<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------- -----------
Commission file Number: 0-21720
SLIPPERY ROCK FINANCIAL CORPORATION
(Name of small business issuer 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)
Issuer's telephone number, including area code: (412) 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 $l.00 per share.
Check whether the issuer (l) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]
Check if there is no disclosure of delinquent filer in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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- KSB or any
amendment to this Form 10-KSB. [ X ]
The issuer's revenues for the year ended December 31, 1996 are $14,589,769.
The aggregate market value of the voting stock held by non-affiliates computed
by reference to the price as of March 1, 1997, is $29,832,096.
The number of shares outstanding of the issuer's Common Stock, as of March 1,
1997, was 1,378,124 shares of Common Stock, par value $0.25 per share.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Part I Annual Report to Shareholders for Fiscal year Ended
December 31, 1996
Part III Proxy statement for the 1997 Annual Meeting of shareholders to be
held April 15, 1997
Page 1 of 41 Pages with Exhibits
Page 1 of 11 Pages without Exhibits
Exhibit Index on Page 11
page 2
<PAGE>
SLIPPERY ROCK FINANCIAL CORPORATION
FORM 10-KSB
Index
Part I Page
----
Item 1. Description of the Business 4 - 6
Item 2. Description of Property 6
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 6
Part II
Item 5. Market for Common Equity and Related Stockholder Matters 6
Item 6. Management's Discussion and Analysis or Plan of Operation 6
Item 7. Financial Statements 7
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 7
Part III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act 7
Item 10. Executive Compensation 7
Item 11. Security Ownership of Certain Beneficial Owners and Management 7
Item 12. Certain Relationships and Related Transactions 7
Item 13. Exhibits and Reports on Form 8-K 7 - 8
Signatures 9 - 10
Index to Exhibits 11
page 3
<PAGE>
SLIPPERY ROCK FINANCIAL CORPORATION
FORM 10KSB
Part I
Item 1. Description of the Business
General
- -------
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, and Grove City, Pennsylvania.
In addition, on August 19, 1996, the Bank purchased the Harrisville,
Pennsylvania branch of Mellon Bank, N.A.. In addition to its retail
locations, the Bank has an operations center located in Slippery Rock
Township.
Supervision and Regulation
- --------------------------
The Company is subject to the jurisdiction of the Securities and Exchange
Commission ("SEC") as a "small business" filer as defined under Item 10 of
Regulation S-B and accordingly, has elected to make its SEC filings under the
disclosure requirements afforded to small business companies.
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.
page 4
<PAGE>
The Bank Insurance Fund ("BIF") insures deposits of commercial banks, (such as
The First National Bank of Slippery Rock) while the Savings Association
Insurance Fund ("SAIF") insures deposits of savings associations. The Federal
Deposit Insurance Corporation Improvement Act of 1991, ("FDICIA")
established the Federal Deposit Insurance Corporation ("FDIC") insurance
assessment procedure as well as a time table to recapitalize both BIF and SAIF
to the Congressionally mandated level of 1.25% of total insured deposits. In
June of 1995, the FDIC had determined that BIF had attained its
Congressionally mandated target. FDIC then issued a refund of pre-paid
insurance premiums and reduced the insurance premium assessed to well
capitalized BIF institutions to the "de-minimus" of $2,000 per year.
Because SAIF had not yet met its funding requirements, no action was taken
regarding the premium assessed to savings institutions, which created a
disparity in operational costs within the financial services industry, On
September 30, 1996, as part of the fiscal 1997 federal budget, legislative
action established a one-time fee assessment to savings institutions of 65.7
cents per one hundred dollars of SAIF insurable deposits to bring the SAIF
fund to full capitalization. In addition, the insurance premium charged to
SAIF insured institutions was reduced to 6.44 cents for years 1997 through
1999. The insurance premium charged to BIF insured institutions was increased
to 1.29 cents per one hundred dollars of insurable deposits for the same time
period. In the year 2000, both BIF and SAIF insured institutions would begin
paying deposit insurance premiums of 2.43 cents. Management estimates FDIC
insurance costs for 1997 to be approximately $20,000 and does not anticipate
the higher insurance premiums to have a significant impact upon future
earnings.
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.
Government Monetary Policy
- --------------------------
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
- ---------------------------
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 $195,689,000, $175,422,000 and $20,267,000 respectively at December 31,
1996.
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 department. The Bank's
business is not seasonal in nature.
At December 31, 1996, the Bank had 76 full-time employees and 25 part- time
employees.
page 5
<PAGE>
Competition
- -----------
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. Description of Property
The Bank has a 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. 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 1996 annual report.
On August 19, 1996, the Bank acquired the Harrisville, Pennsylvania office of
Mellon Bank, N.A. The details of the acquisition can be found in Note 16 of
the notes to financial statements on page 17 of the Company's 1996 annual
report.
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
On January 21, 1997, the Board of Directors approved, subject to shareholder
ratification at the annual meeting, the formation of the 1997 Incentive Stock
Option Plan ("ISOP") and the 1997 Directors Stock Option Plan ("Directors
Plan"). The details of both option plans is included in the Company's 1997
proxy statement on pages 10 through 16 and is incorporated herein by
reference.
Part II
Item 5. Market for 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 1996 Annual
report on page 29, and is incorporated herein by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
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 1996 Annual report on pages 19 through 29 and is incorporated
herein by reference.
page 6
<PAGE>
Item 7. Financial Statements
The Company's consolidated financial statements and notes thereto contained in
the 1996 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 - 17
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
(Not Applicable)
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The information required by this Item pertaining to directors of the Company
is included in the Company's Proxy Statement for its 1997 Annual Meeting of
Shareholders on pages 1 through 3 and page 7 and is incorporated herein by
reference.
Item 10. Executive Compensation
The information required by this Item is included in the 1997 Proxy Statement
in the Executive Compensation section on pages 6 and 7, and is incorporated
herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item is included in the 1997 Proxy Statement
in the Voting Securities section on pages 1 through 4, and is incorporated
herein by reference.
Item 12. Certain Relationships and Related Transactions.
The information required by this Item is included in the 1997 Proxy Statement
in the Transactions with Management section on pages 7 though 10, and is
incorporated herein by reference.
Item 13. Exhibits and Reports on Form 8-K.
(a) The following table presents those exhibits required by Item 601 of
Regulation S - B
page 7
<PAGE>
Slippery Rock Financial Corporation
Form 10-KSB Exhibit List
(a) Exhibits required by Item 601 of Regulation S - B:
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
13 Annual Report to Shareholders for Fiscal Year Ended December 31,
1996 filed with the Commission on March 28, 1997 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 15, 1997
filed with the Commission on March 27, 1997 and incorporated
herein by reference.
(b) Reports on Form 8-K
None
page 8
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
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, 1997
In accordance with the Exchange Act, 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 21, 1997
By /s/ Eleanor L. Cress
------------------------------
Eleanor L. Cress
Secretary
Date: March 21, 1997
page 9
<PAGE>
Signatures (Continued)
By /s/ John W. Conway
------------------------------
John W. Conway
Director
Date: March 18, 1997
By /s/ Grady W. Cooper
------------------------------
Grady W. Cooper
Director
Date: March 18, 1997
By /s/ Robert M. Greenberger
------------------------------
Robert M. Greenberger
Director
Date: March 18, 1997
By /s/ Robert E. Gregg
------------------------------
Robert E. Gregg
Director
Date: March 18, 1997
By /s/ Paul M. Montgomery
------------------------------
Paul M. Montgomery
Director
Date: March 18, 1997
By /s/ S. P. Snyder
------------------------------
S. P. Snyder
Director
Date: March 18, 1997
By /s/ William C. Sonntag
------------------------------
William C. Sonntag
Director
Date: March 18, 1997
By /s/ Charles C. Stoops, Jr.
------------------------------
Charles C. Stoops, Jr.
Director
Date: March 18, 1997
By /s/ Kenneth D. Wimer
------------------------------
Kenneth D. Wimer
Director
Date: March 18, 1997
page 10
Index to Exhibits
Exhibit Number Description Page
- -------------- ----------- ----
13 Annual Report to Shareholders 12
21 List of subsidaries 40
27 Financial Data Schedule 41
page 11
<PAGE>
SLIPPERY ROCK FINANCIAL CORPORATION
SELECTED FINANCIAL DATA
- -----------------------------------
<TABLE>
<CAPTION>
Five Years Ended December 31,
---------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------------------------------------------------------------
(Dollars in thousands except per share data)
<S> <C> <C> <C> <C> <C>
SUMMARY OF EARNINGS
Interest income $ 13,744 $ 12,486 $ 11,042 $ 10,241 $ 10,100
Interest expense 5,761 4,878 4,049 3,871 4,244
---------------------------------------------------------------------
Net interest income 7,983 7,608 6,993 6,370 5,856
Provision for loan losses 200 275 163 250 275
---------------------------------------------------------------------
Net interest income after
provision for loan losses 7,783 7,333 6,830 6,120 5,581
Other income 846 902 809 917 755
Other expense 4,964 4,680 4,534 4,080 3,956
---------------------------------------------------------------------
Income before income taxes 3,665 3,555 3,105 2,957 2,380
Applicable income tax expense 995 1,056 839 748 602
---------------------------------------------------------------------
NET INCOME $2,670 $2,499 $2,266 $2,209 $1,778
=====================================================================
PER SHARE DATA (1)
Earnings per share $1.94 $1.81 $1.64 $1.60 $1.29
Dividends paid $0.57 $0.48 $0.39 $0.34 $0.27
Book value per share at period end $14.73 $13.29 $11.85 $10.69 $9.44
Average number of shares
outstanding 1,378,124 1,378,124 1,378,124 1,378,124 1,378,124
STATEMENT OF
CONDITION STATISTICS
(At end of period)
Assets $195,713 $162,011 $147,374 $141,268 $126,783
Deposits $164,779 $140,664 $129,322 $124,471 $112,115
Loans $141,286 $122,747 $112,613 $99,845 $91,937
Allowance for loan losses $1,177 $1,098 $1,037 $981 $937
Interest-bearing deposits in
other banks $287 $118 $127 $210 $771
Investment securities $37,346 $25,755 $19,638 $23,307 $18,800
Short-term borrowings $9,000 $1,300 - - -
Long term debt $754 $939 $1,109 $1,440 $1,070
Stockholders' equity $20,297 $18,313 $16,330 $14,739 $13,008
SIGNIFICANT RATIOS (2)
Return on average equity 13.78% 14.32% 14.51% 15.78% 14.43%
Return on average assets 1.52% 1.64% 1.56% 1.66% 1.45%
Loans as a percent of deposits 85.74% 87.26% 87.08% 80.22% 82.00%
Ratio of average equity to
average assets 11.05% 11.43% 10.75% 10.55% 10.08%
Dividends as a percent of
net income 29.38% 26.52% 23.78% 21.25% 21.93%
</TABLE>
[FN]
(1) Per share data restated for the effects of a four for one stock split
in 1996 and for 10% stock dividends paid during 1995, 1994, 1993, and 1992.
(2) Loans as a percent of deposits calculations use actual period end
volume data, all other ratios use average daily volume data.
1
page 12
<PAGE>
SLIPPERY ROCK FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET
------------------------------------
<TABLE>
<CAPTION>
December 31,
1996 1995
---------------- ----------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 8,481,808 $ 6,428,308
Interest-bearing deposits in other banks 286,727 118,267
Federal funds sold - 600,000
Mortgage loans held for sale 1,296,047 1,592,950
Investment securities available for sale 26,291,321 12,360,004
Investment securities (market value
of $11,107,779 and $13,494,347 11,055,096 13,394,973
Loans 141,285,519 122,746,590
Less allowance for loan losses 1,176,951 1,098,298
---------------- ----------------
Net loans 140,108,568 121,648,292
Premises and equipment 3,637,030 3,700,485
Accrued interest and other assets 4,556,827 2,167,994
---------------- ----------------
TOTAL ASSETS $ 195,713,424 $ 162,011,273
================ =================
LIABILITIES
Deposits:
Noninterest-bearing demand $ 24,737,745 $ 21,707,304
Interest-bearing demand 20,696,978 18,477,697
Savings 18,260,189 16,382,643
Money market 23,942,880 17,287,064
Time 77,141,411 66,809,687
---------------- ----------------
Total deposits 164,779,203 140,664,395
Short-term borrowings 9,000,000 1,300,000
Long-term debt 753,649 938,863
Accrued interest and other liabilities 883,872 794,603
---------------- ----------------
TOTAL LIABILITIES 175,416,724 143,697,861
---------------- ----------------
STOCKHOLDERS' EQUITY
Common stock, par value $.25, authorized shares
12,000,000, issued and outstanding 1,378,124 344,531 344,531
Capital surplus 10,676,129 10,676,129
Retained earnings 9,134,585 7,255,922
Net unrealized gain on securities 141,455 36,830
---------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 20,296,700 18,313,412
---------------- ----------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 195,713,424 $ 162,011,273
================ ================
</TABLE>
See accompanying notes to the consolidated financial statements.
2
page 13
<PAGE>
SLIPPERY ROCK FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME
- -------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995
---------------- ----------------
<S> <C> <C>
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $ 12,055,139 $ 11,135,250
Interest-bearing deposits in other banks 10,275 10,247
Federal funds sold 172,601 271,141
Interest and dividends on investment securities:
Taxable interest 611,851 484,146
Tax exempt interest 841,668 539,249
Dividends 51,934 46,167
---------------- ----------------
Total interest and
dividend income 13,743,468 12,486,200
---------------- ----------------
INTEREST EXPENSE
Deposits 5,562,371 4,805,870
Short-term borrowings 141,194 13,374
Long-term debt 57,060 58,587
---------------- ----------------
Total interest expense 5,760,625 4,877,831
---------------- ----------------
NET INTEREST INCOME 7,982,843 7,608,369
PROVISION FOR LOAN LOSSES 200,000 275,000
---------------- ----------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 7,782,843 7,333,369
---------------- ----------------
OTHER INCOME
Service charges on deposit accounts 496,583 513,339
Trust department income 53,310 49,054
Net gains (losses) on loan sales (21,223) 35,273
Other income 317,631 304,435
---------------- ----------------
Total other income 846,301 902,101
---------------- ----------------
OTHER EXPENSE
Salaries and employee benefits 2,371,117 2,201,745
Net occupancy expense 415,319 390,137
Equipment expense 597,915 493,097
Data processing expense 177,438 204,705
Pennsylvania shares tax 164,430 147,272
Stationery, printing and supplies 156,126 146,425
Other expense 1,081,188 1,096,259
---------------- ----------------
Total other expense 4,963,533 4,679,640
---------------- ----------------
Income before income taxes 3,665,611 3,555,830
Income tax expense 995,123 1,056,331
---------------- ----------------
NET INCOME $ 2,670,488 $ 2,499,499
================ ===============
EARNINGS PER SHARE $ 1.94 $ 1.81
</TABLE>
See accompanying notes to the consolidated financial statements.
3
page 14
<PAGE>
SLIPPERY ROCK FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Net Unrealized
Common Capital Retained Gain (Loss)
Stock Surplus Earnings on Securities Total
---------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ 313,430 $ 8,530,160 $ 7,608,244 $ (121,956) $ 16,329,878
Net income 2,499,499 2,499,499
Cash dividends ($.48 per share) (658,203) (658,203)
Ten percent stock dividend
(including fractional shares
paid in cash) 31,101 2,145,969 (2,193,618) (16,548)
Net unrealized gain on securities 158,786 158,786
---------- ----------- ----------- ---------- ------------
Balance, December 31, 1995 344,531 10,676,129 7,255,922 36,830 18,313,412
Net income 2,670,488 2,670,488
Cash dividends ($.57 per share) (791,825) (791,825)
Net unrealized gain on securities 104,625 104,625
---------- ----------- ----------- ---------- ------------
Balance, December 31, 1996 $ 344,531 $ 10,676,129 $ 9,134,585 $ 141,455 $ 20,296,700
========== ============ ============ ========== ============
</TABLE>
See accompanying notes to the consolidated financial statements.
4
page 15
<PAGE>
SLIPPERY ROCK FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
- ---------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995
---------------- ----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,670,488 $ 2,499,499
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses 200,000 275,000
Depreciation and amortization 632,478 491,942
Deferred taxes 9,870 87,607
Mortgage loans held for sale (4,898,732) (5,565,891)
Proceeds from sales of mortgage loans 5,174,413 4,431,948
Net (gain) loss on loan sales 21,222 (35,273)
Increase in accrued interest receivable (328,939) (142,966)
Increase in accrued interest payable 25,807 133,047
Other, net (104,229) (112,737)
---------------- ----------------
Net cash provided by
operating activities 3,402,378 2,062,176
---------------- ----------------
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from maturities and repayments 2,792,298 719,196
Purchases (16,568,897) (5,782,999)
Investment securities:
Proceeds from maturities and repayments 4,560,283 2,352,952
Purchases (2,231,508) (3,171,308)
Increase in loans, net (18,587,048) (10,310,257)
Purchases of premises and equipment (489,333) (973,394)
Premium paid on branch acquisition (2,093,982) -
Other, net - (40,691)
---------------- ----------------
Net cash used for
investing activities (32,618,187) (17,206,501)
---------------- ----------------
FINANCING ACTIVITIES
Increase in deposits, net 24,114,808 11,342,594
Proceeds from short-term borrowings 22,110,000 1,300,000
Repayments of short-term borrowings (14,410,000) -
Payments on long-term debt (185,214) (170,336)
Cash dividends paid including
fractional shares (791,825) (674,751)
---------------- ----------------
Net cash provided by
financing activities 30,837,769 11,797,507
---------------- ----------------
Increase (decrease) in
cash and cash equivalents 1,621,960 (3,346,818)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 7,047,575 10,394,393
---------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 8,669,535 $ 7,047,575
================ ================
</TABLE>
See accompanying notes to the consolidated financial statements.
5
page 16
<PAGE>
SLIPPERY ROCK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------
A summary of the significant accounting and reporting policies applied in the
presentation of the accompanying financial statements follows:
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of Slippery Rock
Financial Corporation (the "Company") and its wholly-owned subsidiary, The
First National Bank of Slippery Rock (the "Bank"). All significant
intercompany transactions have been eliminated in consolidation. The
investment in subsidiary on the parent company financial statements is carried
at the parent company's equity in the underlying net assets.
Slippery Rock Financial Corporation is a Pennsylvania company organized to
become the holding company of the Bank. The First National Bank of Slippery
Rock is a national bank headquartered in Slippery Rock, Pennsylvania. The
Company's principal sources of revenues emanate from its portfolio of
residential real estate, commercial mortgage, commercial and consumer loans,
as well as trust and a variety of deposit services provided to its customers
through six locations. The Company is supervised by the Board of Governors of
the Federal Reserve System, while the Bank is subject to regulation and
supervision by the Office of the Comptroller of the Currency.
The accounting principles followed by the Company and its wholly-owned
subsidiary, the Bank, and the methods of applying these principles conform
with generally accepted accounting principles and with general practice within
the banking industry. In preparing the financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the balance sheet and statement of
income. Actual results could differ significantly from those estimates.
Investment Securities
- ---------------------
The Company has classified investment securities into two categories:
Held to Maturity and Available for Sale. Debt securities acquired with the
intent to hold to maturity are stated at cost adjusted for amortization of
premium and accretion of discount which are computed using the interest method
and recognized as adjustments of interest income. Certain other debt
securities have been classified as available for sale to serve principally as
a source of liquidity. Unrealized holding gains and losses for available for
sale securities are reported as a separate component of stockholders' equity,
net of tax, until realized. Realized security gains and losses are computed
using the specific identification method. Interest and dividends on
investment securities are recognized as income when earned.
Loans
- -----
Loans are reported at their principal amount net of unearned income. Interest
from installment loans is recognized in income based on the sum-of-the-month's
digits method or accrual method depending on the date the loans were granted.
Both methods result in approximate level rates of return over the terms of the
loans. Interest on real estate mortgages and commercial loans is recognized
as income when earned on the accrual method. The Company's general policy has
been to stop accruing interest on loans when it is determined that a
reasonable doubt exists as to the collectibility of additional interest.
Loan origination fees and certain direct loan origination costs are being
deferred and the net amount amortized as an adjustment of the related loan
yield. The Company is amortizing these amounts over the contractual lives of
the related loans.
In general, fixed rate, permanent residential mortgage loans originated by the
Bank are held for sale and are carried at the aggregate lower of cost or
market. Such loans are sold to Federal Home Loan Mortgage Corporation
("Freddie Mac") and serviced by the Bank. In May, 1995, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 122, "Accounting for Mortgage Servicing Rights," that
became effective for the Company January 1, 1996. This statement allows
enterprises engaged in mortgage banking activities to recognize as separate
assets the rights to service mortgage loans originated for sale. Additionally,
the Company must periodically assess its capitalized mortgage servicing rights
for impairment based on the fair value of those rights. The adoption of
Statement No. 122 did not have a material effect on its consolidated financial
condition or results of operations as of December 31, 1996.
Allowance for Loan Losses
- -------------------------
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a
Loan," as amended by Statement No. 118. Under this Standard, the Company
estimates credit losses on impaired loans based on the present value of
expected cash flows or fair value of the underlying collateral if the loan
6
page 17
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
- ---------------------------------------------------------
Allowance for Loan Losses (Continued)
- -------------------------------------
repayment is expected to come from the sale or operation of such collateral.
Prior to 1995, the credit losses related to these loans were estimated based
on undiscounted cash flows or the fair value of the underlying collateral.
Statement 118 amends Statement 114 to permit a creditor to use existing
methods for recognizing interest income on impaired loans eliminating the
income recognition provisions of Statement 114. The adoption of these
statements did not have a material effect on the Company's financial position
or results of operation.
Impaired loans are commercial and commercial real estate loans for which it is
probable that the Company will not be able to collect all amounts due
according to the contractual terms of the loan agreement. The Company
individually evaluates such loans for impairment and does not aggregate loans
by major risk classifications. The definition of "impaired loans" is not the
same as the definition of "nonaccrual loans," although the two categories
overlap. The Company may choose to place a loan on nonaccrual status due to
payment delinquency or uncertain collectibility, while not classifying the
loan as impaired if the loan is not a commercial or commercial real estate
loan. Factors considered by management in determining impairment include
payment status and collateral value. The amount of impairment for these types
of impaired loans is determined by the difference between the present value of
the expected cash flows related to the loan, using the original interest
rate, and its recorded value, or, as a practical expedient in the case of
collateralized loans, the difference between the fair value of the collateral
and the recorded amount of the loans. When foreclosure is probable,
impairment is measured based on the fair value of the collateral.
Mortgage loans on one-to-four family properties and all consumer loans are
large groups of smaller balance homogeneous loans and are measured for
impairment collectively. Loans that experience insignificant payment delays,
which are defined as 90 days or less, generally are not classified as
impaired. Management determines the significance of payment delays on a
case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
borrower's prior payment record, and the amount of shortfall in relation to
the principal and interest owed.
The allowance for loan losses represents the amount which management estimates
is adequate to provide for potential losses in its loan portfolio. The
allowance method is used in providing for loan losses. Accordingly, all loan
losses are charged to the allowance and all recoveries are credit to it. The
allowance for loan losses is established through a provision for loan losses
charged to operations. The provision for loan losses is based on management's
periodic evaluation of individual loans, economic factors, past loan loss
experience, changes in the composition and volume of the portfolio, and other
relevant factors. The estimates used in determining the adequacy of the
allowance for loan losses, including the amounts and timing of future cash
flows expected on impaired loans, are particularly susceptible to changes in
the near term.
Premises and Equipment
- ----------------------
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed on both the straight-line and accelerated methods
over the estimated useful lives of the assets. Expenditures for maintenance
and repairs are charged against income as incurred. Costs of major additions
and improvements are capitalized.
Real Estate Owned
- -----------------
Real estate owned acquired in settlement of foreclosed loans is carried as a
component of other assets at the lower of cost or fair value minus estimated
cost to sell. Valuation allowances for estimated losses are provided when the
carrying value exceeds the fair value. Direct costs incurred in the
foreclosure process and subsequent holding costs incurred on such properties
are recorded as expenses of current operations.
Intangible Assets
- -----------------
Intangible assets, the excess of cost over fair value of net assets acquired,
is amortized to expense using the straight-line method over the period
estimated to be benefited. Included in other assets is the premium resulting
from the August 19, 1996 purchase of the Harrisville, Pennsylvania branch
office of Mellon Bank, N.A.
Trust Department
- ----------------
Trust Department assets (other than cash deposits) held by the Bank in
fiduciary or agency capacities for its customers are not included in the
balance sheet since such items are not assets of the Bank. In accordance with
industry practice, trust fees are recorded on the cash basis and approximate
the fees which would have been recognized on the accrual basis.
Income Taxes
- ------------
The Company and its subsidiary file a consolidated federal income tax return.
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax rates
are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
Employee Benefits
- -----------------
Pension and employee benefits include contributions, determined actuarially,
to a retirement plan covering the eligible employees of the Bank. The plan is
funded on a current basis to the extent deductible under existing federal tax
regulations.
7
page 18
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
- ---------------------------------------------------------
Earnings Per Share
- ------------------
Earnings per share are calculated using the weighted average number of shares
outstanding. All per share amounts have been restated for the effect of the
10% stock dividend in 1995 and the four-for one stock split in 1996. The
weighted average number of shares outstanding were 1,378,124 for 1996 and
1995.
Cash Flow Information
- ---------------------
The Company has defined cash and cash equivalents as those amounts included in
the balance sheet captions Cash and due from banks, Federal funds sold, and
the demand deposit portion of Interest-bearing deposits in other banks.
Cash payments for interest in 1996 and 1995 were $5,734,818 and $4,744,784,
respectively. Cash payments for income taxes for 1996 and 1995 amounted to
$972,000 and $960,000, respectively.
Non cash investing activity for 1995 included mortgages originated for the
sale of real estate owned totaling $388,200 and foreclosed mortgage loans
transferred to real estate owned of $529,838.
Pending Accounting Pronouncement
- --------------------------------
In June, 1996 the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
statement requires that, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities
it has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. This statement
provides consistent standards of distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. This statement
is effective for transfers and servicing of financial assets and
extinguishment of liabilities occurring after December 31, 1996, and is to be
applied prospectively. Earlier or retroactive application is not permitted.
Management does not anticipate that implementation of this statement will have
a material effect on its consolidated financial condition or results of
operation.
Reclassification of Comparative Amounts
- ---------------------------------------
Certain comparative amounts for the prior year have been reclassified to
conform to current year presentations. Such reclassifications had no effect on
net income.
2. INVESTMENT SECURITIES
- ------------------------
Amortized cost and estimated market values of investment securities are
summarized as follows:
<PAGE>
<TABLE>
<CAPTION>
1996
---------------------------------------------------------
Gross Gross Estimated
Available for Sale Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
U. S. Treasury securities and
obligations of U. S.
Government corporations
and agencies $ 6,657,208 $ 32,541 $ (7,668) $ 6,682,081
Obligations of states and
political subdivisions 16,648,366 224,005 (17,936) 16,854,435
Other securities 357 - (5) 352
Mortgage-backed securities 1,796,764 23,075 (39,686) 1,780,153
------------- ------------- ------------- ------------
Total debt securities 25,102,695 279,621 (65,295) 25,317,021
Common stocks 974,300 - - 974,300
------------- ------------- ------------- ------------
Total $ 26,076,995 $ 279,621 $ (65,295) $ 26,291,321
============= ============= ============ ============
</TABLE>
8
page 19
<PAGE>
2. INVESTMENT SECURITIES (Continued)
- ------------------------------------
<TABLE>
<CAPTION>
1996
---------------------------------------------------------
Gross Gross Estimated
Held to Maturity Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
U. S. Treasury securities and
obligations of U. S.
Government corporations
and agencies $ 2,624,653 $ 446 $ (2,006) $ 2,623,093
Obligations of states and
political subdivisions 8,154,334 56,593 (3,690) 8,207,237
Other securities 100,000 - - 100,000
Mortgage-backed securities 176,109 1,340 - 177,449
------------- ------------- ------------- ------------
Total $ 11,055,096 $ 58,379 $ (5,696) $ 11,107,779
============= ============= ============= ============
</TABLE>
<TABLE>
<CAPTION>
1995
---------------------------------------------------------
Gross Gross Estimated
Available for Sale Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
U. S. Treasury securities and
obligations of U. S.
Government corporations
and agencies $ 4,473,565 $ 36,278 $ (938) $ 4,508,905
Obligations of states and
political subdivisions 4,500,073 37,180 (6,869) 4,530,384
Mortgage-backed securities 2,605,263 32,502 (42,350) 2,595,415
------------- ------------- ------------- ------------
Total debt securities 11,578,901 105,960 (50,157) 11,634,704
Common stock 725,300 - - 725,300
------------- ------------- ------------- ------------
Total $ 12,304,201 $ 105,960 $ (50,157) $ 12,360,004
============= ============= ============ ============
</TABLE>
<TABLE>
<CAPTION>
1995
---------------------------------------------------------
Gross Gross Estimated
Held to Maturity Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
U. S. Treasury securities and
obligations of U. S.
Government corporations
and agencies $ 2,499,333 $ 11,726 $ (747) $ 2,510,312
Obligations of states and
political subdivisions 10,444,821 94,212 (10,605) 10,528,428
Other securities 102,500 - (63) 102,437
Mortgage-backed securities 348,319 5,003 (152) 353,170
------------- ------------- ------------- ------------
Total $ 13,394,973 $ 110,941 $ (11,567) $ 13,494,347
============= ============= ============= ============
</TABLE>
The amortized cost and estimated market value of debt securities at December
31, 1996, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<PAGE>
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
---------------------------- ---------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Due in one year or less $ 410,000 $ 415,093 $ 3,713,336 $ 3,717,003
Due after 1 year through 5 years 7,622,851 7,649,767 3,970,960 4,009,837
Due after 5 years through 10 years 7,407,317 7,437,312 3,095,524 3,103,489
Due after 10 years 9,662,527 9,814,849 275,276 277,450
------------- ------------- ------------- ------------
Total $ 25,102,695 $ 25,317,021 $ 11,055,096 $ 11,107,779
============= ============= ============= ============
</TABLE>
Investment securities with a carrying value and estimated market value of
$14,358,262 and $14,495,220, respectively, at December 31, 1996, and
$7,491,121 and $7,534,779, respectively, at December 31, 1995 were pledged to
secure public deposits and other purposes as required by law.
9
page 20
<PAGE>
3. LOANS
- --------
Major classifications of loans are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Real Estate:
Construction $ 1,465,853 $ 2,967,217
Residential 70,900,718 58,432,522
Commercial, financial and agricultural 23,312,222 23,283,073
Commercial 18,083,744 13,283,169
Consumer 27,539,532 24,852,564
------------- -------------
141,302,069 122,818,545
Less unearned income 16,550 71,955
------------- -------------
141,285,519 122,746,590
Less allowance for loan losses 1,176,951 1,098,298
------------- -------------
Net loans $ 140,108,568 $ 121,648,292
============= =============
</TABLE>
Real estate loans serviced for Freddie Mac, which are not included in the
consolidated balance sheet, totaled $20,341,070 and $16,887,433 at December
31, 1996 and 1995, respectively.
In the normal course of business, loans are extended to directors, executive
officers, and their associates. In management's opinion, all of these loans
are on substantially the same terms and conditions as loans to other
individuals and businesses of comparable creditworthiness. A summary of loan
activity for those directors, executive officers, and their associates with
aggregate loan balances in excess of $60,000 for the year ended December 31,
1996, is as follows:
Balance Balance
December 31, Amounts December 31,
1995 Additions Collected 1996
------------- ----------- ----------- -------------
$ 1,161,820 6,715,008 5,891,723 $ 1,985,105
The Company's primary business activity is with customers located within its
local trade area. Commercial, residential, personal, and agricultural loans
are granted. Although the Company has a diversified loan portfolio at
December 31, 1996, loans outstanding to individuals and businesses are
dependent upon the local economic conditions in the immediate trade area.
4. ALLOWANCE FOR LOAN LOSSES
- ----------------------------
Changes in the allowance for loan losses for the years ended December 31, 1996
and 1995, are as follows:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Balance, January 1 $ 1,098,298 $ 1,037,399
Add:
Provision charged to operations 200,000 275,000
Recoveries 30,447 25,952
Less loans charged off 151,794 240,053
------------- -------------
Balance, December 31 $ 1,176,951 $ 1,098,298
============ =============
</TABLE>
At December 31, 1996 and 1995, the recorded investment in loans which are
considered to be impaired was $738,551 and $999,535, of which $142,093 and
$593,893 was considered to be nonaccrual. In addition, $110,783 and $150,000
of the related allowance for loan losses has been allocated for these impaired
loans. At December 31, 1996 and 1995, there were commitments for unfunded
letters of credit totaling $146,850 to a borrower with outstanding loans
considered to be impaired.
The average recorded investment in impaired loans during the year ended
December 31, 1996 and 1995, was approximately $824,611 and $987,378. For the
years ended December 31, 1996 and 1995, interest income totaling $62,799 and
$44,839 was recognized on impaired loans, of which $39,310 and $41,884 was
recognized using the cash basis method of income recognition.
10
page 21
<PAGE>
5. PREMISES AND EQUIPMENT
- -------------------------
Major classifications of premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Land $ 544,134 $ 520,634
Bank buildings 3,739,186 3,604,426
Furniture, fixtures, and equipment 3,614,432 3,283,359
------------- -------------
7,897,752 7,408,419
Less accumulated depreciation 4,260,722 3,707,934
------------- -------------
Total $ 3,637,030 $ 3,700,485
============= =============
</TABLE>
Depreciation charged to operations was $552,788 in 1996 and $474,620 in 1995.
6. DEPOSITS
- -----------
Time deposits include certificates of deposit and other time deposits in
denominations of $100,000 or more. Such deposits totaled $15,077,000 and
$14,962,000 at December 31, 1996 and 1995, respectively.
7. INCOME TAXES
- ---------------
The provision for Federal income taxes consists of:
<PAGE>
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Currently payable $ 985,253 $ 968,724
Deferred 9,870 87,607
------------- -------------
Total provision $ 995,123 $ 1,056,331
============= =============
</TABLE>
The tax effects of deductible and taxable temporary differences that give rise
to significant portions of the deferred tax assets and deferred tax
liabilities at December 31, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 337,421 $ 282,317
Deferred loan origination fees, net 71,261 78,578
Premises and equipment 12,650 51,411
Fair market value in excess of
carrying value of loans 41,466 45,251
Other, net 6,493 -
------------- -------------
Total 469,291 457,557
------------- -------------
Deferred tax liabilities:
Unrealized gain on securities 72,871 18,973
Prepaid pension asset 96,795 71,878
Other 3,714 7,027
------------- -------------
Total 173,380 97,878
------------- -------------
Net deferred tax assets $ 295,911 $ 359,679
============= =============
</TABLE>
The Company has paid sufficient taxes in the current and prior years to
warrant recording the full deferred tax asset without a valuation allowance.
The reconciliation between the federal statutory rate and the Company's
effective consolidated income tax rate is as follows:
<TABLE>
<CAPTION>
1996 1995
----------------------------- ----------------------------
% of % of
Pre-tax Pre-tax
Amount Income Amount Income
------------- -------- ------------ --------
<S> <C> <C> <C> <C>
Federal income tax at statutory
rate $ 1,246,308 34.0 % $ 1,208,982 34.0 %
Tax-exempt income (310,905) (8.5) (184,665) (5.2)
Non-deductible interest to carry
tax exempt assets 43,129 1.2 24,910 0.7
Other 16,591 0.4 7,104 0.2
------------- -------- ------------ --------
Actual expense and effective
rate $ 995,123 27.1 % $ 1,056,331 29.7 %
============= ======== ============ ========
</TABLE>
11
page 22
<PAGE>
8. SHORT-TERM BORROWINGS
- ------------------------
Short-term borrowings include two types of borrowings with the Federal Home
Loan Bank of Pittsburgh. FHLB "RepoPlus" advances are short-term borrowings
maturing within one year, bear a fixed rate of interest and are subject to
prepayment penalty. As of December 31, 1996, the Company's total borrowing
limit was $49,396,000 for the RepoPlus advances.
FHLB "Flexline" advances also mature within one year and bear a
variable rate of interest that adjusts daily. There are no prepayment
penalties for these borrowings. As of December 31, 1996, the Company's total
borrowing limit was $4,172,000 for the Flexline advances. Both FHLB credit
products are subject to annual renewal, incur no service charges, and are
secured by a blanket security agreement on outstanding residential mortgages.
As of December 31, 1996 short-term borrowings were comprised of $9,000,000 in
RepoPlus advances. FHLB Flexline advances in the amount of $1,300,000 were
outstanding as of December 31, 1995.
9. LONG-TERM DEBT
- -----------------
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Long-term FHLB advances $ 720,568 $ 898,350
Real estate mortgage payable,
due in monthly installments
of $945, including interest of 10.5% 33,081 40,513
------------- -------------
Total $ 753,649 $ 938,863
============= =============
</TABLE>
Long-term advances from the FHLB consist of a series of borrowings with
maturities ranging from one to four years, each with fixed interest rates
ranging from 4.87% to 6.91%. The weighted average interest rate as of
December 31, 1996, was 6.11%. Pursuant to a collateral agreement entered into
with the FHLB, these advances are secured by stock in the FHLB and qualifying
first mortgage loans.
Principal repayments on long-term debt are scheduled as follows:
Weighted
Average
Year Principal Rate
-------- ------------- -----------
1997 $ 193,146 5.85%
1998 209,838 6.23%
1999 227,996 6.39%
2000 89,588 5.73%
-------------
Total $ 720,568
=============
10.BENEFIT PLANS
- ----------------
Defined Benefit Plan
- --------------------
The Bank sponsors a trusteed, noncontributory defined benefit pension plan
covering substantially all employees and officers. The plan calls for
benefits to be paid to eligible employees at retirement based primarily upon
years of service with the Bank and compensation rates near retirement.
Pension expense includes the following components:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Service cost of the current period $ 100,086 $ 89,067
Interest cost on projected benefit obligation 73,403 59,374
Return on plan assets (141,713) (118,307)
Net amortization and deferral 68,681 43,384
------------- -------------
Net periodic pension cost $ 100,457 $ 73,518
============= =============
</TABLE>
The actuarial present value of accumulated benefit obligations at December 31,
1996 and 1995 was $573,573 and $456,165 including vested benefit obligations
of $566,219 and $446,869. The following table sets forth the unfunded status
and amounts recognized in the balance sheets at December 31, 1996 and 1995:
12
page 23
<PAGE>
10. BENEFIT PLANS (Continued)
- -----------------------------
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Plan assets at fair value $ 1,263,886 $ 988,534
Projected benefit obligation 1,091,394 978,706
------------- -------------
Funded status 172,492 9,828
Unrecognized prior service cost 11,610 13,015
Unrecognized net loss from past
experience different from
that assumed 126,931 246,094
Unrecognized net transition asset (36,799) (41,049)
------------- -------------
Prepaid pension cost $ 274,234 $ 227,888
============= =============
</TABLE>
Plan assets consist primarily of certificates of deposit, money market and
equity mutual funds.
The weighted discount rate used to measure the projected benefit obligation is
7.5%, the rate of increase in future compensation levels is 5.0%, and the
long-term rate of return on assets is 7.5%. The Bank uses the straight-line
method of amortization for prior service cost and unrecognized gains and
losses.
Stock Option Plan
- -----------------
On January 21, 1997, the Board of Directors approved, subject to shareholder
ratification at the annual meeting, the formation of the 1997 Incentive Stock
Option Plan ("ISOP") and the 1997 Directors Stock Option Plan ("Directors
Plan"). The ISOP will provide for granting up to 100,000 shares of
authorized but unissued common stock to eligible salaried employees. The
Directors Plan will provide for 36,000 authorized but unissued shares of
common stock to be granted to nonemployee directors. The per share exercise
price of an option granted will not be less than the fair value of a share of
common stock on the date the option is granted.
11. COMMITMENTS AND CONTINGENT LIABILITIES
- -----------------------------------------
Commitments
- -----------
In the normal course of business, there are various outstanding commitments
and contingent liabilities which are not reflected in the accompanying
financial statements. These commitments were comprised of the following at
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Commitments to extend credit $ 23,097,600 $ 19,230,000
Standby letters of credit and financial guarantees 539,400 284,000
------------- -------------
Total $ 23,637,000 $ 19,514,000
============= =============
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Standby
letters of credit are conditional commitments issued by the Bank guaranteeing
performance by a customer to a third party. Those guarantees are issued
primarily to support public and private borrowing arrangements including
commercial paper, bond financing, and similar transactions.
Such commitments and standby letters of credit involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized
in the financial statements.
The exposure to loss under these commitments is limited by subjecting them to
credit approval and monitoring procedures. The amount of collateral obtained,
if deemed necessary by the Company, upon the extension of credit is based on
management's credit evaluation of the counterparty. Substantially all of the
commitments to extend credit are contingent upon customers maintaining
specific credit standards at the time of the loan funding. Management
assesses the credit risk associated with certain commitments to extend credit
in determining the level of the allowance for loan losses. Since many of the
commitments are expected to expire without being drawn upon, the total
contractual amounts do not necessarily represent future funding requirements.
Contingent Liabilities
- ----------------------
The Bank is involved in various legal actions from normal business activities.
Management believes that the liability, if any, arising from such litigation
will not have a material adverse effect on the Company's financial position.
12. COMMON STOCK
- ---------------
During the first quarter of 1996, the Board of Directors of the Company
approved an increase in the number of shares authorized from 1,000,000 to
3,000,000. On April 9, 1996, the Board of Directors approved a four-for-one
stock split to shareholders of record on June 1, 1996. The par value of the
stock was reduced from $1.00 per share to $0.25 per share. As a result of the
stock split, the number of authorized shares was increased to 12,000,000.
13
page 24
<PAGE>
12. COMMON STOCK (Continued)
- ---------------------------
On October 17, 1995, the Board of Directors declared a 10% stock dividend to
stockholders of record on November 15, 1995. The fractional shares resulting
from the stock dividend were paid in cash.
Average shares outstanding and all per share amounts included in the financial
statements are based on the increased number of shares giving retroactive
effect to the stock split and stock dividend.
13. REGULATORY RESTRICTIONS
- --------------------------
Cash and Due from Banks
- -----------------------
Included in cash and due from banks are reserves required by the district
Federal Reserve Bank of $1,215,000 and $1,043,000 and at December 31, 1996 and
1995. The required reserves are computed by applying prescribed ratios to the
classes of average deposit balances. These are held in the form of cash on
hand and a balance maintained directly with the Federal Reserve Bank.
Dividends
- ---------
Under the National Bank Act, the approval of the Comptroller of the Currency
is required if dividends declared by the subsidiary bank in any one year
exceed the net profits of that year as defined, combined with net retained
profit from the two preceding years. Using this formula, the amount available
for payment of dividends in 1997, without approval of the Comptroller, will be
limited to $3,725,775 plus net profits retained up to the date of the dividend
declaration.
14. CAPITAL REQUIREMENTS
- ------------------------
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal regulatory agencies. Failure to
meet minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary actions by the regulators that, if undertaken, could
have a direct material effect on the Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and the Bank must meet specific capital guidelines that
involve quantitative measures of the entities' assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Company's and the Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weighting, and other factors.
Quantitative measures established by the regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of
Total and Tier I capital (as defined in the regulations) to risk-weighted
assets (as defined) and of Tier I capital to average assets (as defined).
Management believes as of December 31, 1996 that the Company and the Bank meet
all capital adequacy requirements to which they are subject.
As of December 31, 1996, the most recent notification from the Federal Reserve
Board has categorized the Company as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized, the Company must maintain minimum Total risk-based, Tier I
risk-based, and Tier I leverage ratios at least 100 to 200 basis points above
those ratios set forth in the table. There have been no conditions or events
since that notification that management believes have changed the Company's
category.
The following table reflects the Company's capital ratios and minimum
requirements at December 31. The Bank's capital ratios are substantially the
same as the Company's.
<TABLE>
<CAPTION>
1996 1995
----------------------------- -----------------------------
Amount Ratio Amount Ratio
------------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets)
- ---------------------------------------
Company $ 19,303,842 14.52 % $ 19,374,880 16.60 %
To be "Well Capitalized" 13,298,500 10.00 11,669,500 10.00
For Capital Adequacy Purposes 10,638,800 8.00 9,335,600 8.00
Tier I Capital (to Risk Weighted Assets)
- ---------------------------------------
Company $ 18,126,891 13.63 % $ 18,276,582 15.66 %
To be "Well Capitalized" 7,979,100 6.00 7,001,700 6.00
For Capital Adequacy Purposes 5,319,400 4.00 4,667,800 4.00
Tier I Capital (to Average Total Assets)
- ---------------------------------------
Company $ 18,126,891 9.55 % $ 18,276,582 11.59 %
To be "Well Capitalized" 9,491,100 5.00 7,884,815 5.00
For Capital Adequacy Purposes 7,592,880 4.00 6,307,852 4.00
</TABLE>
14
page 25
<PAGE>
15.FAIR VALUE DISCLOSURE
- ------------------------
Financial instruments are as cash, evidence of ownership interest in an
entity, or a contract which creates an obligation or right to receive or
deliver cash or another financial instrument from/to a second entity on
potentially favorable or unfavorable terms.
Fair value is defined as the amount at which a financial instrument could be
exchanged in a current transaction between willing parties other than in a
forced or liquidation sale. If a quoted market price is available for a
financial instrument, the estimated fair value would be calculated based upon
the market price per trading unit of the instrument.
If no readily available market exists, the fair value estimates for financial
instruments should be based upon management's judgment regarding current
economic conditions, interest rate risk, expected cash flows, future estimated
losses, and other factors as determined through various option pricing
formulas or simulation modeling. As many of these assumptions result from
judgments made by management based upon estimates which are inherently
uncertain, the resulting estimated fair values may not be indicative of the
amount realizable in the sale of a particular financial instrument. In
addition, changes in assumptions on which the estimated fair values are based
may have a significant impact on the resulting estimated fair values.
As certain assets such as deferred tax assets and premises and equipment are
not considered financial instruments, the estimated fair value of financial
instruments would not represent the full value of the Company.
The Company employed simulation modeling in determining the estimated fair
value of financial instruments for which quoted market prices were not
available based upon the following assumptions:
Cash and Due from Banks, Interest-Bearing Deposits in Other Banks, Federal
Funds Sold, Short-Term Borrowings, Accrued Interest Receivable, and Accrued
Interest Payable
- --------------------------------------------------------------------------
The fair value is equal to the current carrying value.
Investment Securities and Mortgage Loans Held for Sale
- ------------------------------------------------------
The fair value of investment securities held as investments and mortgage loans
held for sale is equal to the available quoted market price. If no quoted
market price is available, fair value is estimated using the quoted market
price for similar securities and loans. The fair value of investment
securities available for sale is equal to the current carrying value.
Loans, Deposits, and Long-Term Debt
- -----------------------------------
The fair value of loans is estimated by discounting the future cash flows
using a simulation model which estimates future cash flows and employs
discount rates that consider reinvestment opportunities, operating expenses,
non-interest income, credit quality, and prepayment risk. Demand, savings,
and money-market deposit accounts are valued at the amount payable on demand
as of year end. Fair values for time deposits, and long-term debt are
estimated using a discounted cash flow calculation that applies contractual
costs currently being offered in the existing portfolio to current market
rates being offered for deposits and notes of similar remaining maturities.
Commitments to Extend Credit
- ----------------------------
These financial instruments are generally not subject to sale, and estimated
fair values are not readily available. The carrying value, represented by the
net deferred fee arising from the unrecognized commitment or letter of credit,
and the fair value, determined by discounting the remaining contractual fee
over the term of the commitment using fees currently charged to enter into
similar agreements with similar credit risk, are not considered material for
disclosure. The contractual amounts of unfunded commitments and letters of
credit are presented in Note 11.
The estimated fair value of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
1996 1995
---------------------------- ----------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Financial assets:
Cash, interest-bearing
deposits in other banks
and federal funds $ 8,768,535 $ 8,768,535 $ 7,146,575 $ 7,146,575
Mortgage loans held for sale 1,296,047 1,296,047 1,592,950 1,592,950
Investment securities 37,346,417 37,399,100 25,754,977 25,854,351
Net loans 140,108,568 140,249,835 121,648,292 122,768,000
Accrued interest receivable 1,434,346 1,434,346 1,105,407 1,105,407
------------- ------------- ------------- -------------
Total $ 188,953,913 $ 189,147,863 $ 157,248,201 $ 158,467,283
============= ============= ============= =============
Financial liabilities:
Deposits $ 164,779,203 $ 165,319,536 $ 140,664,395 $ 141,735,891
Short-term borrowings 9,000,000 9,000,000 1,300,000 1,300,000
Long-term debt 753,649 753,649 938,863 1,087,447
Accrued interest payable 567,159 567,159 541,352 541,352
------------- ------------- ------------- -------------
Total $ 175,100,011 $ 175,640,344 $ 143,444,610 $ 144,664,690
============= ============= ============= =============
</TABLE>
15
page 26
<PAGE>
16. BRANCH ACQUISITION
- ----------------------
On August 19, 1996, the Bank acquired certain assets and deposit liabilities
of the Harrisville, Pennsylvania office of Mellon Bank, N.A. The transaction
was accounted for as a purchase. The Bank assumed deposit liabilities of
$19,754,546 and acquired cash and premises and equipment totaling $382,333.
The premium paid to acquire this office amounted to $2,093,982. This amount is
shown in premises and equipment and other assets. The identifiable portion of
the premium is being amortized over a seven year period, while the goodwill
portion acquired is being amortized over a fifteen year period.
17. PARENT COMPANY
- -----------------
Following are condensed financial statements for the parent company:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEET
December 31,
1996 1995
------------- -------------
<S> <C> <C>
ASSETS
Cash $ 4,988 $ 4,182
Investment in bank subsidiary 20,267,361 18,278,649
Other assets 24,351 30,581
------------- -------------
Total assets $ 20,296,700 $ 18,313,412
============= =============
STOCKHOLDERS' EQUITY
Common Stock $ 344,531 $ 344,531
Additional Paid-In Capital 10,676,129 10,676,129
Retained Earnings 9,134,585 7,255,922
Unrealized gain on investments 141,455 36,830
------------- -------------
Total stockholders' equity $ 20,296,700 $ 18,313,412
============= =============
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF INCOME
Year Ended December 31,
1996 1995
------------- -------------
<S> <C> <C>
INCOME
Dividends from subsidiary $ 822,428 $ 683,443
EXPENSES 54,586 38,837
------------- -------------
Income before income tax benefit 767,842 644,606
Income tax benefit (18,559) (13,205)
------------- -------------
Income before equity in undistributed
net income of subsidiary 786,401 657,811
Equity in undistributed net income of subsidiary 1,884,087 1,841,688
------------- -------------
NET INCOME $ 2,670,488 $ 2,499,499
============= =============
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF CASH FLOWS
Year Ended December 31,
1996 1995
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 2,670,488 $ 2,499,499
Adjustments to reconcile net income
to net cash provided by
operating activities:
Equity in undistributed net income
of subsidiary (1,884,087) (1,841,688)
Amortization 11,584 11,584
Other (5,354) (3,838)
------------- -------------
Net cash provided
by operating activities 792,631 665,557
------------- -------------
FINANCING ACTIVITIES
Cash dividends (791,825) (658,203)
Cash paid in lieu of fractional shares - (16,548)
------------- -------------
Net cash used for financing activities (791,825) (674,751)
------------- -------------
Increase (decrease) in cash 806 (9,194)
CASH AT BEGINNING OF PERIOD 4,182 13,376
------------- -------------
CASH AT END OF PERIOD $ 4,988 $ 4,182
============= =============
</TABLE>
16
page 27
<PAGE>
REPORT OF INDEPENDENT AUDITORS
- ------------------------------
SNODGRASS
Certified Public Accountants
Board of Directors and Stockholders
Slippery Rock Financial Corporation
We have audited the accompanying consolidated balance sheet of Slippery Rock
Financial Corporation and subsidiary as of December 31, 1996 and 1995, and the
related consolidated statements of income, changes in stockholders' equity,
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Slippery
Rock Financial Corporation and subsidiary as of December 31, 1996 and 1995,
and the results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
As explained in the notes to the consolidated financial statements, effective
January 1, 1995, the Company changed its method of accounting for the
impairment of loans and the related allowance for loan losses.
/s/ S.R.Snodgrass A.C.
Wexford, PA
March 1, 1997
S.R. Snodgrass, A.C.
101 Bradford Road Wexford, PA 15090-6909 Phone: 412-934-0344
Facsimile: 412-934-0345
17
page 28
<PAGE>
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF OPERATING RESULTS AND FINANCIAL CONDITION
- -----------------------------------------------------
OVERVIEW
- --------
Slippery Rock Financial Corporation ("Company") is the parent holding company
for The First National Bank of Slippery Rock ("Bank"). This discussion and
the related financial data represent predominantly the financial condition and
results of operations of the Bank for the two years ended December 31, 1996,
and is presented to assist in the understanding and evaluation of the
financial condition and the results of operations of the Company and is
intended to supplement, and should be read in conjunction with, the
consolidated financial statements and the related notes.
Management is not aware of any current recommendations by the regulatory
agencies that will have a material effect on future earnings, liquidity or
capital of the Company.
RESULTS OF OPERATIONS
- ---------------------
Net income for 1996 was $2,670,000, an increase of $171,000 from 1995's
earnings of $2,499,000. An increase in net interest income after provision
for loan losses of $449,000 was offset by a net decrease in total other income
of $56,000 and a net increase in total other expense of $284,000. Income
before taxes at December 31, 1996 was $3,665,000 an increase of $110,000 or
3.09% from the $3,555,000 reported at December 31, 1995. Federal income taxes
of $995,000 at December 31, 1996 represents a decrease of $61,000 from the
$1,056,000 reported at December 31, 1995.
Earnings per share, after the retroactive effect of a four for one stock split
on June 30, 1996 and a ten percent stock dividend paid on December 28, 1995,
of $1.94 at December 31, 1996 compares to $1.81 at December 31, 1995, an
increase of $0.13 per share.
NET INTEREST INCOME
- -------------------
Net interest income is the amount by which interest generated from interest
earning assets exceeds interest paid on interest-bearing liabilities. Net
interest income, on a tax equivalent basis, which is the primary component of
earnings, was $8,450,000 for 1996, as compared to $7,888,000 for 1995.
Annual Net Income
Thousands
(BAR GRAPH IN THIS AREA)
$1,778 $2,209 $2,266 $2,499 $2,670
- ----------------------------------
1992 1993 1994 1995 1996
Earnings Per Share
Dollars
(BAR GRAPH IN THIS AREA)
$1.29 $1.60 $1.64 $1.81 $1.94
- -------------------------------------
1992 1993 1994 1995 1996
Dividends Paid Per Share
Dollars
(BAR GRAPH IN THIS AREA)
$0.27 $0.34 $0.39 $0.48 $0.57
- --------------------------------------
1992 1993 1994 1995 1996
- -------------------------------------
18
page 29
<PAGE>
The following table is an analysis of the average balance sheets and the net
interest income for each of the years in the three year period ended December
31, 1996.
Slippery Rock Financial Corporation
AVERAGE BALANCE SHEETS AND NET INTEREST ANALYSIS
- ------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------ ------------------------------ ------------------------------
Average Average Average
Volume(4) Interest Yield Volume(4) Interest Yield Volume(4) Interest Yield
--------- -------- ------- -------- -------- ------- -------- -------- -------
ASSETS (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Investment securities:
Taxable $ 10,614 $ 663 6.25% $ 8,374 $ 531 6.34% $ 8,075 $ 485 6.01%
Non-taxable (2) 17,573 1,275 7.26 11,312 817 7.22 13,347 994 7.45
Interest-bearing deposits
in other banks 233 10 4.29 115 10 8.70 103 11 10.68
Loans (1), (2), (3) 132,278 12,090 9.14 118,201 11,137 9.42 110,261 9,760 8.85
Federal funds sold 3,260 173 5.31 4,615 271 5.87 3,089 134 4.34
--------- -------- --------- -------- --------- --------
Total interest-earning
assets 163,958 14,211 8.67 142,617 12,766 8.95 134,875 11,384 8.44
-------- -------- --------
Noninterest-earning assets
Cash and due from banks 5,896 5,541 6,348
Allowance for loan losses (1,153) (1,020) (1,025)
Other assets 6,663 5,511 5,065
-------- -------- --------
Total assets $175,364 $152,649 $145,263
======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing liabilities
Interest bearing checking $ 18,717 407 2.17 $ 16,137 367 2.27 $ 15,525 378 2.43
Money market accounts 21,609 828 3.83 15,442 438 2.84 17,617 458 2.60
Savings deposits 17,904 450 2.51 17,500 470 2.69 19,501 554 2.84
Time deposits 70,481 3,878 5.50 63,080 3,531 5.60 55,116 2,569 4.66
Borrowed funds 3,297 198 6.01 1,121 72 6.42 1,556 90 5.78
--------- -------- --------- -------- --------- --------
Total interest-bearing
liabilities 132,008 5,761 4.36 113,280 4,878 4.31 109,315 4,049 3.70
-------- -------- --------
Noninterest-bearing liabilities
Demand deposits 23,227 21,311 19,881
Other liabilities 750 609 446
Stockholders' equity 19,379 17,449 15,621
-------- -------- --------
Total liabilities
and stockholders'
equity $175,364 $152,649 $145,263
======== ======== ========
Net interest income and net
yield on interest-earning
assets $ 8,450 5.15% $ 7,888 5.53% $ 7,335 5.44%
======== ======== ========
</TABLE>
[FN]
(1) Interest on loans includes fee income.
(2) Yields on interest-earning assets have been computed on a
taxable-equivalent basis using the federal income tax statutory rate of 34%.
(3) Nonaccrual loans and loans held for sale included.
(4) Daily average balances.
19
page 30
<PAGE>
ANALYSIS OF CHANGES IN NET INTEREST INCOME
- ------------------------------------------
(Dollars in Thousands)
<TABLE>
<CAPTION>
1996 CHANGE FROM 1995 1995 CHANGE FROM 1994
------------------------------- -----------------------------
TOTAL CHANGE DUE TO TOTAL CHANGE DUE TO
CHANGE VOLUME(1)(5) RATE(1) CHANGE VOLUME(1)(5) RATE(1)
------ --------------------- ------ --------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME ON:
Taxable investment securities $ 132 $ 140 $ (8) $ 46 $ 18 $ 28
Non-taxable investments(3) 458 453 5 (177) (147) (30)
Interest-bearing deposits in
other banks 0 7 (7) (1) 1 (2)
Loans(2)(3)(4) 953 1,292 (339) 1,377 728 649
Federal funds sold (98) (74) (24) 137 80 57
------- -------- -------- ------- -------- -------
Total interest income 1,445 1,818 (373) 1,382 680 702
------- -------- -------- ------- -------- -------
INTEREST EXPENSE ON:
Interest bearing checking 40 57 (17) (11) 15 (26)
Money market accounts 390 209 181 (20) (60) 40
Savings deposits (20) 12 (32) (84) (56) (28)
Time deposits 347 411 (64) 962 400 562
Borrowed funds 126 131 (5) (18) (27) 9
------- -------- -------- ------- -------- -------
Total interest expense 883 820 63 829 272 557
------- -------- -------- ------- -------- -------
NET INTEREST INCOME $ 562 $ 998 $ (436) $ 553 $ 408 $ 145
======= ======== ======== ======= ======== =======
</TABLE>
[FN]
(1) Changes in interest income/expense not arising from volume or rate
variances are allocated proportionately to rate and volume.
(2) Interest on loans includes fee income.
(3) Yields on interest-earning assets have been computed on a
taxable-equivalent basis using the federal income tax statutory rate of 34%.
(4) Nonaccrual loans and loans held for sale included.
(5) Daily average balances.
Interest income and interest expense increases or decreases as the volumes of
interest sensitive assets and liabilities and interest rates fluctuate.
Average interest-earning assets increased $21,341,000 in 1996, while
interest-bearing liabilities increased $18,728,000.
The yield on average interest-earning assets decreased in 1996 to 8.67% from a
level of 8.95% in 1995. The decrease is due to lower market rates during the
period. Prime rate, for example, which is the rate that banks charge to their
highest credit quality commercial customers, declined steadily throughout 1995
from a peak level of 9.00% in February 1995 to 8.25% at December 31, 1996.
Accordingly, tax equivalent loan yields decreased in 1996 to 9.14%, a decrease
of 28 basis points from a yield of 9.42% in 1995.
Despite the general reduction in interest rates relative to their position at
December 31, 1995, the yield on average interest-bearing liabilities increased
from a level of 4.31% at December 31, 1995 to 4.36% at December 31, 1996. The
increase in the Company's cost of funds is due to an increase in yields paid
on money market accounts. In 1996, in an effort to maintain existing deposits
and to attract new depositors, the Company began offering a tiered money
market product. Three separate tiers were established, each paying an
attractive market interest rate based on balances maintained in the account.
Average volumes for the money market product also increased during the period,
increasing from a level of $15,442,000 at December 31, 1995 to a level of
$21,609,000 at December 31, 1996. The effect of the reduction in yields on
interest-earning assets and the increase in the cost of interest-bearing
liabilities was that the net interest margin at December 31, 1996 decreased
from that of December 31, 1995. Net interest margin at December 31, 1996 was
5.15%, as compared to 5.53% at December 31, 1995. In addition, there is a
time lag between changes in interest rates and their effect on the Bank's cost
of funds. If interest rates rise, it would be expected that the yield on
assets and the cost of funds would also increase, however, the effect upon the
net interest margin would be dependent upon the extent of the increase in
rates, the timing of the change and the general composition of the mix of
interest-earning assets and interest-bearing liabilities.
Total Assets
Millions
(BAR GRAPH IN THIS AREA)
$126,783 $141,268 $147,374 $162,011 $195,713
- ----------------------------------------------------
1992 1993 1994 1995 1996
- ----------------------------------------------------
Return on Average Assets
Percentage
(BAR GRAPH IN THIS AREA)
1.45% 1.66% 1.56% 1.64% 1.52%
- ----------------------------------------------------
1992 1993 1994 1995 1996
- ----------------------------------------------------
Return on Stockholders' Equity
Percentage
(BAR GRAPH IN THIS AREA)
14.43% 15.78% 14.51% 14.32% 13.78%
- ----------------------------------------------------
1992 1993 1994 1995 1996
- ----------------------------------------------------
20
page 31
<PAGE>
OTHER INCOME AND OTHER EXPENSE
- ------------------------------
Other operating income for 1996 totaled $846,000, a decrease of $56,000 or
6.2% from $902,000 at December 31, 1995. The principal sources of other
income are service charges, fees and commissions. The decrease in other
income for 1996 resulted primarily from decreased fees and service charges on
deposit accounts, which decreased $17,000 and to a reduction in gains and
losses recorded on the sales of loans, which decreased $56,000. The reduction
in deposit account service charges resulted from a reduction in non-sufficient
funds ("NSF") check charges due to volume reductions. A net loss of $21,000
at December 31, 1996 on the sale of $5,197,000 of fixed rate, residential
mortgages compared to a net gain of $35,000 on the sale of $4,432,000 at
December 31, 1995.
Total other expenses of $4,964,000 at December 31, 1996 represents an increase
of $285,000 from $4,679,000 at December 31, 1995. The increase in other
expenses was brought about by those items that are generally thought to be
recurring in nature. Those items would include salaries and benefits,
occupancy, and supplies expense. In addition to the normal recurring
increases, equipment expense increased $105,000 in 1996, due to increased
depreciation expense of $63,000, of which $15,000 was attributed to the
Harrisville branch acquisition, and to an increase in equipment maintenance
expense of $42,000. The increase in maintenance expense was due primarily to
annual hardware and software agreements purchased for the check imaging and
loan and deposit document preparation systems recorded during the fourth
quarter of 1995 and the first quarter of 1996. One-time expenses charged to
operations for the branch purchase totaled $56,000 and was comprised of
various legal fees, check printing fees and data processing conversion fees.
In addition, amortization of the intangible asset resulting from the
Harrisville acquisition was $65,000 at December 31, 1996. FDIC insurance
expense was $2,000 at December 31, 1996, a reduction of $147,000 from the
$149,000 paid in 1995. As a result of legislation enacted for the
recapitalization of the Savings Insurance Fund ("SAIF") on September 30, 1996,
the Company does expect FDIC insurance costs to increase to approximately
$20,000 in 1997.
INCOME TAXES
- ------------
Federal income taxes for 1996 of $995,000 represented a 5.8% decrease from the
$1,056,000 reported in 1995, the decline is due to an increase in tax-exempt
interest income which increased 67.5% to $909,000 in 1996. Tax-exempt income
increased due to an increase in tax-exempt bonds which were purchased with
proceeds from the branch acquisition. Average tax-exempt investments at
December 31, 1996 were $17,573,000 an increase of $6,261,000 from the
$11,312,000 reported at December 31, 1995. As a result, the Company's
effective tax rate decreased to 27.1% in 1996 from 29.7% in 1995.
FINANCIAL CONDITION
- -------------------
Average total interest-earning assets increased $21.3 million in 1996,
primarily from increases in average loan balances, which increased $14 million
or 11.9% and increases in average tax-exempt investment securities of $6.2
million. The increase in average interest earning assets was funded by an
increase in average deposits of $18.5 million or 13.8%. Total assets at
December 31, 1996 were $195,713,000, an increase of $33.7 million or 20.8%
from the $162,011,000 reported at December 31, 1995. Total deposits at
December 31, 1996 were $164,779,000, an increase of $24,115,000 or 17.1%.
Exclusive of the branch acquisition, total deposits at December 31, 1996 were
$145,305,000.
On August 19, 1996, the Bank acquired certain assets and deposit liabilities
of the Harrisville, Pennsylvania office of Mellon Bank, N.A. The transaction
was recorded as a branch purchase. The Bank assumed deposit liabilities of
approximately $19.8 million and acquired cash and premises and equipment
totaling $382,000. The premium paid to acquire this office amounted to
$2,094,000. These amounts are shown in premises and equipment and other
assets. The identifiable portion of the premium is being amortized over a
seven year period, while the goodwill portion acquired is being amortized over
a fifteen year period. Management views the Harrisville community to be a
natural extension of the Bank's market. Proceeds from the purchase not
initially used to fund loan growth were used to purchase tax-exempt securities
within the available for sale portfolio. The securities purchased have short
term staggered maturities to fulfill future loan funding needs.
As part of the Bank's strategies for liquidity and managing interest rate risk
exposure in the loan portfolio, the Bank sold approximately $5 million in
fixed rate, 1-4 family mortgages in 1996. The ratio of total net loans to
total deposits of 85.7% at December 31, 1996, compares to the 87.3% value
reported at December 31, 1995.
21
page 32
<PAGE>
LIQUIDITY
- ---------
Liquidity represents the ability of the Company to meet normal cash flow
requirements of both borrowers and depositors efficiently. Asset liquidity is
provided by repayments of and the management of maturity distributions for
loans and securities. One measure that the Bank uses to monitor liquidity is
the liquidity ratio which assesses the relationship between certain earning
assets, customer deposits and short-term interest-bearing liabilities. This
ratio was 3.7% of total assets as of December 31, 1996 compared to 4.8% at
December 31, 1995. This decrease was due primarily to a reduction in daily
federal funds sold, which is a component of the liquidity ratio. Federal
funds sold declined $600,000.
As exhibited by the Statement of Cash Flows in the Company's 1996 annual
report, cash was used to fund the Company's investing activities which totaled
$32.6 million. Cash was used to fund net increases in loans of $18.6 million,
the purchase of available for sale securities of $16.6 million, the purchase
of investment securities of $2.2 million and the premium paid for the branch
acquisition of $2.1 million. Financing activities totaling $30.8 million were
used to fund the investing activities. A net increase in deposits of $24.1
million, $19.8 million of which resulted from the branch acquisition, was the
primary component of the net cash provided by financing activities. Advances
on short-term lines of credit available through the Federal Home Loan Bank
("FHLB") totaled $22.1 million in 1996. These advances were used primarily as
a source of funding to purchase available for sale securities in anticipation
of final closing on the branch acquisition. FHLB advances allowed management
to take advantage of what it believed were favorable yields in the bond market
prior to final settlement of the branch acquisition and therefore was able to
lock in favorable interest rate spreads. All of the advances pertaining to
the securities purchases were then paid off after final settlement on the
branch purchase. Cash dividends paid in 1996 were $792,000, an increase of
$117,000 from $675,000 paid in 1995.
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 as well. The Company may
structure borrowings from FHLB to match those of customer credit requests, and
therefore, lock in interest rate spreads over the lives of the loans. At
December 31, 1996, the Company had one such matched funding loan outstanding
totaling $720,000.
The Company's short-term borrowings with FHLB are of two types, "RepoPlus"
advances and "Flexline". "RepoPlus" advances are short-term borrowings
maturing within one year, bear a fixed rate of interest and are subject to
prepayment penalty. At December 31, 1996, the Company's total borrowing limit
was $49,396,000 for this product. Short-term borrowings at December 31, 1996
were $9.0 million which were comprised of RepoPlus advances used for general
liquidity purposes and were subsequently paid in January, 1997.
"Flexline" advances also mature within one year and bear a variable rate of
interest that reprices daily. There are no repayment penalties for these
borrowings. At December 31, 1996, the Company's borrowing limit was
$4,172,000 for Flexline advances. The Company had no Flexline advances
outstanding at December 31, 1996, but did have $1.3 million outstanding at
December 31, 1995.
In addition to borrowing from the FHLB as a source for liquidity, the Company
also continued activity in the secondary mortgage market. Specifically, the
Company sold fixed rate residential real estate mortgages to the Federal Home
Loan Mortgage Corporation ("Freddie Mac"). The sales to Freddie Mac not only
provided an opportunity for the Bank to remain competitive in the market
place, by allowing it to offer a fixed rate mortgage product, but also
provided an additional source of liquidity and an additional tool for
management to limit interest rate risk exposure. Total fixed rate mortgage
sales in 1996 were $5.2 million, with net losses of $21,000. In 1995, sales
totaled $4.4 million with net gains of $35,000. The Bank continues to service
all loans sold to Freddie Mac. The retaining of the servicing also provides a
source of fee income, which totaled $46,000 and $40,000 in 1996 and 1995
respectively. Although the Company anticipates the sale of approximately $1.3
million in the first quarter of 1997, there were no unfunded commitments to
sell at December 31, 1996.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
statement requires that, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities
it has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. This statement
provides consistent standards of distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. This statement is
effective for transfers and servicing of financial assets and extinguishment
of liabilities occurring after December 31, 1996, and is to be applied
prospectively. Earlier or retroactive application is not permitted.
Management does not anticipate that implementation of this statement will have
a material effect on its consolidated financial condition or results of
operations.
The following table is a schedule of the maturity distributions and weighted
average yield of investment securities as of December 31, 1996:
22
page 33
<PAGE>
Available for Sale
<TABLE>
<CAPTION>
Amortized Cost Maturing:
------------------------------------------------------------------------------------
After 1 After 5
Within but within but within After No Fixed
1 Year 5 Years 10 Years 10 Years Maturity Total
------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U. S. Treasury securities $ - $ 4,929 $ - $ - $ - $ 4,929
Securities of U. S.
Government agencies 1,728 1,728
Obligations of states and political
subdivisions 410 966 7,262 8,011 16,649
Mortgage-backed securities (2) 145 1,652 1,797
--------- -------- --------- --------- ---------- --------
Total debt securities 410 7,623 7,407 9,663 - 25,103
Common Stocks 974 974
--------- -------- --------- --------- ---------- --------
Total $ 410 $ 7,623 $ 7,407 $ 9,663 $ 974 $ 26,077
========= ========= ========= ========= ========== ========
Weighted average yield (1) 8.50% 6.28% 5.22% 7.83% -% 7.24%
========= ========= ========= ========= ========== ========
</TABLE>
Held to Maturity
<TABLE>
<CAPTION>
Amortized Cost Maturing:
------------------------------------------------------------------------------------
After 1 After 5
Within but within but within After No Fixed
1 Year 5 Years 10 Years 10 Years Maturity Total
------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U. S. Treasury securities $ 1,623 $ 501 $ - $ - $ - $ 2,124
Securities of U. S.
Government agencies 500 500
Obligations of states and political
subdivisions 2,090 2,970 2,996 99 8,155
Other 100 100
Mortgage-backed securities (2) 176 176
--------- -------- --------- --------- ---------- --------
Total $ 3,713 $ 3,971 $ 3,096 $ 275 $ - $ 11,055
========= ========= ========= ========= ========== ========
Weighted average yield (1) 6.63% 7.15% 7.51% 7.41% -% 7.04%
========= ========= ========= ========= ========== ========
</TABLE>
[FN]
(1) Weighted average yields were computed on a tax equivalent basis using the
federal income tax statutory rate and were determined on the basis of cost,
adjusted for amortization of premium or accretion of discount.
(2) Mortgage-backed securities provide for periodic principal repayments. It
is anticipated that these securities will be repaid prior to their contractual
maturity dates.
Investments maturing within one year and other short-term investments such as
interest-bearing deposits with other banks and federal funds sold were 2.2% of
total assets at December 31, 1996, a decrease from 3.1% in 1995. The reduction
is due primarily to a reduction in federal funds sold and to the total asset
growth as a result of the branch acquisition.
INTEREST RATE SENSITIVITY
- -------------------------
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 "gaps", 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. However, not all assets and
liabilities with similar maturities and repricing opportunities will reprice
at the same time or to the same degree. As a result, the Company's gap
position does not necessarily predict the impact on interest income given a
change in interest rate levels.
The following table shows the Company's gap position for December 31, 1996,
based upon contractual repricing opportunities or maturities, with variable
rate products measured to the date of the next repricing opportunity as
opposed to contractual maturities, while fixed rate products are measured to
contractual maturity without any consideration for prepayments:
23
page 34
<PAGE>
<TABLE>
<CAPTION>
91 days
0-90 to 1 to 5 Over
Days 1 Year Years 5 Years Total
---------- --------- --------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Assets
Interest-bearing deposits $ - $ 99 $ - $ - $ 99
Investments (2), (3) 818 6,115 14,382 16,031 37,346
Federal funds sold -
Loans (1) 41,244 28,804 18,737 52,501 141,286
---------- --------- --------- ---------- ----------
Total 42,062 35,018 33,119 68,532 178,731
---------- --------- --------- ---------- ----------
Liabilities
Interest-bearing demand 20,697 20,697
Savings 18,260 18,260
Money market 23,943 23,943
Certificates > $100,000 4,701 4,286 5,581 509 15,077
Other time deposits 12,125 25,518 22,671 1,750 62,064
Borrowed funds 9,003 203 548 9,754
---------- --------- --------- ---------- ----------
Total 88,729 30,007 28,800 2,259 149,795
---------- --------- --------- ---------- ----------
Interest sensitivity gap $ (46,667) $ 5,011 $ 4,319 $ 66,273 $ 28,936
========== ========= ========= ========== ==========
Cumulative interest sensitivity gap (46,667) (41,656) (37,337) 28,936 -
========== ========= ========= ========== ==========
Rate sensitive assets/rate sensitive
liabilities 0.47 1.17 1.15 - 1.19
</TABLE>
[FN]
(1) Includes nonaccrual loans, excludes loans held for sale.
(2) Includes investments available for sale.
(3) Investments are classified by the earlier of call date or maturity date
for repricing purposes.
At December 31, 1996, the Company had a cumulative negative gap of $41,656,000
at the one year horizon. This value compares to a negative gap of $19,654,000
at December 31, 1995. The change is due to the increase in deposits from the
Harrisville branch acquisition and the short term advances from the FHLB, both
of which increased the Company's rate sensitive liabilities in the 0-90 day
time frame.
CAPITAL RESOURCES
- -----------------
Capital adequacy is the ability of the Company to support growth while
protecting the interests of shareholders and depositors. Total capital
consists of common stock, surplus, retained earnings and net unrealized gains
/ losses on securities. Equity capital increased $1,983,000 or 10.8% in 1996.
This increase is attributed, primarily, to retained net income. Historically,
the Company has generated net retained profits sufficient to support normal
growth and expansion.
Bank regulatory agencies have designated certain capital ratio requirements
which they use to assist in monitoring the safety and soundness of financial
institutions.
Effective January 27, 1995, regulators issued a final rule with respect to
the implementation of Financial Accounting Statement No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", for regulatory capital
reporting purposes. Under this final rule, net unrealized holding losses on
available for sale equity securities (but not debt securities) with readily
determinable fair values will be included when calculating the Company's Tier
1 capital. All other unrealized holding gains and losses on available for
sale securities will be excluded from the Company's Tier 1 capital. Based
upon the composition of the Company's investment portfolio, such final rule
will have no material effect on the Company's Tier 1 capital.
For 1996, 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 December 31, 1996:
<TABLE>
<CAPTION>
Actual
----------------------- Minimum
Amount Ratio Ratio
-------- ------- -------
<S> <C> <C> <C>
Tier 1 risk - based capital $ 18,127 13.63% 4.00%
Total risk - based capital 19,304 14.52 8.00
Leverage capital 18,127 9.55 3.00
</TABLE>
As the above table illustrates, all regulatory capital requirements have been
complied with at December 31, 1996. In addition, management does not
anticipate any future activity that would have a negative impact on any of
these ratios.
INFLATION AND CHANGING PRICES
- ------------------------------
Management is aware of the impact inflation has on interest rates and the
resulting impact it can have on the Company's performance. The ability of a
financial institution to cope with inflation can only be determined by the
analysis and monitoring of its asset and liability structure. The Company
24
page 35
<PAGE>
INFLATION AND CHANGING PRICES (Continued)
- -----------------------------------------
does monitor its asset and liability position, with particular emphasis on the
mix of interest rate sensitive assets and liabilities, in order to reduce the
effect of inflation upon its performance. However, it must be remembered that
the asset and liability structure of a financial institution is substantially
different from that of an industrial corporation, in that virtually all assets
and liabilities are monetary in nature, meaning that they have been or will be
converted into a fixed number of dollars regardless of changes in prices.
Examples of monetary items include cash, loans and deposits. Nonmonetary
items are those assets and liabilities which do not gain or lose purchasing
power solely as a result of general price level changes. Examples of
nonmonetary items are premises and equipment.
Inflation can have a more direct impact on the categories of other operating
income and other operating expense, such as salaries, employee benefit costs
and supplies. These expenses are closely monitored by management for both the
effects of inflation and increases relating to such items as staffing levels,
usage of supplies and occupancy costs.
INVESTMENT SECURITIES
- ---------------------
The following schedule presents the composition of the investment portfolio as
of the two most recent years ended:
<TABLE>
<CAPTION>
Amortized Cost
-----------------------------------------------------------------
December 31,
-----------------------------------------------------------------
1996 1995
---------------------------- ---------------------------
Available Held to Available Held to
for Sale Maturity for Sale Maturity
--------- --------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 4,929 $ 2,125 $ 2,474 $ 1,999
Securities of U. S.
Government agencies 1,728 500 2,000 500
Obligation of states and
political subdivisions 16,649 8,154 4,500 10,445
Other 100 103
Mortgage backed securities 1,797 176 2,605 348
--------- --------- --------- --------
25,103 11,055 11,579 13,395
Restricted common stock 974 725
--------- --------- --------- --------
Total $ 26,077 $ 11,055 $ 12,304 $ 13,395
========= ========= ========= ========
</TABLE>
There are no securities in excess of 10% of stockholders' equity at December
31, 1996, deemed to be payable from and secured by the same source of revenue
or taxing authority.
LOANS
- -----
The following table presents the composition of the loan portfolio as of the
five most recent year ends:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Commercial, financial and
agricultural $ 18,084 $ 13,283 $ 9,677 $ 9,807 $ 11,710
Real estate construction 1,466 2,967 4,516 2,862 1,548
Real estate mortgage 94,213 81,717 76,012 63,019 56,039
Loans to individuals 27,539 24,852 22,638 24,551 23,399
--------- --------- --------- --------- ---------
141,302 122,819 112,843 100,239 92,696
Less unearned income 17 72 230 394 759
--------- --------- --------- --------- ---------
Total loans $ 141,285 $ 122,747 $ 112,613 $ 99,845 $ 91,937
========= ========= ========= ========= =========
</TABLE>
The following table presents the maturity distribution sensitivity of real
estate construction and commercial loans:
<TABLE>
<CAPTION>
December 31, 1996
------------------------------------------------------------------
Due After
Due in 1 1 Year
Year or Through Due After
Less 5 Years 5 Years Total
--------- --------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $ 5,773 $ 6,453 $ 5,858 $ 18,084
Real estate construction 1,466 1,466
--------- --------- --------- --------
$ 7,239 $ 6,453 $ 5,858 $ 19,550
========= ========= ========= ========
Predetermined interest rates $ 1,286 $ 4,431 $ 2,542 $ 8,259
Floating interest rates 5,953 2,022 3,316 11,291
--------- --------- --------- --------
$ 7,239 $ 6,453 $ 5,858 $ 19,550
========= ========= ========= ========
</TABLE>
25
page 36
<PAGE>
Generally, loans with maturities of 1 year or less consist of funds drawn on
commercial lines of credit, short-term notes, and demand notes written without
alternative maturity schedules. All lines of credit and demand loans are
subject to an annual review where the account may be approved for up to one
year. Real estate construction loans have a six month maturity, after which
the loans are generally transferred to the real estate mortgage portfolio and
amortized over their contractual lives.
ALLOWANCE FOR LOAN LOSSES
- -------------------------
The following table presents a summary of loan loss experience for each of the
years in the five years ended December 31, 1996:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loans outstanding at end of period $ 141,285 $ 122,747 $ 112,613 $ 99,845 $ 91,937
========= ========= ========= ========= =========
Average loans outstanding (1) $ 132,278 $ 118,201 $ 110,261 $ 98,648 $ 87,794
========= ========= ========= ========= =========
Allowance for loan losses:
Balance, beginning
of period $ 1,098 $ 1,037 $ 981 $ 937 $ 780
Loans charged off:
Commercial, financial
and agricultural 8 38 125 34
Real estate mortgages 5 50 4 23 38
Consumer 139 190 89 85 57
--------- --------- --------- --------- ---------
Total loans
charged off 152 240 131 233 129
Recoveries:
Commercial, financial
and agricultural 5 4 5 6 1
Real estate mortgages 4 1
Consumer 22 21 19 21 10
--------- --------- --------- --------- ---------
Total recoveries 31 26 24 27 11
--------- --------- --------- --------- ---------
Net loans
charged off 121 214 107 206 118
--------- --------- --------- --------- ---------
Provision charged to expense 200 275 163 250 275
--------- --------- --------- --------- ---------
Balance, end of period $ 1,177 $ 1,098 $ 1,037 $ 981 $ 937
========= ========= ========= ========= =========
Ratio of net charge offs during the
period to average loans
outstanding during the period 0.09% 0.18% 0.10% 0.21% 0.13%
</TABLE>
[FN]
(1) Daily average balances.
The following table presents non - performing loans including nonaccrual
accounts and loans past due 90 days or more as to interest or principal. In
addition, interest data on nonaccrual and restructured loans at December 31,
1996 is also presented:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-performing and restructured loans:
Loans past due 90 days or more $ 177 $ 87 $ 78 $ 175 $ 702
Nonaccrual loans 798 783 733 850 446
Restructured loans 597 306
--------- --------- --------- --------- ---------
Total non-performing and
restructured loans 1,572 1,176 811 1,025 1,148
--------- --------- --------- --------- ---------
Non-performing assets
Other real estate owned 221 149 20 83 124
Repossessed assets 24 24 5 53 11
--------- --------- --------- --------- ---------
Total other non-performing assets 245 173 25 136 135
--------- --------- --------- --------- ---------
Total non-performing assets $ 1,817 $ 1,349 $ 836 $ 1,161 $ 1,283
========= ========= ========= ========= =========
Non-performing and restructured loans
as a percentage of total loans 1.1% 1.0% 0.7% 1.0% 1.2%
Non-performing assets as a percentage of
total assets 0.9% 0.8% 0.6% 0.8% 1.0%
Non-performing and restructured loans
as a percentage of loan loss allowance 133.6% 107.1% 78.2% 104.5% 122.5%
Nonaccrual and restructured loan interest data:
Interest computed at
original terms: $ 100
========
Interest recognized in income $ 70
========
</TABLE>
26
page 37
<PAGE>
Other real estate owned of $221,000, at December 31, 1996 is comprised
primarily of three properties, two of which resulted from foreclosure
activities during December 1996. Management believes that each of the parcels
will sell within a reasonable time period and that the sales will not pose any
significant risk to the operations, liquidity or capital position of the
Company.
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 December 31, 1996, the Company had impaired loans of $739,000, of which
$142,000 was in nonaccrual status. Impaired loans at December 31, 1995 were
$999,000. The average investment in impaired loans was $825,000 and $987,000
for the periods ended December 31, 1996 and 1995, respectively. Impaired
loans had a general loan loss reserve allocation of $111,000 at December 31,
1996 and $150,000 at December 31, 1995.
Of the total impaired loans, $596,000 were restructured loans which consisted
of loans to a single borrower. Upon completion of the sale of a significant
portion of its business operations in 1996, the Bank restructured the
borrower's accounts to allow for the repayment of the debt from the remaining
business operations. The restructured loans at December 31, 1996 were
classified as nonaccrual at December 31, 1995. There were no additions to the
impaired loan classifications during 1996. Although the composition of
nonaccrual loans that did not meet the definition of impaired at December 31,
1996 varied from those at December 31, 1995, the aggregate dollars in the
nonaccrual classification were not significantly different. Non-performing
loans as a percentage of total loans at December 31, 1996 were 1.11% compared
to 1.0% at December 31, 1995. Management does not consider any of the
non-performing loans to pose any significant risk to the capital position of
future earnings of the Company.
Commercial, financial and agricultural loans are classified as nonaccrual when
the loans become 90 days or more past due, and all other loans 120 days or
more past due. In addition, a loan may also be classified as nonaccrual if,
in the opinion of management, doubts as to the collectibility of the account
arise prior to reaching certain past due parameters. At the time the account
is placed on nonaccrual status, all previously accrued interest is charged
against current earnings. At the time the accrual of interest is
discontinued, future income is recognized only when cash is received.
Management is not aware of any trends or uncertainties related to any loans
classified as doubtful or substandard which might have a material effect on
future earnings, liquidity or capital resources. In addition, management is
not aware of any information pertaining to material credits which would cause
it to doubt the ability of such borrowers to comply with the loan repayment
terms.
The risk of loan losses is one of the inherent risks associated with lending.
Management recognizes and experience indicates, that at any point in time,
possible losses may exist in the loan portfolio. Therefore, based upon
management's best estimate, each year provisions are charged against earnings
to maintain the allowance for loan losses at a level sufficient to recognize
this potential risk. For 1996, management provided $200,000 to the allowance
for loan losses.
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. Based upon this
evaluation, allocations of the current allowance are made, with accounts not
subject to specific review having fixed factors applied. The unallocated
portion of the allowance is then assessed to determine if it is deemed
sufficient to absorb any unidentified losses. A quarterly report is presented
to and approved by the Board of Directors.
To further monitor and assess the risk characteristics of the loan portfolio,
loan delinquencies are reviewed to consider any developing problem loans.
Based upon the procedures in place, considering past charge-offs and
recoveries and assessing the current risk elements in the portfolio,
management believes the allowance for loan losses at December 31, 1996 is
adequate. Management believes the allowance can be allocated to commercial,
real estate and consumer categories as follows:
<TABLE>
<CAPTION>
1996 1995
----------------------- ---------------------
% of % of
Loans in Loans in
Category Category
to Total to Total
Amount Loans Amount Loans
--------- ------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $ 139 12.8% $ 169 10.8%
Real estate - construction 1.0 2.4
Real estate mortgage 315 66.7 196 66.6
Consumer 299 19.5 312 20.2
Unallocated 424 421
--------- ------- -------- --------
Total $ 1,177 100.0% $ 1,098 100.0%
========= ======= ======== ========
</TABLE>
27
page 38
<PAGE>
Deposits
- --------
The following table presents average deposits by type and the average interest
rates paid as of 1996, 1995 and 1994:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------
1996 1995 1994
------------------- ------------------- -------------------
(Dollars in thousands)
Average Average Average
Average Rate Average Rate Average Rate
Balance Paid Balance Paid Balance Paid
--------- ------- --------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing
demand $ 23,227 - % $ 21,311 - % $ 19,881 - %
Interest-bearing demand 18,717 2.17 16,137 2.27 15,525 2.43
Money market 21,609 3.83 15,442 2.84 17,617 2.60
Savings 17,904 2.51 17,500 2.69 19,501 2.84
Time 70,481 5.50 63,080 5.60 55,116 4.66
--------- --------- ---------
Total $ 151,938 4.32% $ 133,470 4.28% $ 127,640 3.67%
========= ====== ========= ====== ========= ======
</TABLE>
The following table presents the maturity schedule of time deposits of
$100,000 and over:
Three months or less $ 4,702
Over three through six months 2,053
Over six months through twelve months 2,234
Over twelve months 6,088
----------
Total $ 15,077
==========
Market for Common Equity and Related Stockholder Matters
- --------------------------------------------------------
Prior to fourth quarter 1995, the Company's common stock was traded locally.
There was no established public trading market for Slippery Rock Financial
Corporation's common stock at that time. During the fourth quarter of 1995,
the Company began trading its stock in the local over-the-counter market
through the National Association of Securities Dealers OTC "Bulletin Board"
system, which is its automated system for reporting non-NASDAQ quotes and the
National Quotation Bureau's "Pink Sheets". Price quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may
not represent actual transactions. The Company uses the following firms in
establishing a market for its stock:
Legg Mason Wood Walker - Pittsburgh, PA
F. J. Morrissey & Co. - Philadelphia, PA
Monroe Securities, Inc. - Rochester, NY
Ryan Beck & Co. - West Orange, NJ
The following table summarizes the high and low prices and dividend
information since January 1, 1995, price quotes and cash dividend payments
have been restated for the four for one stock split on June 28, 1996. Prices
are based on information made available to the Company. The Company paid cash
dividends semi-annually in 1996 and 1995 and will begin paying quarterly
dividends in 1997.
<TABLE>
<CAPTION>
1996 1995
------------------------------ -----------------------------
Stock Price Stock Price
------------------- ------------------
Dividend Dividend
High Low Declared High Low Declared
-------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $ 25.38 $ 24.63 $ None $ 13.75 $ 13.75 $ None
Second Quarter 25.38 24.63 0.275 0.230
Third Quarter 29.50 22.00 None 17.50 13.75 None
Fourth Quarter 0.300 19.00 19.00 0.250
</TABLE>
The Company paid cash dividends of $0.575 per share in 1996, adjusted for the
four for one split on June 28, 1996. It is the present intention of the
Company's Board of Directors to continue the dividend payment policy; however,
future dividends must depend upon earnings, financial condition and any other
factors relevant at the time the Board of Directors consider such dividends.
Cash available for dividend distributions to shareholders of the Company must
initially come from dividends paid by the Bank to the Company. Therefore, any
restrictions on the Bank's dividend payments are directly applicable to the
Company.
As of December 31, 1996, the Company had approximately 532 shareholders of
record.
28
page 39
List of Subsidiaries
The First National Bank of Slippery Rock
page 40
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