month period ended June 30, 2000 was $0.66, an increase
of $0.12 from $0.54 per share earned during the same six-month period in 1999.
FINANCIAL CONDITION
-------------------
Total assets increased $27.6 million or 11.8% from $233.0 million at December
31, 1999 to $260.6 million at June 30, 2000. The increase in total assets is
due primarily to an increase in total loans, including loans available for
sale, of $28.4 million. The most significant growth occurred within the 1-4
family real estate portfolio, which increased $12.6 million. This was
followed by net increases within the consumer, commercial and commercial real
estate portfolios of $6.2 million, $6.0 million and $3.2 million,
respectively.
Total deposits of $208.7 million at June 30, 2000 represented an increase of
$11.6 million or 5.9% from $197.1 million at December 31, 1999. With the
exception of money market deposit accounts, all deposit products had net
increases during the period. The most significant increases were within
time certificates and non-interest bearing demand, which increased $11.7
million and $2.1 million, respectively. The increases were due to the
opening of the New Wilmington branch facility and to various time certificate
promotions as part of the "Grand Opening". The decrease in money market
accounts is attributed to seasonal activity of the local university.
10
<PAGE>
At June 30, 2000, the Company serviced approximately $43.8 million in sold
fixed rate mortgages. Sales of fixed rate mortgages for the period ended
June 30, 2000 totaled $3.0 million with net losses of $2,000. Management
does anticipate future sales of fixed rate mortgages; however, the extent to
which the Company participates in the secondary market will be dependent upon
demand for fixed rate mortgages in the market place, liquidity needs of the
Company 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, 2000, 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, 2000:
<TABLE>
<CAPTION>
Actual
--------------------- Minimum Well
Amount Ratio Ratio Capitalized
-------------------------------------------------
<S> <C> <C> <C> <C>
Tier 1 risk - based capital $ 25,879 13.51 % 4.00 % 6.00 %
Total risk - based capital 27,666 14.44 8.00 10.00
Leverage capital 25,879 10.61 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, 2000. 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.
11
<PAGE>
LIQUIDITY
The principal functions of the Company'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 Company 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 2.8% of total assets as of June 30, 2000 compared
to 2.6% at December 31, 1999. 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 100.4%
at June 30, 2000 as compared to 92.0% at December 31, 1999 and 86.7% at June
30, 1999. The Company'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 June 30, 2000, the Company had
two such matched funding loans outstanding totaling $276,000.
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. At June 30, 2000, the Company had $23.0 million in
RepoPlus advances outstanding used for general liquidity purposes.
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 Company 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 Company continues to service all loans
sold to Freddie Mac.
The Statement of Cash Flows, for the six-month period ended June 30, 2000,
indicates an increase in cash and cash equivalents of $301,000. Cash was
provided from a net increase in deposits of $11.6 million, an increase in
short-term borrowings of $14.0 million, and repayments of investment
securities available for sale of $2.0 million. Cash was used during the
period for the origination of loans held for sale of $4.4 million and for the
origination of loans of $27.1 million. Dividends paid during the six-month
period ended June 30, 2000 totaled $554,000. Cash and cash equivalents
totaled $11.6 million at June 30, 2000, an increase of $300,000 from $11.3
million at December 31, 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.
12
<PAGE>
RISK ELEMENTS
The following schedule presents the non-performing assets for the last
five quarters:
<TABLE>
<CAPTION>
Jun Mar Dec Sept Jun
2000 2000 1999 1999 1999
------- ------- ------- ------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
NON-PERFORMING AND RESTRUCTURED LOANS
Loans past due 90 days or more $ 392 $ 361 $ 93 $ 52 $ 370
Non-accrual loans 2,412 2,183 2,526 1,930 1,356
Restructured loans - - - - -
------- ------- ------- ------- -------
Total non-performing
and restructured loans 2,804 2,544 2,619 1,982 1,726
------- ------- ------- ------- -------
OTHER NON-PERFORMING ASSETS
Other real estate owned 280 210 280 70 229
Repossessed assets 20 16 33 38 35
------- ------- ------- ------- -------
Total other non-performing assets 300 226 313 108 264
------- ------- ------- ------- -------
TOTAL NON-PERFORMING ASSETS $ 3,104 $ 2,770 $ 2,932 $ 2,090 $ 1,990
======= ======= ======= ======= =======
Non-performing and restructured loans
as a percentage of total loans(1) 1.33 % 1.30 % 1.43 % 1.09 % 1.00 %
Non-performing assets and
restructured loans as a
percentage of total loans
and other non-performing
Assets and restructured loans(1) 1.48 % 1.42 % 1.60 % 1.15 % 1.15 %
(1) Excludes loans held for sale.
</TABLE>
The allowance for loan losses at June 30, 2000 totaled $1,787,000 or 0.85% of
total loans (including loans held for sale) as compared to $1,681,000 or
0.92% at December 31, 1999. Provisions for loan losses were $224,000 and
$210,000 for the six-month periods ended June 30, 2000 and 1999.
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 Company.
Management, through the use of the quarterly evaluation, believes that the
allowance is maintained at an adequate level.
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 June 30, 2000, the Company had nonaccrual loans of
$2,412,000, of which, $2,025,000 were classified as impaired.
The average balance in 2000 of impaired loans was $1,975,000. Impaired
loans had a related allowance allocation of $304,000 and income recognized in
2000 for impaired loans totaled $6,000.
While impaired loans at June 30, 2000 were comprised of several loan
accounts, three borrowers accounted for $1.8 million of the total, of which
one borrower totaled $1.1 million. Two of the borrowers continued voluntary
liquidation of assets as part of work out arrangements with the Company. The
remaining borrower pertains to a participated loan for a dairy operation. The
Company was cross-collateralized on cattle, feed and real estate, including
facilities. Prior to year-end 1999, based on internal analysis, the Company
determined that a loss pertaining to the cattle portion of the credit was
eminent. Accordingly, management recorded a charge off in the amount of
$300,000 during the fourth quarter of 1999, which represented the Company's
portion of the total loss. In addition, the remaining dairy herd has been
sold with all proceeds delivered to the Company. Management anticipates
receiving deed in lieu of foreclosure on the remaining real estate. Management
continues negotiations with an interested third party for a lease with an
option to purchase and 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.
Management believes none of the non-performing assets, including other real
estate owned, at June 30, 2000, pose any significant risk to the operations,
liquidity or capital position of the Company.
13
<PAGE>
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 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.
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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
$502,000 or 4% 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.
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.
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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 18, 2000. The following two (2) matters were voted upon:
(1) Election of the four (4) persons listed in CLASS II of the Proxy Statement
dated March 31, 2000 whose terms expire in 2003.
CLASS II DIRECTORS:
-------------------
Mr. Robert M. Greenberger
Mr. Paul M. Montgomery
Mr. William C. Sonntag
Mr. Norman P. Sundell
(2) Such other business as may properly come before the meeting or any
adjournment thereof.
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
CONTINUING CLASS I DIRECTORS WHOSE TERMS EXPIRE IN 2002 ARE:
Mr. John W. Conway
Mr. William D. Kingery
Mr. Charles C. Stoops, Jr.
The following table presents the results of the vote tabulation
ISSUE DESCRIPTION VOTES FOR VOTES AGAINST
1 Election of CLASS II Directors
Mr. Robert M. Greenberger 2,510,154 41,884
Mr. Paul M. Montgomery 2,510,154 41,884
Mr. William C. Sonntag 2,510,154 41,884
Mr. Norman P. Sundell 2,510,154 41,884
2 No other issues were brought before the meeting.
ITEM 5. OTHER INFORMATION
(none)
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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
99.0 Independent Auditor's Review
(b) Reports on Form 8-K
None
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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: August 9, 2000 By:/s/William C. Sonntag
-------------- ---------------------
William C. Sonntag
President & CEO
Date: August 9, 2000 By:/s/ Mark A. Volponi
-------------- -------------------
Mark A. Volponi
Treasurer
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