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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
------------------
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 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) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 1, 2002, there were 2,776,504 shares outstanding of the issuer's
class of common stock.
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, 2002
and December 31, 2001 3
Consolidated Statements of Income Three months ended
September 30, 2002 and 2001 and Nine months ended
September 30, 2002 and 2001 4
Consolidated Statement of Comprehensive Income
Three months ended September 30, 2002 and 2001 and
Nine months ended September 30, 2002 and 2001 5
Consolidated Statement of Changes in
Stockholders' Equity, Nine months ended
September 30, 2002 and 2001 6
Consolidated Statement of Cash Flows
Nine months ended September 30, 2002 and 2001 7
Notes to Consolidated Financial Statements 8-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-16
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 17-18
Item 4. Controls and Procedures 18
Part II Other Information
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports of Form 8-K 19
Signatures 20
2
Slippery Rock Financial Corporation and Subsidiary
CONSOLIDATED BALANCE SHEET
(Unaudited - $ in 000)
September 30, December 31,
2002 2001
------------- ------------
ASSETS
Cash and due from banks $ 17,647 $ 14,903
Interest-bearing deposits in other banks 132 -
Federal funds sold 13,100 7,700
Mortgage loans held for sale 1,841 3,514
Investment securities:
Available for sale 66,395 44,217
Held to maturity (market value $2,915 and $1,129) 2,899 1,118
Loans 234,388 240,786
Less allowance for loan losses 3,172 2,766
--------- ---------
Net loans 231,216 238,020
Premises and equipment 7,479 7,518
Accrued interest and other assets 7,231 7,045
--------- ---------
Total assets $ 347,940 $ 324,035
========= =========
LIABILITIES
Deposits:
Noninterest-bearing demand $ 47,798 $ 42,211
Interest-bearing demand 36,449 28,226
Savings 58,373 39,589
Money market 26,799 22,614
Time 115,290 129,255
--------- ---------
Total deposits 284,709 261,895
Other borrowings 30,198 30,260
Accrued interest and other liabilities 1,278 1,901
--------- ---------
Total liabilities 316,185 294,056
--------- ---------
STOCKHOLDERS' EQUITY
Common stock (par value $0.25; 12,000,000 shares authorized;
2,776,216 and 2,772,874 shares issued and outstanding) 694 693
Capital surplus 10,652 10,601
Retained earnings 19,458 18,731
Accumulated other comprehensive income (loss) 951 (46)
--------- ---------
Total stockholders' equity 31,755 29,979
--------- ---------
Total liabilities and stockholders' equity $ 347,940 $ 324,035
========= =========
See accompanying notes to the unaudited consolidated financial statements
3
Slippery Rock Financial Corporation and Subsidiary
CONSOLIDATED STATEMENT OF INCOME
(Unaudited - $ in 000 except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---------------------------- -----------------------------
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $ 4,278 $ 5,075 $ 13,358 $ 15,312
Interest-bearing deposits in other banks 1 1 2 2
Federal funds sold 57 157 147 709
Interest and dividends on investment securities:
Taxable interest 592 230 1,451 513
Tax-exempt interest 153 219 479 616
Dividends 14 28 48 83
----------- ----------- ----------- -----------
Total interest and dividend income 5,095 5,710 15,485 17,235
INTEREST EXPENSE
Deposits 1,699 2,459 5,232 7,596
Other borrowings 395 397 1,173 1,231
----------- ----------- ----------- -----------
Total interest expense 2,094 2,856 6,405 8,827
----------- ----------- ----------- -----------
NET INTEREST INCOME 3,001 2,854 9,080 8,408
Provision for loan losses 150 105 761 315
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,851 2,749 8,319 8,093
OTHER INCOME
Service charges on deposit accounts 235 261 716 726
Trust department income 20 21 103 126
Net investment securities gains (losses) - 37 (7) 37
Net gains on loan sales 177 294 420 488
Interchange fee income 69 61 201 177
Other income 123 178 358 506
----------- ----------- ----------- -----------
Total other income 624 852 1,791 2,060
OTHER EXPENSE
Salaries and employee benefits 1,264 1,098 3,661 3,146
Occupancy expense 176 166 521 483
Equipment expense 245 191 684 595
Data processing expense 81 97 257 258
Stationery, printing, and supplies 60 51 159 161
Pennsylvania shares tax 77 69 218 202
Other expense 737 495 1,838 1,461
----------- ----------- ----------- -----------
Total other expense 2,640 2,167 7,338 6,306
----------- ----------- ----------- -----------
Income before income taxes 835 1,434 2,772 3,847
Income tax expense 238 434 793 1,148
----------- ----------- ----------- -----------
NET INCOME $ 597 $ 1,000 $ 1,979 $ 2,699
=========== =========== =========== ===========
PER SHARE DATA
Average shares for the period, Basic 2,776,163 2,769,671 2,775,734 2,769,489
Average shares for the period, Diluted 2,780,089 2,777,297 2,780,541 2,772,031
Earnings per share, Basic $ 0.21 $ 0.36 $ 0.71 $ 0.97
Earnings per share, Diluted $ 0.21 $ 0.36 $ 0.71 $ 0.97
Dividends paid $ 0.15 $ 0.14 $ 0.45 $ 0.40
See accompanying notes to the unaudited consolidated financial statements
4
Slippery Rock Financial Corporation and Subsidiary
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited - $ in 000)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
--------- ------- -------- --------
Net income $ 597 $ 1,000 $ 1,979 $ 2,699
Other comprehensive income:
Unrealized gains on available for sale securities 621 546 1,504 675
Reclassification adjustment for (gains) losses included in net income - (37) 7 (37)
------- ------- ------- -------
Other comprehensive income before tax 621 509 1,511 638
Income tax expense related to other comprehensive income 211 173 514 217
------- ------- ------- -------
Other comprehensive income, net of tax 410 336 997 421
------- ------- ------- -------
Comprehensive income $ 1,007 $ 1,336 $ 2,976 $ 3,120
======= ======= ======= =======
See accompanying notes to the unaudited consolidated financial statements
5
Slippery Rock Financial Corporation and Subsidiary
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited - $ in 000)
Accumulated
Other
Common Capital Retained Comprehensive
Stock Surplus Earnings Income (Loss) Total
-----------------------------------------------------------------------------------
Balance, December 31, 2001 $ 693 $ 10,601 $ 18,731 $ (46) $ 29,979
Net Income 1,979 1,979
Net unrealized gain on
available for sale securities 997 997
Stock options exercised 1 51 (3) 49
Cash dividends ($0.45 per share) (1,249) (1,249)
-----------------------------------------------------------------------------------
Balance, September 30, 2002 $ 694 $ 10,652 $ 19,458 $ 951 $ 31,755
===================================================================================
See accompanying notes to the unaudited consolidated financial statements
6
Slippery Rock Financial Corporation and Subsidiary
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited - $ in 000)
Nine Months Ended
September 30,
2002 2001
-------- --------
OPERATING ACTIVITIES
Net income $ 1,979 $ 2,699
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 761 315
Depreciation,amortization and accretion of investment securities 639 577
Originations of mortgage loans held for sale (29,525) (18,618)
Proceeds from sales of mortgage loans 31,306 18,762
Net gains on loan sales (420) (488)
Net investment security (gains) losses 7 (37)
Decrease in accrued interest receivable 31 36
Increase (decrease) in accrued interest payable (552) 203
Other, net (248) (33)
-------- --------
Net cash provided by operating activities 3,978 3,416
-------- --------
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from sales 2,195 4,539
Proceeds from maturities and repayments 9,428 1,941
Purchases (32,353) (22,896)
Investment securities held to maturity:
Proceeds from maturities and repayments 2,218 1,040
Purchases (4,000) -
Decrease (Increase) in loans, net 5,840 (15,851)
Purchases of premises and equipment (580) (1,228)
Proceeds from loan sales - 6,428
-------- --------
Net cash used for investing activities (17,252) (26,027)
-------- --------
FINANCING ACTIVITIES
Increase in deposits, net 22,813 38,872
Decrease in short term borrowings - (30,000)
Proceeds from other borrowings - 30,000
Payments on other borrowings (62) (56)
Proceeds from stock options exercised 48 7
Cash dividends paid (1,249) (1,108)
-------- --------
Net cash provided by financing activities 21,550 37,715
-------- --------
Increase in cash and cash equivalents 8,276 15,104
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 22,603 12,642
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 30,879 $ 27,746
======== ========
Cash payments for interest $ 6,957 $ 8,624
Cash payments for income taxes $ 816 $ 1,145
See accompanying notes to the unaudited consolidated financial statements
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.
NOTE 2 - EARNINGS PER SHARE
There were no convertible securities which would affect the numerator in
calculating basic and diluted earnings per share; therefore, net income as
presented on the Consolidated Statement of Income will be used as the numerator.
The following table sets forth the composition of the weighted-average common
shares (denominator) used in the basic and diluted earnings per share
computation.
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended
September 30, 2002 September 30, 2001 September 30, 2002 September 30, 2001
Weighted-average common shares
outstanding used to calculate basic
earnings per share 2,776,163 2,769,671 2,775,734 2,769,489
Additional common stock equivalents
(stock options) used to calculate
diluted earnings per share 3,926 7,626 4,807 2,542
--------- --------- --------- ---------
Weighted-average common shares and
common stock equivalents used to
calculate diluted earnings per share 2,780,089 2,777,297 2,780,541 2,772,031
========= ========= ========= =========
Options to purchase 39,050 shares of common stock at prices from $18.50 to
$19.30 were outstanding for the periods ended September 30, 2002 and 2001,
respectively, but were not included in the computation of diluted EPS because
to do so would have been anti-dilutive.
NOTE 3 - RESTATEMENT OF FINANCIAL STATEMENTS
On October 1, 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (FAS) No. 147, Acquisitions of
Certain Financial Institutions, which amends FAS No.72 and No.144 and FAS
Interpretation No.9. This Statement addresses the financial accounting and
reporting for the acquisition of all or part of a financial institution, except
for a transaction between two or more mutual enterprises. The new requirement
changes the accounting for goodwill from an amortization approach to an
impairment-only approach as of the effective date that FAS No. 142 was adopted,
which in Slippery Rock Financial Corporation's case was January 1, 2002. As a
result of complying with FAS No. 147, the company is required to restate
earnings for the first and second fiscal quarters of 2002. The following table
details the changes on net income and earnings per share as a result of this
restatement:
Three Months Ended Three Months Ended Six Months Ended
March 31, 2002 June 30, 2002 June 30, 2002
Previously As Previously As Previously As
Reported Restated Reported Restated Reported Restated
------------ ------------ ------------ ------------ -------------- --------------
Net Income $ 599,000 $ 616,000 $ 749,000 $ 766,000 $ 1,348,000 $ 1,382,000
Earnings Per Share $ 0.22 $ 0.22 $ 0.27 $ 0.28 $ 0.49 $ 0.50
NOTE 4 - RECLASSIFICATION OF COMPARATIVE AMOUNTS
Certain comparative amounts for the prior periods have been reclassified to
conform to current period presentations. Such reclassifications had no effect on
net income or stockholders' equity.
8
NOTE 5 - RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued FAS No. 143, Accounting for Asset Retirement
Obligations, which requires that the fair value of a liability be recognized
when incurred for the retirement of a long-lived asset and the value of the
asset be increased by that amount. The statement also requires that the
liability be maintained at its present value in subsequent periods and outlines
certain disclosures for such obligations. The new statement takes effect for
fiscal years beginning after June 15, 2002. The adoption of this statement,
which is effective January 1, 2003, is not expected to have a material effect on
the Company `s financial statements.
On January 1, 2002, the Company adopted FAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. FAS 144 supercedes FAS 121 and
applies to all long-lived assets (including discontinued operations) and
consequently amends APB Opinion No. 30, Reporting Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business. FAS 144
requires that long-lived assets that are to be disposed of by sale be measured
at the lower of book value or fair value less costs to sell. The adoption of FAS
No. 144 did not have a material effect on the Company's financial statements.
In April 2002, the FASB issued FAS No. 145, "Recission of FASB Statement No. 4,
44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections". FAS
No. 145 rescinds FAS No. 4, which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result, the criteria
in Opinion 30 will now be used to classify those gains and losses. This
statement also amends FAS No. 13 to require that certain lease modifications
that have economic effects similar to sale-leaseback transactions be accounted
for in the same manner as sale-leaseback transactions. This statement also makes
technical corrections to existing pronouncements, which are not substantive but
in some cases may change accounting practice. FAS No. 145 is effective for
transactions occurring after May 15, 2002. The adoption of FAS No. 145 did not
have a material effect on the Company's financial position or results of
operations.
In July 2002, the FASB issued FAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, which requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. This statement replaces
EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred
in a Restructuring). The new statement will be effective for exit or disposal
activities initiated after December 31, 2002, the adoption of which is not
expected to have a material effect on the Company's financial statements.
On October 1, 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (FAS) No. 147, Acquisitions of
Certain Financial Institutions, effective for all business combinations
initiated after October 1, 2002. This Statement addresses the financial
accounting and reporting for the acquisition of all or part of a financial
institution, except for a transaction between two or more mutual enterprises.
This Statement removes acquisitions of financial institutions, other than
transactions between two or more mutual enterprises, from the scope of FAS No.
72, Accounting for Certain Acquisitions of Banking or Thrift Institutions, and
FASB Interpretation No. 9, Applying APB Opinions No. 16 and 17 When a Savings
and Loan Association or a Similar Institution Is Acquired in a Business
Combination Accounted for by the Purchase Method. The acquisition of all or part
of a financial institution that meets the definition of a business combination
shall be accounted for by the purchase method in accordance with FAS No. 141,
Business Combinations, and FAS No. 142, Goodwill and Other Intangible Assets.
This Statement also provides guidance on the accounting for the impairment or
disposal of acquired long-term customer-relationship intangible assets (such as
depositor- and borrower-relationship intangible assets and credit cardholder
intangible assets), including those acquired in transactions between two or more
mutual enterprises. Upon adoption of this statement, the Company ceased the
amortization of $1,013,197 in goodwill associated with branch acquisitions. The
Company will continue to review the remaining goodwill on an annual basis for
impairment. However, $130,421 in core deposit intangible will continue to be
amortized and reviewed for impairment in accordance with FAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets.
9
Item 2. 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, 2002 and 2001
Total interest income of $5,095,000 for the three-month period ended September
30, 2002 compared to $5,710,000 for the same three-month period in 2001, a
decrease of $615,000 or 10.8%. The overall decrease in total interest income is
attributed principally to a decrease in interest and fees on loans of $797,000
or 15.7%. This is partially offset by an increase in taxable interest income
from investments of $362,000. Income from interest and fees on loans decreased
due to a decrease in yields within the loan portfolio. The tax equivalent yield
on interest earning assets fell from 8.07% at September 30, 2001 to 6.89% at
September 30, 2002. As a result of the Federal Reserve Board's action to manage
interest rates in the U.S. economy, interest rates were decreased eleven times
in 2001. Prime rate, the rate at which banks lend funds to their best commercial
customers, was at 4.75% at September 30, 2002. This is 1.25% lower than the
prime rate of 6.00% at September 30, 2001. As interest rates fell, the Bank's
variable rate earning assets repriced downward, and continue to do so, while new
loans with lower yields are being added to the portfolio.
Although the tax equivalent yield on earning assets decreased during the
three-month period ended September 30, 2002, the average volume of loans
increased. Average gross loans, including loans available for sale, at September
30, 2002 were $241.1 million, an increase of $1.3 million or 0.5% from $239.8
million at September 30, 2001. Virtually all major segments within the loan
portfolio reflected net increases in average balances from September 30, 2001.
The most significant growth occurred within the dealer, commercial, and
commercial real estate segments. Average dealer loans increased $2.1 million or
13.7%, average commercial loans increased $1.5 million or 7.0%, and average
commercial real estate loans increased $1.1 million or 1.6%. These increases
were partially offset by decreases of $2.0 million in student loans and $1.2
million in real estate mortgages. The increase within the average loan portfolio
was brought about by general market activity.
Taxable investment interest income increased due to an increase in volume within
the investment portfolio. Average total investments were $66.9 million at
September 30, 2002, an increase of $14.3 million from $52.6 million at September
30, 2001.
Total interest expense of $2,094,000 for the three-month period ended September
30, 2002 represented a decrease of $762,000 from the $2,856,000 reported for the
same three-month period in 2001. The change is comprised primarily of a decrease
in interest expense on deposits of $760,000. Although average interest-bearing
deposits increased $10.1 million, interest expense decreased for the period.
This resulted from a general decline in the Bank's cost of funds. The Bank's
cost of deposits decreased from 4.05% at September 30, 2001 to 2.80% at
September 30, 2002. The Bank also saw a shift in consumer preference within the
interest bearing deposits. Average time deposits decreased $14.4 million from
September 30, 2001, while the average savings products increased $17.2 million
or 52.0%. Due to the low interest rate environment, consumer preference has
shifted towards the more liquid products and away from the fixed maturity
products.
10
Net interest income of $3,001,000 for the three months ended September 30, 2002
compared to $2,854,000 for the same three-month period in 2001, an increase of
$147,000.
The provision for loan losses for the three months ended September 30, 2002 was
$150,000, an increase of $45,000 from September 30, 2001. Management felt the
increase in the provision expense was warranted as a result of its normal
quarterly analysis of loan loss reserve adequacy. The details of the analysis
and methodology are discussed further under the Risk Elements section that
follows.
Total other income for the three-month period ended September 30, 2002 of
$624,000 compared to $852,000 for the three-month period ended September 30,
2001, a decrease of $228,000. This decrease consists primarily of a decrease in
the gains on loan sales of $117,000 and a decrease in commission and fee income
of $58,000.
Gains of $177,000 were recorded on the sale of $4.6 million of fixed rate, 1-4
family residential mortgages to the Federal Home Loan Mortgage Corporation
("Freddie Mac") for the three-month period ended September 30, 2002. For the
three-month period ended September 30, 2001, $9.2 million of fixed rated, 1-4
family residential mortgages were sold resulting in a gain of $211,000. In the
third quarter of 2001, there were also sales of the credit card portfolio of
$662,000 and student loans of $5.7 million, which resulted in gains of $26,000
and $57,000, respectively.
Total other expense of $2,640,000 for the three months ended September 30, 2002
compared to $2,167,000 for the same three-month period in 2001. This represents
an increase of $473,000 or 21.8%. The increase is primarily derived from an
increase in salaries and employee benefits expense of $166,000 and an increase
in other expense of $242,000. The increases in salaries and employee benefits
resulted principally from additional personnel as well as an increase in the
cost of employee benefits.
Other expense increased primarily due to $89,000 of legal and professional fees
and $78,000 of miscellaneous expense. Of these expenses, $117,000 were related
to professional fees associated with the OCC exam, and $24,000 are due to
charges on a deposit account held at another bank. Partially offsetting these
increases was a decrease in intangible amortization expense due to FASB
Statement No. 147. The Company adopted FASB Statement No. 142 on January 1, 2002
and due to FASB Statement No. 147 is required to restate earnings to reflect the
discontinuation of amortization of goodwill effective January 1, 2002 resulting
in a benefit of $26,000 to the Company for the three months ended September 30,
2002.
Net income for the three-month period ended September 30, 2002 was $597,000, a
decrease of $403,000 from the $1,000,000 reported at September 30, 2001.
Earnings per share for the three-month period ended September 30, 2002 were
$0.21, a decrease of $0.15 from $0.36 per share earned during the same
three-month period in 2001.
Comparison of the Nine Months Ended September 30, 2002 and 2001
Total interest income of $15.5 million for the nine-month period ended September
30, 2002 compared to $17.2 million for the same nine-month period in 2001, a
decrease of $1.7 million or 10.2%. The overall decrease in total interest income
is attributed principally to a decrease in interest and fees on loans of $2.0
million or 12.8%. Income from interest and fees on loans decreased due to a
decrease in yields within the loan portfolio as discussed above.
Total interest expense of $6.4 million for the nine-month period ended September
30, 2002 represented a decrease of $2.4 million from the $8.8 million reported
for the same nine-month period in 2001. The decrease in interest expense is
comprised primarily of a decrease in interest expense on deposits of $2.3
million. The decrease in interest expense on deposits was due to a general
decline in the Bank's cost of funds.
11
Net interest income of $9.1 million for the nine months ended September 30, 2002
compared to $8.4 million for the same nine-month period in 2001, an increase of
$672,000.
The provision for loan losses for the nine months ended September 30, 2002 was
$761,000, an increase of $446,000 from September 30, 2001. Management felt the
increase in the provision expense was warranted as a result of its normal
quarterly analysis of loan loss reserve adequacy. The details of the analysis
and methodology are discussed further under the Risk Elements section that
follows.
Total other income for the nine-month period ended September 30, 2002 of $1.8
million compared to $2.1 million for the nine-month period ended September 30,
2001, a decrease of $269,000. The decrease is primarily due to a decrease in
other income of $148,000, net gains on loan sales of $68,000, and net gains
(losses) on the sale of investment securities of $44,000. Other income decreased
primarily due to a decrease in volume-based fees and to a decrease in insurance
commissions generated from the sale of life and disability insurance on loans.
Gains of $420,000 were recorded on the sale of $31.2 million of fixed rate, 1-4
family residential mortgages to the Federal Home Loan Mortgage Corporation
("Freddie Mac") for the nine-month period ended September 30, 2002. For the
nine-month period ended September 30, 2001, $18.6 million of fixed rated, 1-4
family residential mortgages were sold resulting in a gain of $405,000. In
addition to the sale of mortgages, the Company also sold its credit card
portfolio and a portion of its student loans as discussed above.
Total other expense of $7.3 million for the nine months ended September 30, 2002
compared to $6.3 million for the same nine-month period in 2001. This
represented an increase of $1.0 million or 14.6%. The increase is primarily
derived from an increase in salaries and employee benefits expense of $515,000
and an increase in other expense of $377,000. The increases in salaries and
employee benefits resulted principally from additional personnel as well as an
increase in the cost of employee benefits.
The increase in other expense is primarily due to an increase in legal and
professional fees of $138,000, collection expense of $88,000, and contributions
expense of $50,000. Collection expense increased due to increased legal costs
associated with various delinquency and foreclosure activities. Legal and
professional fees increased due to various projects that the Bank is currently
involved in, including the examination as discussed earlier, and are expected to
remain higher throughout the remainder of the year 2002. Contribution expense
has increased due to the Bank's contribution to a local community redevelopment
project. These increases were partially offset by a decrease in loan servicing
fees of $41,000. Loan servicing fees decreased due to the lower volume of
student loans being serviced by a third party. A reduction of $78,000 was also
seen in intangible amortization related to FASB Statement No. 147 as discussed
earlier.
Net income for the nine-month period ended September 30, 2002 was $2.0 million,
a decrease of $720,000 from the $2.7 million reported at September 30, 2001.
Earnings per share for the nine-month period ended September 30, 2002 were
$0.71, a decrease of $0.26 from $0.97 per share earned during the same
nine-month period in 2001.
Financial Condition
Total assets increased $23.9 million or 7.4% from $324.0 million at December 31,
2001 to $347.9 million at September 30, 2002. The increase in total assets is
due to an increase in available for sale investment securities of $22.2 million.
Total gross loans (including loans available for sale) decreased $8.1 million
from December 31, 2001. The most significant decrease within the loan portfolio
occurred within the residential real estate loans, which decreased $5.2 million.
The sale of fixed rate mortgages to the Federal Home Loan Mortgage Corporation
was the major contributor of this decrease. For the nine months ended September
30, 2002, the Company sold $31.2 million of fixed rate mortgages, which compared
to sales of $25.2 million for the entire year of 2001. The increase in the
volume of sold loans can be attributed to an all time low in interest rates,
which has resulted in an increase in the demand for mortgage loans especially
refinances.
12
Total deposits of $284.7 million at September 30, 2002 represented an increase
of $22.8 million or 8.7% from $261.9 million at December 31, 2001. With the
exception of time certificates, all deposit products had net increases during
the period. The most significant increase was within savings accounts, which
increased $18.8 million, followed by increases of $8.2 million in
interest-bearing demand, $5.6 million in noninterest-bearing demand, and $4.2
million in money market accounts. With the recent decline in the economy and
interest rates, many customers are taking advantage of savings products like the
"Classic Plus Savings" product, which pays an attractive market rate while
fulfilling customer liquidity needs. Classic Plus Savings had a balance of $31.5
million at September 30, 2002 an increase of $12.2 million from December 31,
2001.
At September 30, 2002, the Company serviced approximately $78.6 million in sold
fixed rate mortgages. Sales of fixed rate mortgages for the nine-month period
ended September 30, 2002 totaled $31.2 million with net gains of $420,000.
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, 2002, 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, 2002:
Actual Minimum Well
--------------------
Amount Ratio Ratio Capitalized
-------------------- --------- -------------
Tier 1 risk - based capital $ 29,586 12.93% 4.00% 6.00%
Total risk - based capital 32,451 14.18 8.00 10.00
Leverage capital 29,586 8.73 4.00 5.00
As the above table illustrates, the Company exceeds both the minimum and
well-capitalized regulatory capital requirements at September 30, 2002.
On October 18, 2002, the Company announced that its subsidiary bank had
entered into an agreement with the Bank's primary regulator, the Office of the
Comptroller of the Currency ("OCC"). The agreement is designed to evaluate and
enhance certain areas of the Bank's operations, including management, credit
administration, audit, information technology and regulatory compliance. There
are no stipulations that limit or restrict the Bank's ability to pay dividends
or require the Bank to increase its capital position. The Company does
anticipate incurring additional operating expenses in connection with complying
with the agreement. Potentially impacted areas would include: staffing levels,
legal and consulting fees and higher deposit insurance premiums.
A copy of the agreement is included as an exhibit to a Form 8-K filed by
Slippery Rock Financial Corporation on October 18, 2002.
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
13
maintaining adequate levels of adjustable rate, short term, or relatively risk
free interest earning assets. Management evaluates the Company's liquidity
position over 30 day, 60 day, and 90+ day time horizons. The analysis not only
identifies liquidity within the balance sheet, but off balance sheet as well. It
identifies anticipated sources and uses of funds as well as potential sources
and uses. Anticipated needs would include liquidity for credit demand,
commitments to purchase assets, and anticipated deposit decreases. Anticipated
sources would include cash (net of reserve requirements), maturing investment
securities, daily fed funds sold, anticipated deposit increases, and the
repayment of loans. Potential uses would include unfunded loan commitments
available on lines of credit. Potential sources would include borrowing capacity
available to the Company through the Federal Home Loan Bank ("FHLB"). At
September 30, 2002, for the 30-day horizon, the Company had a net anticipated
funding position of 5.8% of total assets. This ratio was 3.5% as of December 31,
2001. Management views this ratio to be at an adequate level.
Management also monitors its liquidity by the loans to deposits ratio. The loans
(including loans held for sale) to deposits ratio was 82.9% at September 30,
2002 as compared to 93.2% at December 31, 2001 and 92.2% at September 30, 2001.
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
the FHLB not only provides a source of liquidity for the Company, but also
serves as a tool to reduce interest rate risk. 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,
2002, the Company continued to have three such matched funding loans outstanding
totaling $143,000.
The Company continues to also have short-term borrowing availability through
FHLB "RepoPlus" advances. "RepoPlus" advances are short-term borrowings maturing
within one year, bearing a fixed rate of interest and subject to prepayment
penalty. At September 30, 2002 and 2001, the Company had no "RepoPlus" advances
outstanding. The Company's remaining borrowing capacity with FHLB was $86.6
million at September 30, 2002.
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 sold 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 provide an additional source of liquidity.
Loan sales on the secondary market also provide management an additional tool to
use in managing interest rate risk exposure within the balance sheet. The
Company continues to service all loans sold to Freddie Mac.
The Statement of Cash Flows, for the nine-month period ended September 30, 2002,
indicates an increase in cash and cash equivalents of $8.3 million. Cash was
provided from proceeds from sales of mortgage loans of $31.3 million, proceeds
from sales, maturities, and repayments of available for sale and held to
maturity securities of $13.8 million, and a net increase in deposits of $22.8
million. Cash was used during the period for the origination of loans held for
sale of $29.5 million, the purchase of available for sale investments of $32.4
million, and the purchase of held to maturity investments of $4.0 million. Cash
dividends paid during the nine-month period ended September 30, 2002 totaled
$1,250,000. Cash and cash equivalents totaled $30.9 million at September 30,
2002, an increase of $8.3 million from $22.6 million at December 31, 2001.
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.
14
RISK ELEMENTS
The following schedule presents the non-performing assets for the last six
quarters:
Sept Jun Mar Dec Sept Jun
2002 2002 2002 2001 2001 2001
---------- ---------- ----------- ---------- --------- ---------
(dollars in thousands)
Non-performing and restructured loans
Loans past due 90 days or more $ 31 $ 52 $ 27 $ 69 $ 49 $ 32
Non-accrual loans 5,297 5,270 5,586 5,915 4,586 4,745
Restructured loans 467 463 - - - -
-------- -------- -------- --------- --------- ---------
Total non-performing
and restructured loans 5,795 5,785 5,613 5,984 4,635 4,777
-------- -------- -------- -------- -------- ---------
Other non-performing assets
Other real estate owned 456 251 335 216 193 -
Repossessed assets 83 94 37 22 46 77
-------- -------- -------- -------- --------- ---------
Total other non-performing assets 539 345 372 238 239 77
-------- -------- -------- -------- --------- ---------
Total non-performing assets $ 6,334 $ 6,130 $ 5,985 $ 6,222 $ 4,874 $ 4,854
======== ======== ======== ======== ========= =========
Non-performing and restructured loans
as a percentage of total loans(1) 2.47% 2.45% 2.32% 2.49% 1.93% 1.99%
Non-performing assets and
restructured loans as a
percentage of total loans
and other non-performing
Assets and restructured loans(1) 2.70% 2.60% 2.47% 2.58% 2.02% 2.02%
(1) Excludes loans held for sale.
The non-performing schedule above reflects increases in non-accrual loans, from
previously reported filings, of approximately $1.7 million for each of the
periods ended 2002 and for increases of approximately $1.9 million for each of
the periods ended 2001. The increases resulted principally as a result of recent
regulatory examination for four specific loan credits involving three customer
relationships. Perceived regulatory concerns were raised for documentation and
credit administration issues for these credits. Accordingly, management has
complied with the regulatory mandate to place the four loans in non-accrual
status. Although the loans have performed in the past and continue to perform in
accordance with the contractual agreements, there has been deterioration of the
financial strength and performance of the individuals and/or entities.
Management has enhanced the Bank's collateral positions thereby further
minimizing the risk of loss on these credits. Since the loans had no delinquency
issues, income recorded on an accrual basis would approximate that recognized on
a cash basis respective to the date of non-accrual for these particular credits.
It is anticipated that three of the loans totaling $1.7 million will be placed
back in accrual status subsequent to a six-month performance review period,
which ends in December 2002.
The allowance for loan losses at September 30, 2002 totaled $3,172,000 or 1.34%
of total loans (including loans held for sale) as compared to $2,766,000 or
1.13% at December 31, 2001. Provisions for loan losses were $761,000 and
$315,000 for the nine-month periods ended September 30, 2002 and 2001. Based on
the Bank's methodology for evaluating the level of the loan loss allowance,
growth in the loan portfolio over the past two
15
years, and the uncertainties in the current economic and financial markets;
management felt it prudent to further bolster the allowance in 2002. This action
not only enhances financial strength and stability in the current environment,
but for subsequent periods as well.
In determining the level at which the allowance for loan losses should be
maintained, management relies on in-house quarterly reviews of significant loans
and commitments outstanding, including a continuing review of problem or
non-performing loans and overall portfolio quality. Commercial and commercial
real estate loans are risk-rated by individual loan officers and a loan review
committee. Consumer and residential real estate loans are generally reviewed in
the aggregate due to their relative smaller dollar size and homogeneous nature.
Specific provision and allowance allocations are made for risk-rated loans that
have gone before the loan review committee. These allocations are based upon
specific borrower data, such as non-performance, delinquency, financial
performance, capacity to repay, and collateral valuation. Non-account specific
allocations are made for all remaining loans within the portfolio based on
recent charge-off history, other known trends and expected losses. In addition,
allocations are made for qualitative factors such as changes in the local,
regional and national economies, industry trends, loan growth, and loan
administration. A quarterly report and recommendation is presented to and
approved by the Board of Directors. Management believes the allowance is
adequate to cover known losses within the loan portfolio. However, no assurances
can be made concerning the future financial condition of borrowers, the
deterioration of which would require additional provisions in subsequent
periods.
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, 2002, the Company had nonaccrual loans of $5,297,000. Impaired
loans at September 30, 2002 were $5,499,000, of which, $5,032,000 were also
classified as nonaccrual. The average balance in 2002 of impaired loans was
$5,449,000. Impaired loans had a related allowance allocation of $1,374,000 and
income recognized in 2002 for impaired loans totaled $169,000.
Exclusive of the impaired loans identified from the recent regulatory exam,
impaired loans at September 30, 2002 were comprised principally of two
borrowers. These borrowers accounted for $2.4 million of total impaired loans.
One credit, totaling $1.6 million, was classified as impaired during the fourth
quarter of 2001 as a result of the borrower's deteriorating financial condition.
The borrower has subsequently filed for bankruptcy relief.
The second largest borrower within the impaired loan accounts, exclusive of
those identified during the regulatory exam, has a balance of $801,000 and
pertains to a participated loan for a dairy operation. The Company was
cross-collateralized on cattle, feed, and real estate, including facilities. In
1999, the Bank recorded a $300,000 charge off pertaining to the cattle portion
of the loan. The borrower has subsequently filed for bankruptcy relief, and the
Company continues foreclosure proceedings on the real estate portion of the loan
through the bankruptcy courts. As a result of prudent collateral valuations
subsequent to the original charge off, the Company has recorded charge offs of
$100,000 and $190,000 in 2000 and 2001, respectively, resulting principally from
valuations on the remaining feed stored on the property. Based on an evaluation
performed in November 2002, the Company anticipates an additional $101,000
charge off in the fourth quarter of 2002. Management will continue its
collateral valuations until final resolution of the matter, which may result in
additional chargeoffs. The Company now anticipates possession of the real estate
in 2003.
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.
Management believes none of the non-performing assets, including other real
estate owned, at September 30, 2002, pose any significant risk to the
operations, liquidity or capital position of the Company.
16
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.
At September 30, 2002, the Company had a cumulative negative gap of $44.5
million at the one-year horizon. The 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 rate increases or
decreases of + or- 300 basis points (or 3.00%) in 100 basis point (or 1.00%)
increments. The analysis reprices the balance sheet and forecasts future cash
flows over a one-year horizon at the new interest rate levels. The cash flows
are then totaled to calculate net interest income. Assumptions are made for loan
and investment pre-payment speeds and are incorporated into the simulation as
well. Loan and investment pre-payment speeds will increase as interest rates
decrease and slow as interest rates rise. The current analysis indicates that,
given a 300 basis point overnight decrease in interest rates, the Company would
experience a potential $2,679,000 or 20.4% decline in net interest income. If
rates were to increase 300 basis points, the analysis indicates that the
Company's net interest income would increase $763,000 or 5.8%. 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, that in gap analysis
and simulation modeling 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
17
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 provide 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.
Item 4. Controls and Procedures
Within the 90 days prior to the date of this Form 10-Q, the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, including the Company's President and Chief Executive Officer along
with the Company's Chief Financial Officer, of the effectiveness of the design
and operation of the Company's disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based upon that evaluation, the Company's President
and Chief Executive Officer along with the Company's Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company (including
its consolidated subsidiaries) required to be included in the Company's periodic
SEC filings. There have been no significant changes in the Company's internal
controls or in other factors which could significantly affect internal controls
subsequent to the date the Company carried out its evaluation.
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)
18
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
99.0 Independent Auditor's Review
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 - Chief Executive Officer
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 - Chief Financial Officer
(b) Reports on Form 8-K - "Press Release, dated October 18, 2002, of
Slippery Rock Financial Corporation" and "Agreement, dated October 15,
2002, between The First National Bank of Slippery Rock and the Office of
the Comptroller of the Currency" filed October 18, 2002.
19
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 14, 2002 By: /s/ William C. Sonntag
----------------------
William C. Sonntag
President & CEO
Date: November 14, 2002 By: /s/ Mark A. Volponi
-----------------------
Mark A. Volponi
Treasurer
20
SECTION 302 CERTIFICATION
I, William C. Sonntag, President and Chief Executive Officer of Slippery Rock
Financial Corporation (the "Company"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of Slippery Rock
Financial Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and
have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the Company, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
(b) evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The Company's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Company's auditors and the audit
committee of Company's board of directors:
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial
data and have identified for the Company's auditors any
material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Company's internal controls; and
6. The Company's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002 /s/ William C. Sonntag
----------------- --------------------------------
President & Chief Executive Officer
21
SECTION 302 CERTIFICATION
I, Mark A. Volponi, Chief Financial Officer of Slippery Rock Financial
Corporation (the "Company"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of Slippery Rock
Financial Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and
have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the Company's disclosure controls
and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The Company's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Company's auditors and the audit
committee of Company's board of directors:
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial data
and have identified for the Company's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the Company's
internal controls; and
6. The Company's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Mark A. Volponi
----------------- -------------------
Chief Financial Officer
22