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FORM 10-K-ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
For the fiscal year ended DECEMBER 31, 1999
-----------------
TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934 [NO FEE REQUIRED]
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
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
100 SOUTH MAIN STREET
SLIPPERY ROCK, PENNSYLVANIA 16057 - 1245
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (724) 794-2210
Securities registered pursuant to Section 12(b) of the Act: Not Applicable
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $0.25 per share.
Indicate by check mark whether the registrant (I) has filed all reports
required to be filed by Section 13 or 15(d) of the 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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K contained is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part Ill of this Form 10-
K or any amendment to this Form 10-K.
The aggregate market value of the voting stock held by non-affiliates computed
by reference to the price as of December 31,1999, is $37,164,040.
The number of shares outstanding of the issuer's Common Stock, as of March 30,
2000, was 2,769,048 shares of Common Stock, par value $0.25 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Part I Annual Report to Shareholders for Fiscal year Ended December 31, 1999
Part II Proxy statement for the 2000 Annual Meeting of shareholders to be held
April 18, 2000
Page 1 of 66 Pages with Exhibits
Page 1 of 12 Pages without Exhibits
Exhibit Index on Page 10
Slippery Rock Financial Corporation
Form 10-K
Index
Part I Page
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Item 1. Business 4-6
Item 2. Properties 6
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 6
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholders Matters 7
Item 6. Selected Financial Data 7
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 7-8
Item 8. Financial Statements and Supplementary Data 9
Item 9. Changes in and disagreements with Accountants on
Accounting and Financial Disclosures 9
Part III
Item 10. Directors and Executive Officers of the Registrant 9
Item 11. Executive Compensation 9
Item 12. Security Ownership of Certain Beneficial Owners and
Management 9
Item 13. Certain Relationships and Related Transactions 9
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 10
Signatures 11-12
Index to Exhibits 13
3
SLIPPERY ROCK FINANCIAL CORPORATION
FORM 10K
Part I
ITEM 1. Business
General
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Slippery Rock Financial Corporation ("Company") is a one bank holding company
organized under the laws of the Commonwealth of Pennsylvania. In addition, the
Company is registered with and supervised by the Board of Governors of the
Federal Reserve System (the Federal Reserve Board). On June 30,1992, The First
National Bank of Slippery Rock (Bank) completed the reorganization of the Bank
into a holding company structure through the exchange of the outstanding
shares of common stock for shares of common stock of Slippery Rock Financial
Corporation (Company). The Company's primary business is the holding of all of
the outstanding common shares of its wholly owned subsidiary, The First
National Bank of Slippery Rock. The Company's primary source of income has
been dividends paid by the Bank.
The Bank is nationally chartered and is a member of the Federal Reserve
System. The Bank's deposit are insured by the Federal Deposit Insurance
Corporation (FDIC) and is a full-service institution that offers various
demand and time deposit products and originates secured and unsecured
commercial, consumer and mortgage loans.
The Bank has two offices located in Slippery Rock, Pennsylvania and one each
in the communities of Prospect, Portersville, Grove City, Harrisville, and New
Wilmington, Pennsylvania. The Bank's Trust Division operates from a separate
freestanding facility, which also is located in Slippery Rock. In addition to
its retail locations, the Bank has an operations center located in Slippery
Rock Township.
Supervision and Regulation
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The Company is subject to the jurisdiction of the Securities and Exchange
Commission ("SEC"). In addition, Slippery Rock Financial Corporation is also
subject to the provisions of the Bank Holding Company Act of 1956 as amended
("Bank Holding Company Act") and to the supervision of the Federal Reserve
Board. The Bank Holding Company Act requires Slippery Rock Financial
Corporation to receive prior approval of the Federal Reserve Board before it
owns or controls more than 5% of the voting shares of any financial
institution.
A bank holding company is prohibited from engaging in or acquiring control of
more than 5% of the voting shares of any company engaged in non-banking
activities unless the Federal Reserve Board views the activities to be closely
related to banking or managing or controlling banks. In addition, the Bank
Holding Company Act prohibits changes in control of a bank holding company
without prior notice to the Federal Reserve Board.
Slippery Rock Financial Corporation is required to file an annual report with
the Federal Reserve Board and any additional information as required. The
Federal Reserve Board may also require examinations of Slippery Rock Financial
Corporation or any or all of its subsidiaries.
The Federal Reserve Act applies certain restrictions on a bank subsidiary of a
bank holding company regarding extensions of credit to the bank holding
company or any of its other subsidiaries, investments in stocks or other
securities of the bank holding company or the use of such stocks or securities
as collateral to any borrower.
4
Legislation and Regulatory Changes
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The various legislative and regulatory bodies frequently make changes and
proposed changes to laws and regulations applicable to banks and bank holding
companies. No predictions as to the impact these changes may have on Slippery
Rock Financial Corporation or its subsidiary can be made.
On September 29,1994, the President signed into law the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 (the "Interstate Banking Act").
Under the Interstate Banking Act, the Federal Reserve Board, subsequent to
analytical review, may approve an application by the Company to acquire all or
substantially all of the assets of a bank located outside of the Commonwealth
of Pennsylvania regardless of whether such a transaction is prohibited under
the law of any state. In addition, the Interstate Banking Act provides that,
beginning June 1,1997, federal supervisory agencies may approve a merger of
the Bank with another bank located in a different state or the establishment
of a new branch office either by acquisition or "de novo" unless the
Commonwealth of Pennsylvania enacts legislation prior to that date which
specifically allows or prohibits a merger with a financial institution in
another state. Management currently has no plans to engage in interstate
banking activities.
FINANCIAL SERVICES MODERNIZATION ACT OF 1999
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On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley
Act (better known as the Financial Services Modernization Act of 1999) which
will, effective March 11, 2000, permit bank holding companies to become
financial holding companies and thereby affiliate with securities firms and
insurance companies and engage in other activities that are financial in
nature. A bank holding company may become a financial holding company if each
of its subsidiary banks is well capitalized under the Federal Deposit
Insurance Corporation Act of 1991 prompt corrective action provisions, is well
managed, and has at least a satisfactory rating under the Community
Reinvestment Act by filing a declaration that the bank holding company wished
to become a financial holding company. No regulatory approval will be
required for a financial holding company to acquire a company, other than a
bank or savings association, engaged in activities that are financial in
nature or incidental to activities that are financial in nature, as determined
by the Federal Reserve Board.
The Financial Services Modernization Act defines "financial in nature"
to include:
securities underwriting, dealing and market making;
sponsoring mutual funds and investment companies;
insurance underwriting and agency;
merchant banking activities;
and activities that the Federal Reserve Board has determined to be
closely related to banking.
In addition, a financial holding company may not acquire a company that is
engaged in activities that are financial in nature unless each of the
subsidiary banks of the financial holding company has a Community Reinvestment
Act rating of satisfactory or better.
The specific effects of the enactment of the Financial Services Modernization
Act on the banking industry in general and on the Company and the Bank in
particular have yet to be determined due to the fact that the Financial
Services Modernization Act was only recently adopted.
The United States Congress has periodically considered and adopted
legislation, such as the Gramm-Leach-Bliley Act, which has resulted in further
deregulation of both banks and other financial institutions, including mutual
funds, securities brokerage firms and investment banking firms. No assurance
can be given as to whether any additional legislation will be adopted or as to
the effect such legislation would have on the business of the Bank or the
Company
Government Monetary Policy
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Financial institutions may be affected by legislative changes and by the
monetary and fiscal policies of various legislative and regulatory bodies. A
primary function of the Federal Reserve Board is to promote economic growth by
influencing interest rates and the national supply of money and credit. The
Federal Reserve Board accomplishes this through the use of open market
activities of the buying and selling of U. S. Government securities, by
changing the discount rate on bank borrowings and by changing the level of
reserve requirements on bank deposits.
All of these instruments of monetary policy are used in various combinations
to influence the volume of bank lending activity, the volume of investment and
deposit activity and the interest rates charged on loans and paid on deposits.
Because these instruments significantly influence short-term interest rates,
the monetary policies of the Federal Reserve Board have had a significant
effect on the operating results of banks in the past and are expected to
continue to do so in the future.
5
History and Business - Bank
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The Bank's headquarters are located at 100 South Main Street, Slippery Rock,
Pennsylvania 16057. The Bank had total assets, total liabilities, and total
equity of $233,022,000, $207,602,000 and $25,420,000 respectively at December
31, 1999.
The Bank is a full service financial institution, whose products and services
include the accepting of time and demand deposits, and the origination of
secured and unsecured commercial, mortgage and consumer loans. In addition to
these services, the Bank also has a full service trust division that not only
offers traditional trust services, but the sale of mutual funds and annuities
as well. The Bank's business is not seasonal in nature.
At December 31,1999, the Bank had 93 full-time employees and 22 part- time
employees.
Competition
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The Bank competes with other area commercial banks, savings and loan
institutions and credit unions. In addition, the Bank competes with major
regional financial institutions headquartered in other areas of Pennsylvania.
The Bank also competes for deposits with other non-financial institutions such
as those firms that offer mutual funds or insurance annuities. Interest
charged on loans, interest paid on deposits and service charges on deposit
accounts are all comparable to competitors in the general market place.
ITEM 2. Properties
The Bank has a full service drive through branch facility in addition to the
Main banking facility in Slippery Rock, Pennsylvania, as well as one full
service branch facility each in the communities of Prospect, Portersville,
Harrisville, New Wilmington, and Grove City, Pennsylvania. The Bank also has
an operations center located in Slippery Rock Township. In addition, in 1998,
the Bank moved its trust department to a freestanding facility in Slippery
Rock. While the Bank owns all of its facilities, it is subject to a real
estate mortgage obligation at its Prospect, Pennsylvania location. The details
of which can be found in note 9 of the notes to financial statements on page
13 of the Company's 1999 annual report.
In 1999, the Bank acquired land in New Wilmington Borough and Hickory
Township, Lawrence County, Pennsylvania for the construction of two new full
service branch facilities. Construction of the New Wilmington facility began
in the third quarter of 1999 and was completed in March 2000. Total project
costs, for the New Wilmington office, including land acquisition, approximated
$1.0 million. Construction of the Hickory Township facility is anticipated to
begin in the second quarter of 2000 with a targeted completion of fourth
quarter 2000. In addition, the Bank anticipates opening a grocery store
branch in a local Slippery Rock establishment in third quarter 2000.
Management does not anticipate that the projects will pose any significant
risk to the capital position or future earnings of the Company.
Slippery Rock Financial Corporation's headquarters are located at the Bank's
Main office facility at 100 South Main Street, Slippery Rock, Pennsylvania,
16057. The Company pays no rent or other form of consideration for the use of
the facility as its corporate headquarters.
ITEM 3. Legal Proceedings
(Not Applicable)
ITEM 4. Submission of Matters to a Vote of Security Holders
(Not Applicable)
6
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
The information required by this Item pertaining to Market for Common Equity
and Related Stockholder Matters is included in the Company's 1999 Annual
report on page 34, and is incorporated herein by reference
.
ITEM 6. Selected Financial Data
The information required by this Item pertaining to Selected Financial Data is
included in the Company's 1999 Annual report on page 2, and is incorporated
herein by reference.
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information required by this Item pertaining to Management's Discussion
and Analysis of Operating Results and Financial Condition is included in the
Company's 1999 Annual report on pages 21 through 34, and is incorporated
herein by reference
ITEM 7A. 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 land 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 December 31,1999, the Company had a cumulative negative gap of $49,044,000
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
7
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 $868,000 or
8% 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 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.
8
ITEM 8. Financial Statement and Supplementary Data
The Company's consolidated financial statements and notes thereto contained in
the 1999 Annual Report are filed as Exhibit 13 hereto and are incorporated in
their entirety by reference under this item.
Annual Report
-Page-
Consolidated Balance Sheet 3
Consolidated Statement of Income 4
Consolidated Statement of Changes in
Stockholders equity 5
Consolidated Statement of Cash Flows 6
Notes to Consolidated Financial Statements 7 -19
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
(Not Applicable)
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The information required by this Item pertaining to directors of the Company
is included in the Company's Proxy Statement for its 2000 Annual Meeting of
Shareholders on pages 4 and 5 and page 11 and is incorporated herein by
reference
ITEM 11. Executive Compensation
The information required by this Item is included in the 2000 Proxy Statement
in the Executive Compensation section on pages 6 through 11, and is
incorporated herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item is included in the 2000 Proxy Statement
in the Voting Securities section on pages 1 through 3, and is incorporated
herein by reference.
ITEM 13. Certain Relationships and Related Transactions.
The information required by this Item is included in the 2000 Proxy Statement
in the Transactions with Management section on page 12, and is incorporated
herein by reference.
9
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following table presents those exhibits required by Item 601 of
Regulation S - K
Slippery Rock Financial Corporation
FORM 10-K EXHIBIT LIST
(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
9 N/A
10 N/A
11 N/A
12 N/A
13 Annual Report to Shareholders for Fiscal Year Ended
December 31, 1999 filed with the Commission on March 31,
2000 and incorporated reference.
16 N/A
18 N/A
21 List of Subsidiaries
22 N/A
23 N/A
24 N/A
27 Financial Data Table
28 N/A
9.1 Notice of Annual Meeting, Proxy Statement and form of
Proxy for Annual Meeting of Shareholders to be held on
April 18, 2000 filed with the Commission on March 31,
2000 and incorporated herein by reference.
9.2 Accountant's Opinion
(b) Reports on Form 8-K
None
10
Signatures
Pursuant to the requitements of Section 13 or 15(d) of the 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
By : /s/ William C. Sonntag
----------------------
William C. Sonntag
President & CEO
Date: March 21, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Mark A. Volponi
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Mark A. Volponi
Treasurer
Date: March 21, 2000
By: /s/ Eleanor L. Cress
--------------------
Eleanor L. Cress
Secretary
Date: March 21, 2000
11
Signatures (Continued)
By: /s/ John W. Conway
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John W. Conway
Director
Date: March 21, 2000
By: /s/ Robert M. Greenberger
-------------------------
Robert M. Greenberger
Director
Date: March 21, 2000
By: /s/ Robert E. Gregg
--------------------
Robert E. Gregg
Director
Date: March 21, 2000
By: /s/ Paul M. Montgomery
----------------------
Paul M. Montgomery
Director
Date: March 21, 2000
By: /s/ S.P. Snyder
---------------
S. P. Snyder
Director
Date: March 21, 2000
By: /s/ William C. Sonntag
----------------------
William C. Sonntag
Director
Date: March 21, 2000
By: /s/ Charles C. Stoops, Jr.
--------------------------
Charles C. Stoops, Jr.
Director
Date: March 21, 2000
By: /s/ Norman P. Sundell
---------------------
Norman P. Sundell
Director
Date: March 21, 2000
By: /s/ Kenneth D. Wimer
--------------------
Kenneth D. Wimer
Director
Date: March 21, 2000
12
Index to Exhibits
Item Number Description Page
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21 List of Subsidiaries XX
99.2 Report of Independent Auditors XX-XX
13