<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 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 November 09, 2000, there were 2,769,381 shares outstanding of the issuer's
class of common stock.
<PAGE> 2
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, 2000
And December 31, 1999 3
Consolidated Statements of Income for the
Three months ended September 30, 2000 and 1999
and for the Nine months ended September 30, 2000
and 1999 4
Consolidated Statement of Changes in
Stockholders Equity for the
Nine months ended September 30, 2000 and 1999 5
Consolidated Statement of Cash Flows for the
Nine months ended September 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 13
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings 15
ITEM 2. Changes in Securities and Use of Proceeds 15
ITEM 3. Defaults Upon Senior Securities 15
ITEM 4. Submission of Matters to a Vote of Security Holders 15
ITEM 5. Other Information 15
ITEM 6. Exhibits and Reports of Form 8-K 15
SIGNATURES 16
<PAGE> 3
SLIPPERY ROCK FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(UNAUDITED - $ IN 000)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 9,828 $ 10,068
Interest-bearing deposits in other banks 28 38
Federal funds sold 3,600 1,200
Mortgage loans held for sale 469 --
Investment securities:
Available for sale 25,270 26,600
Held to maturity (market value $2,735 and $2,986) 2,727 2,973
Loans 222,840 183,142
Less allowance for loan losses 1,923 1,681
--------- ---------
Net loans 220,917 181,461
Premises and equipment 6,570 5,177
Accrued interest and other assets 5,397 5,502
--------- ---------
Total assets $ 274,806 $ 233,019
========= =========
LIABILITIES
Deposits:
Noninterest-bearing demand $ 37,058 $ 32,469
Interest-bearing demand 27,508 24,547
Savings 27,989 22,187
Money market 22,870 27,349
Time 104,801 90,571
--------- ---------
Total deposits 220,226 197,123
Short-term borrowings 25,000 9,000
Other Borrowings 444 304
Accrued interest and other liabilities 1,437 983
--------- ---------
Total liabilities 247,107 207,410
--------- ---------
STOCKHOLDERS' EQUITY
Common stock (par value $0.25; authorized shares
12,000,000; issued and outstanding 2,769,381) 692 692
Surplus 10,552 10,547
Retained earnings 16,795 14,937
Accumulated other comprehensive loss (340) (567)
--------- ---------
Total stockholders' equity 27,699 25,609
--------- ---------
Total liabilities and stockholders' equity $ 274,806 $ 233,019
========= =========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
3
<PAGE> 4
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,
----------------------------- -----------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 4,816 $ 3,754 $ 13,254 $ 10,854
Interest-bearing deposits in other banks 1 2 2 190
Federal funds sold 65 46 125 247
Interest on investment securities:
Taxable 136 186 448 452
Exempt from federal income tax 205 212 619 556
Dividends 20 17 58 49
---------- ---------- ---------- ----------
Total interest income 5,243 4,217 14,506 12,348
---------- ---------- ---------- ----------
INTEREST EXPENSE
Deposits 1,995 1,664 5,478 5,036
Borrowed funds 407 16 812 28
---------- ---------- ---------- ----------
Total interest expense 2,402 1,680 6,290 5,064
---------- ---------- ---------- ----------
NET INTEREST INCOME 2,841 2,537 8,216 7,284
Provision for loan losses 173 105 397 315
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,668 2,432 7,819 6,969
---------- ---------- ---------- ----------
OTHER INCOME
Service charges on deposit accounts 207 167 626 460
Trust department income 19 26 99 104
Net gains on sales of loans 31 -- 59 124
Other income 196 168 559 483
---------- ---------- ---------- ----------
Total other income 453 361 1,343 1,171
---------- ---------- ---------- ----------
OTHER EXPENSE
Salaries and employee benefits 875 781 2,570 2,321
Occupancy expense, net 110 87 312 275
Furniture and equipment expense 209 183 606 615
Data processing expense 83 60 201 171
Stationery, printing and supplies 63 26 170 102
Pennsylvania shares tax 63 57 183 168
Other 505 356 1,316 1,140
---------- ---------- ---------- ----------
Total other expense 1,908 1,550 5,358 4,792
---------- ---------- ---------- ----------
Income before income taxes 1,213 1,243 3,804 3,348
Income tax expense 356 361 1,116 975
---------- ---------- ---------- ----------
NET INCOME $ 857 $ 882 $ 2,688 $ 2,373
========== ========== ========== ==========
PER SHARE DATA
Average shares for the period, Basic 2,769,381 2,764,248 2,769,188 2,764,248
Average shares for the period, Diluted 2,769,381 2,766,360 2,769,920 2,766,360
Earnings per share, basic $ 0.31 $ 0.32 $ 0.97 $ 0.86
Earnings per share, diluted $ 0.31 $ 0.32 $ 0.97 $ 0.86
Dividends paid $ 0.10 $ 0.09 $ 0.30 $ 0.27
</TABLE>
See accompanying notes to the consolidated financial statements
4
<PAGE> 5
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 2,688 2,688 2,688
Net unrealized gain on securities 227 227 227
Stock options exercised 5 5
Cash dividends ($0.30 per share) (830) (830)
--------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2000 $ 692 $ 10,552 $ 16,795 $ (340) $ 27,699 $ 2,915
================================================================================
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
5
<PAGE> 6
SLIPPERY ROCK FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED - $ IN 000)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------
2000 1999
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,688 $ 2,373
Adjustments to reconcile net
income to net cash provided by
operating activities:
Provision for loan losses 397 315
Depreciation and amortization 444 494
Deferred taxes (87) (146)
Origination of loans held for sale (6,325) (10,900)
Proceeds from sale of loans held for sale 5,857 11,662
Gain on sale of loans (59) (124)
Increase in accrued interest receivable (223) (165)
(Decrease) increase in accrued interest payable 299 (100)
Other, net 511 (15)
-------- --------
Net cash provided by operating activities 3,502 3,394
-------- --------
INVESTING ACTIVITIES
Decrease in interest-bearing deposits in other banks, net -- 8,000
Investment securities available for sale:
Repayments 2,072 4,020
Purchases (387) (14,914)
Investment securities held to maturity:
Repayments 345 382
Purchases (100) --
Increase in loans, net (39,836) (21,532)
Purchase of premises and equipment (1,863) (909)
Proceeds from the sale of other real estate owned -- 166
Other -- --
-------- --------
Net cash used for investing activities (39,769) (24,787)
-------- --------
FINANCING ACTIVITIES
Increase in deposits, net 23,102 13,717
Increase in short term borrowings, net 16,000 5,000
Increase in borrowed funds 186 223
Payments on borrowed funds (46) (14)
Proceeds from stock options exercised 5 11
Cash dividends paid (830) (746)
-------- --------
Net cash provided by financing activities 38,417 18,191
-------- --------
Increase (Decrease) in cash and cash equivalents 2,150 (3,202)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 11,306 15,035
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,456 $ 11,833
======== ========
Cash payments for interest $ 5,979 $ 5,163
Cash payments for income taxes $ 1,085 $ 1,042
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
6
<PAGE> 7
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> 8
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, 2000 AND 1999
Total interest income of $5,243,000 for the three- month period ended September
30, 2000 compared to $4,217,000 for the same three-month period in 1999, an
increase of $1,026,000 or 24.3%. The overall increase in total interest income
is attributed to an increase in interest and fees on loans of $1,062,000 or
28.3%. Income from interest and fees on loans increased due to volume increases
within the loan portfolio. Average loans, including loans available for sale, at
September 30, 2000 were $216.7 million, an increase of $38.9 million or 21.9%
from $177.8 million at September 30, 1999.
Although virtually all 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 $18.0 million or 23.5%, average commercial real
estate loans increased $14.8 million or 30.5%, and consumer loans increased $8.2
million or 40.1%. These increases were partially offset by a decline in student
loans of $6.9 million, as a result of those loans being sold. Although
management continues to pursue new lending opportunities, the increase within
the loan portfolio was brought about by general market activity.
Total interest expense of $2,402,000 for the three-month period ended September
30, 2000 represented an increase of $722,000 from the $1,680,000 reported for
the same three-month period in 1999. The increase in interest expense was
comprised of increases in interest expense on deposits of $331,000 and on
borrowed funds of $391,000. 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 September 30, 2000. Average deposits increased
$12.8 million and average borrowed funds increased $22.5 million compared to the
same period in 1999. The advances are used for general liquidity purposes and to
meet the demands of the current lending opportunities.
Net interest income of $2,841,000 for the three months ended September 30, 2000
compared to $2,537,000 for the same three-month period in 1999, an increase of
$304,000.
The provision for loan losses amounted to $173,000 an increase of $68,000
compared to the same period in 1999. The increased level of provision for loan
losses was primarily fueled by the loan growth during 2000 combined with
management's continual evaluation of the adequacy of the allowance for loan
losses. On a quarterly basis, the allowance for loan losses is evaluated based
upon local economic conditions, performance of outstanding loans, an
individual's ability to repay based on an evaluation of a borrower's financial
condition and performance, trends within the loan portfolio such as growth,
delinquencies, and charge-off activity, and trends within the industry.
Total other income for the three-month period ended September 30, 2000 of
$453,000 compared to $361,000 for the three-month period ended September 30,
1999, an increase of $92,000. An increase in service charges on deposit accounts
of $40,000 and an increase in gains on the sale of loans of $31,000 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.
8
<PAGE> 9
Total other expense of $1,908,000 for the three-months ended September 30, 2000
compared to $1,550,000 for the same three-month period in 1999. This represented
an increase of $358,000 or 23.1%. The increase is primarily derived from an
increase in salaries and employee benefits expense of $94,000, and an increase
stationary, printing, and supplies of $37,000. 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 first
quarter of 2001. In addition, the Company will open its new supermarket branch
in Slippery Rock on October 20, 2000.
Net income for the three-month period ended September 30, 2000 was $857,000, a
decrease of $25,000 from the $882,000 reported at September 30, 1999. Earnings
per share for the three-month period ended September 30, 2000 was $0.31, a
decrease of $0.01 from $0.32 per share earned during the same three-month period
in 1999.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Total interest income of $14,506,000 for the nine-month period ended September
30, 2000 compared to $12,348,000 for the same nine-month period in 1999, an
increase of $2,158,000 or 17.5%. The primary increase in total interest income
is attributed to an increase in interest and fees on loans of $2,400,000 or
22.1%. Income from interest and fees on loans increased due to volume increases
within the loan portfolio, as discussed above.
Total interest expense of $6,290,000 for the nine-month period ended September
30, 2000 represented an increase of $1,226,000 from the $5,064,000 reported for
the same nine-month period in 1999. The increase in interest expense was
comprised of increases in interest expense on deposits of $442,000 and on
borrowed funds of $784,000. The increase in interest on both deposits and
borrowed funds was due to an increase in average borrowings outstanding during
the nine-month period ended September 30, 2000.
Net interest income of $8,216,000 for the nine months ended September 30, 2000
compared to $7,284,000 for the same nine-month period in 1999, an increase of
$932,000.
Total other income for the nine-month period ended September 30, 2000 of
$1,343,000 compared to $1,171,000 for the nine-month period ended September 30,
1999, an increase of $172,000. Increases in service charges on deposit accounts
of $166,000 and other income of $75,000 were partially offset by a decline of
$64,000 in gains on the sale of loans. 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 $43,000 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
$40,000 due to increased activity. Trust brokerage commissions increased $11,000
due to increased sales of non-traditional deposit products within the Bank's
Trust Division.
Total other expense of $5,358,000 for the nine-months ended September 30, 2000
compared to $4,792,000 for the same nine-month period in 1999. This represented
an increase of $566,000 or 11.8%. The increase is primarily derived from an
increase in salaries and employee benefits expense of $249,000, and an increase
stationary, printing, and supplies of $68,000. The increase in salary and
benefits is attributed to staff additions pertaining to the Lawrence County,
Pennsylvania expansions.
Net income for the nine-month period ended September 30, 2000 was $2,688,000, an
increase of $315,000 from the $2,373,000 reported at September 30, 1999.
Earnings per share for the nine-month period ended September 30, 2000 was $0.97,
an increase of $0.11 from $0.86 per share earned during the same nine-month
period in 1999.
9
<PAGE> 10
FINANCIAL CONDITION
Total assets increased $41.8 million or 17.9% from $233.0 million at December
31, 1999 to $274.8 million at September 30, 2000. The increase in total assets
is due primarily to an increase in total loans, including loans available for
sale, of $40.2 million. The most significant growth occurred within the 1-4
family real estate portfolio, which increased $15.1 million. This was followed
by net increases within the consumer, commercial and commercial real estate
portfolios of $7.6 million, $4.6 million and $9.3 million, respectively.
Total deposits of $220.2 million at September 30, 2000 represented an increase
of $23.1 million or 11.7% 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, savings, and non-interest bearing demand, which increased $14.2
million, $5.8 million and $4.6 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.
At September 30, 2000, the Company serviced approximately $46.1 million in sold
fixed rate mortgages. Sales of fixed rate mortgages for the period ended
September 30, 2000 totaled $5.8 million with net gains of $59,000. 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 September 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 September 30, 2000:
<TABLE>
<CAPTION>
Actual
----------------------- Minimum Well
Amount Ratio Ratio Capitalized
----------------------- ------- -----------
<S> <C> <C> <C> <C>
Tier 1 risk - based capital $ 26,518 12.99% 4.00% 6.00%
Total risk - based capital 28,441 13.93 8.00 10.00
Leverage capital 26,518 9.95 4.00 5.00
</TABLE>
As the above table illustrates, the Company exceeds both the minimum and "well
capitalized" regulatory capital requirements at September 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.
10
<PAGE> 11
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 3.1% of
total assets as of September 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 100.3% at
September 30, 2000 as compared to 92.0% at December 31, 1999 and 89.4% at
September 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 September 30, 2000, the Company continued to have one
such matched funding loan outstanding totaling $271,000.
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 September 30, 2000, the Company had $25.0 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 nine-month period ended September 30, 2000,
indicates an increase in cash and cash equivalents of $2,150,000. Cash was
provided from a net increase in deposits of $23.1 million, an increase in
short-term borrowings of $16.0 million, and repayments of investment securities
available for sale of $2.1 million. Cash was used during the period for the
origination of loans held for sale of $6.3 million and for the origination of
loans of $39.8 million. Dividends paid during the nine-month period ended
September 30, 2000 totaled $830,000. Cash and cash equivalents totaled $13.5
million at September 30, 2000, an increase of $2,150,000 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.
11
<PAGE> 12
RISK ELEMENTS
The following schedule presents the non-performing assets for the last five
quarters:
<TABLE>
<CAPTION>
Sept Jun Mar Dec Sept
2000 2000 2000 1999 1999
------ ------ ------ ------ ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
NON-PERFORMING AND RESTRUCTURED LOANS
Loans past due 90 days or more $ 36 $ 392 $ 361 $ 93 $ 52
Non-accrual loans 2,770 2,412 2,183 2,526 1,930
Restructured loans -- -- -- -- --
------ ------ ------ ------ ------
Total non-performing
and restructured loans 2,806 2,804 2,544 2,619 1,982
------ ------ ------ ------ ------
OTHER NON-PERFORMING ASSETS
Other real estate owned 280 280 210 280 70
Repossessed assets 20 20 16 33 38
------ ------ ------ ------ ------
Total other non-performing assets 300 300 226 313 108
------ ------ ------ ------ ------
TOTAL NON-PERFORMING ASSETS $3,106 $3,104 $2,770 $2,932 $2,090
====== ====== ====== ====== ======
Non-performing and restructured loans
as a percentage of total loans(1) 1.26% 1.33% 1.30% 1.43% 1.09%
Non-performing assets and
restructured loans as a
percentage of total loans
and other non-performing
Assets and restructured loans(1) 1.39% 1.48% 1.42% 1.60% 1.15%
</TABLE>
(1) Excludes loans held for sale.
The allowance for loan losses at September 30, 2000 totaled $1,923,000 or 0.86%
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 $397,000 and
$315,000 for the nine-month periods ended September 30, 2000 and 1999.
12
<PAGE> 13
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 September 30, 2000, the Company had nonaccrual loans of $2,770,000, of which,
$2,007,000 were classified as impaired. The average balance in 2000 of impaired
loans was $1,990,000. 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 September 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 anticipated receiving deed in lieu
of foreclosure on the remaining real estate, until the borrower filed for
bankruptcy in the third quarter of 2000. Management is proceeding with
foreclosure procedures and has been granted permission from the bankruptcy court
to proceed with foreclosure action. 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 September 30, 2000, 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.
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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 rates, the Bank would experience a potential $802,000 or 7%
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
(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
99.0 Independent Auditor's Review
(b) Reports on Form 8-K
None
15
<PAGE> 16
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: November 09, 2000 By: /s/ William C. Sonntag
----------------- -------------------------------
William C. Sonntag
President & CEO
Date: November 09, 2000 By: /s/ Mark A. Volponi
----------------- -------------------------------
Mark A. Volponi
Treasurer
16
