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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, 1998
TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE A
1934 [NO FEE REQUIRED]
For the transition period from to .
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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
Indicate by check mark whether the registrant (l) has filed all reports
required to 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
--- ---
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 III 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, 1998, is $37,424,353.
The number of shares outstanding of the issuer's Common Stock, as of March 1,
1999, was 2,764,248 shares of Common Stock, par value $0.25 per share.
1
DOCUMENTS INCORPORATED BY REFERENCE
Part I Annual Report to Shareholders for Fiscal year Ended
December 31, 1998
Part III Proxy statement for the 1999 Annual Meeting of shareholders to be
held April 20, 1999
Page 1 of 58 Pages with Exhibits
Page 1 of 10 Pages without Exhibits
Exhibit Index on Page 11
2
SLIPPERY ROCK FINANCIAL CORPORATION
FORM 10-K
Index
Part I Page
Item 1. Business 4-5
Item 2. Properties 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 5
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 6
Item 6. Selected Financial Data 6
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation 6
Item 7A. Quantitive and Qualitive Disclosures About Market Risk 6-7
Item 8. Financial Statements and Supplementary Data 7
Item 9. Changes in and disagreements with Accountants on Accounting
and Financial Disclosures 7
Part III
Item 10. Directors and Executive Officers of the Registrant 7
Item 11. Executive Compensation 7
Item 12. Security Ownership of Certain Beneficial Owners
and Management 7
Item 13. Certain Relationships and Related Transactions 7
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 8
Signatures 9-10
Index to Exhibits 11
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 deposits are insured by the Federal Deposit Insurance
Corporation (FDIC) and is a full-service institution and 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, and Harrisville,
Pennsylvania. 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.
Legislation and Regulatory Changes
- ----------------------------------
Changes and proposed changes to laws and regulations applicable to banks and
bank holding companies are frequently made by the various legislative and
regulatory bodies. 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.
4
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.
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, liabilities and total equity
of $215,754,000, $191,623,000 and $24,131,000 respectively at December 31,
1998.
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, 1998, the Bank had 83 full-time employees and 20 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, and Grove City, Pennsylvania. The Bank also has an operations
center located in Slippery Rock Township. In addition, in 1999 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 1998 annual report.
In addition, on September 4, 1997, the Bank acquired certain assets and
deposit liabilities of the Slippery Rock, Pennsylvania office of First Western
Bank, F.S.B. The transaction was accounted for as a purchase. The Bank
assumed the deposit liabilities of the office and acquired premises and
equipment. The purchased branch was subsequently closed with all assets and
liabilities being combined with the Bank's Main Street branch. In 1998, the
Bank renovated the purchased facility for the purposes of housing the Bank's
expanded trust services division.
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)
5
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 1998 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 1998 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 Financial Condition and Results of Operations is included in the
Company's 1998 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 and rate sensitive
liabilities. These differences, or interest rate repricing "gap", provide an
indication of the extent that the Company's net interest income is effected by
future changes in interest rates. During a period of rising interest rates, a
positive gap, a position of more rate sensitive assets than rate sensitive
liabilities, is desired. During a falling interest rate environment, a
negative gap is desired, that is, a position in which rate sensitive
liabilities exceed rate sensitive assets.
At December 31, 1998, the Company had a cumulative negative gap of $27,732,000
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 .
The simulation also calculates net interest income based upon estimates of the
largest foreseeable rate increase or decrease, (+or - 200 basis points or
2.00%). The current analysis indicates that, given a 200 basis point
overnight movement in interest rate, the Bank would experience a potential
$220,000 or 2% change in net interest income. It is important to note,
however, that this exercise would be of a worst case scenario. It would be
more likely to have incremental changes in interest rates, rather than a
single significant increase or decrease. When management believes interest
rate movements will occur, it can restructure the balance sheet and thereby
the ratio of rate sensitive assets to rate sensitive liabilities which in turn
will effect the net interest income. It is important to note; however, not
all assets and liabilities with similar maturities and repricing opportunities
will reprice at the same time or to the same degree and therefore, could
effect forecasted results.
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.
6
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.
Item 8. Financial Statements and Supplementary Data
The Company's consolidated financial statements and notes thereto contained in
the 1998 Annual Report are filed as Exhibit 13 hereto and are incorporated in
their entirety by reference under this item.
Annual Report
Page
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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 1999 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 1999 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 1999 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 1999 Proxy Statement
in the Transactions with Management section on page 12, and is incorporated
herein by reference.
7
Part IV
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,
1998 filed with the Commission on March 31, 1999 and
incorporated herein by reference.
16 N/A
18 N/A
21 List of subsidiaries
22 N/A
23 N/A
24 N/A
27 Financial Data Schedule
28 N/A
99.1 Notice of Annual Meeting, Proxy Statement and form of Proxy for
Annual Meeting of Shareholders to be held on April 20, 1999
filed with the Commission on March 31, 1999 and incorporated
herein by reference.
99.2 Accountant's Opinion
(b) Reports on Form 8 - K
None
8
SIGNATURES
Pursuant to the requirements 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 16, 1999
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
-------------------------
Mark A. Volponi
Treasurer
Date: March 16, 1999
By: /s/ Eleanor L. Cress
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Eleanor L. Cress
Secretary
Date: March 16, 1999
9
Signatures (Continued)
By: /s/ John W. Conway
-------------------------
John W. Conway
Director
Date: March 16, 1999
By: /s/ Grady W. Cooper
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Grady W. Cooper
Director
Date: March 16, 1999
By: /s/ Robert M. Greenberger
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Robert M. Greenberger
Director
Date: March 16, 1999
By: /s/ Robert E. Gregg
-------------------------
Robert E. Gregg
Director
Date: March 16, 1999
By: /s/ William D. Kingery
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William D. Kingery
Director
Date: March 16, 1999
By: /s/ Paul M. Montgomery
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Paul M. Montgomery
Director
Date: March 16, 1999
By: /s/ S. P. Snyder
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S. P. Snyder
Director
Date: March 16, 1999
By: /s/ William C. Sonntag
-------------------------
William C. Sonntag
Director
Date: March 16, 1999
By: /s/ Charles C. Stoops, Jr.
-------------------------
Charles C. Stoops, Jr.
Director
Date: March 16, 1999
By: /s/ Norman P. Sundell
-------------------------
Norman P. Sundell
Director
Date: March 16, 1999
Index to Exhibits
Item Number Description
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21 List of Subsidiaries
99.2 Report of Independent Auditors
11