<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 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to .
----------- -----------
Commission file Number: 0-21720
SLIPPERY ROCK FINANCIAL CORPORATION
(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: (724) 794-2210
Securities registered pursuant to Section 12(b) of the Act: Not Applicable
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $0.25 per share.
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, 1997 are $16,205,893.
The aggregate market value of the voting stock held by non-affiliates computed
by reference to the price as of March 1, 1998, is $32,659,153.
The number of shares outstanding of the issuer's Common Stock, as of March 1,
1998, was 1,379,424 shares of Common Stock, par value $0.25 per share.
1
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Part I Annual Report to Shareholders for Fiscal year Ended December 31,
1997
Part III Proxy statement for the 1997 Annual Meeting of shareholders to be
held April 21, 1998
Page 1 of 45 Pages with Exhibits
Page 1 of 10 Pages without Exhibits
Exhibit Index on Page 10
2
<PAGE>
SLIPPERY ROCK FINANCIAL CORPORATION
FORM 10-KSB
Index
Part I
Page
----
Item 1. Description of the Business 4-5
Item 2. Description of Property 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 5
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 6
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 6
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 6
Item 10. Executive Compensation 6
Item 11. Security Ownership of Certain Beneficial Owners and Management 6
Item 12. Certain Relationships and Related Transactions 6
Item 13. Exhibits and Reports on Form 8-K 7
Signatures 8-9
Index to Exhibits 10
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, Grove City, and Harrisville,
Pennsylvania. In addition to its retail locations, the Bank has an operations
center located in Slippery Rock Township.
Supervision and Regulation
- --------------------------
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.
On September 29, 1994, the President signed into law the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 ( the "Interstate
Banking Act"). Under the Interstate Banking Act, the Federal Reserve Board,
subsequent to analytical review, may approve an application by the Company to
acquire all or substantially all of the assets of a bank located outside of
the Commonwealth of Pennsylvania regardless of whether such a transaction is
prohibited under the law of any state. In addition, the Interstate Banking
Act provides that, beginning June 1, 1997, federal supervisory agencies may
approve a merger of the Bank with another bank located in a different state or
the establishment of a new branch office either by acquisition or "de novo"
unless the Commonwealth of Pennsylvania enacts legislation prior to that date
which specifically allows or prohibits a merger with a financial institution
in another state. Management currently has no plans to engage in interstate
banking activities.
4
<PAGE>
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 $207,148,000, $184,972,000 and $22,175,000 respectively at December 31,
1997.
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, 1997, the Bank had 80 full-time employees and 24 part-time
employees.
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 12 of the Company's 1997 annual report.
In addition, on September 4, 1997, the Bank acquired certain assets and
deposit liabilities of the Slippery Rock, Pennsylvania office of First
Western Bank, F.S.B. The transaction was accounted for as a purchase. The
Bank assumed the deposit liabilities of the office and acquired premises and
equipment. The purchased branch was subsequently closed with all assets and
liabilities being combined with the Bank's Main Street branch.
The Company currently has plans to sell the existing drive through facility in
Slippery Rock and constructing a new full service facility across the street
from the existing branch. Management felt that increased volume at the aging
facility in conjunction with a general remodeling and expansion project within
the shopping plaza in which the facility is located, provided an opportunity
for the move. Although still in the design phase, management does not
anticipate the cost of the project to have any significant impact upon future
earnings, capital or liquidity of the Company.
Slippery Rock Financial Corporation's headquarters are located at the Bank's
Main office facility at 100 South Main Street, Slippery Rock, Pennsylvania,
16057. The Company pays no rent or other form of consideration for the use of
the facility as its corporate headquarters.
Item 3. Legal Proceedings
(Not Applicable)
Item 4. Submission of Matters to a Vote of Security Holders
(Not Applicable)
5
<PAGE>
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 1997 Annual
report on page 30, 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 1997 Annual report on pages 20 through 30, and is incorporated
herein by reference.
Item 7. Financial Statements
The Company's consolidated financial statements and notes thereto contained in
the 1997 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 7-18
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 1998 Annual Meeting of
Shareholders on pages 1 through 3 and page 8 and is incorporated herein by
reference.
Item 10. Executive Compensation
The information required by this Item is included in the 1998 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 1998 Proxy Statement
in the Voting Securities section on pages 1 through 5, and is incorporated
herein by reference.
Item 12. Certain Relationships and Related Transactions.
The information required by this Item is included in the 1998 Proxy Statement
in the Transactions with Management section on page 8, and is incorporated
herein by reference.
6
<PAGE>
Item 13. Exhibits and Reports on Form 8-K.
(a) The following table presents those exhibits required by Item 601 of
Regulation S-B
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,
1997 filed with the Commission on March 31, 1998 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 21, 1998 filed
with the Commission on March 31, 1998 and incorporated herein by
reference.
99.2 Accountant's Opinion
(b)Reports on Form 8-K
None
7
<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 17, 1998
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 17, 1998
By /s/ Eleanor L. Cress
-------------------------------
Eleanor L. Cress
Secretary
Date: March 17, 1998
8
<PAGE>
Signatures (Continued)
By /s/ John W. Conway
-------------------------------
John W. Conway
Director
Date: March 17, 1998
By /s/ Grady W. Cooper
-------------------------------
Grady W. Cooper
Director
Date: March 17, 1998
By /s/ Robert M. Greenberger
-------------------------------
Robert M. Greenberger
Director
Date: March 17, 1998
By /s/ Robert E. Gregg
-------------------------------
Robert E. Gregg
Director
Date: March 17, 1998
By /s/ William D. Kingery
-------------------------------
William D. Kingery
Director
Date: March 17, 1998
By /s/ Paul M. Montgomery
-------------------------------
Paul M. Montgomery
Director
Date: March 17, 1998
By /s/ S. P. Snyder
-------------------------------
S. P. Snyder
Director
Date: March 17, 1998
By /s/ William C. Sonntag
-------------------------------
William C. Sonntag
Director
Date: March 17, 1998
By /s/ Norman P. Sundell
-------------------------------
Norman P. Sundell
Director
Date: March 17, 1998
By /s/ Kenneth D. Wimer
-------------------------------
Kenneth D. Wimer
Director
Date: March 17, 1998
9
<PAGE>
Index to Exhibits
Item Number Description
- ----------- ---------------------------------------------
13 Annual Report of Shareholders
21 List of Subsidiaries
27 Financial Data Schedule
99.2 Report of Independent Auditors
10
<PAGE>
(MAP IN CENTER PAGE IDENTIFYING SLIPPERY ROCK FINANCIAL CORPORATION'S AREA
MARKET AREA INCLUDING MERCER, VENANGO, LAWRENCE, BUTLER, BEAVER, AND ALLEGHENY
COUNTIES - PLOTTED CITIES ARE GROVE CITY, HARRISVILLE, SLIPPERY ROCK,
PORTERSVILLE, AND PROSPECT)
INDEX Page
President's Letter . . . . . . . . . . . . . . . . . 1
Selected Financial Data. . . . . . . . . . . . . . . 2
Consolidated Financial Statements. . . . . . . . . .3-6
Notes to Consolidated Financial Statements . . . . .7-18
Report of Independent Auditors . . . . . . . . . . . 19
Management's Discussion and Analysis of
Operating Results and Financial Condition. . . 20-30
Market for Common Equity and
Related Stockholder Matters. . . . . . . . . . . 30
<PAGE>
Dear Shareholders:
1997 was a record year for your Corporation as consolidated net income
reached a new high of $2,883,000, an increase of $213,000 or 8.0% from the
$2,670,000 reported at December 31, 1996. Earnings per share was $2.09, an
increase of $0.15 cents from the $1.94 per share earned in 1996. Total assets
for the corporation reached a new high of $207,148,000 at year end,
December 31, 1997, an increase of $11,435,000 or 5.8% from December 31, 1996.
Total deposits were $181,224,000 at December 31, 1997 compared to $164,779,000
at December 31, 1996, an increase of $16,446,000 or 10%. Return on average
assets of 1.46% at December 31, 1997 compared to a return of 1.52% at December
31, 1996 while the return on average equity of 13.52% at December 31, 1997
compared to 13.78% at December 31, 1996.
1997 was a year of steady growth for your bank that was augmented by the
purchase of the Slippery Rock Office of First Western Bank, F.S.B. on
September 4, 1997. This purchase increased our deposit base in Slippery Rock
by $3.7 million and added approximately 1,000 new account holders. As
consolidations increase throughout the financial services industry we will
continue to look for acquisitions such as this to further enhance the growth
of The First National Bank of Slippery Rock.
During 1997 several new products and services were offered by our bank.
Xpress 24, a telephone banking system was introduced early in 1997 and has
been a very successful addition to our line of customer service products.
Xpress 24 allows customers 24 hour access to account information and, in
addition, customers may make account balance inquiries, verify transactions,
make transfers and loan payments. This service is offered to our customers
with no additional charge and enables your bank to provide enhanced service
with reduced costs. We are now averaging approximately 10,000 calls per month
and believe this has been one of the most successful new products in recent
years.
Another new service that was offered during 1997 was the MASTERMONEY
DEBIT Card. The MASTERMONEY DEBIT card replaces the traditional ATM card and
allows the customer to use their DEBIT card at over 14 million MasterCard
merchants worldwide. The MASTERMONEY CARD is a product that many of our
customers were requesting, and we believe this is an excellent improvement to
one of our existing products.
1998 promises to be a busy year for your corporation as we have just
announced that the former First Western building will be expanded and
remodeled to become the new home of The First National Bank of Slippery Rock
Trust Division. This move will allow the Trust Department to be more visible
and be located at ground level to facilitate easier walk-in traffic. In
conjunction with this move and our expansion we have begun to sell mutual
funds through our Trust Division. Mutual funds have been one of the fastest
growing financial service products in the last ten years and changes in
regulations make it easier now for banks to be involved in that market. The
sale of mutual funds will not take away from our existing traditional bank
deposit products but offer those customers that so desire, an alternative
investment product.
Another project for 1998 will be the relocation of our Plaza Office in
Slippery Rock. The existing Plaza Office has been sold to the Giant Eagle
Corporation, and we will be constructing a new, larger full service facility
directly across the road from where our current branch is located. With the
growth in the community of Slippery Rock, we believe that this new Plaza
Office will better serve our local market.
In addition to the expansion of the Plaza Office we have signed a lease
with Giant Eagle to open a grocery store branch in the newly expanded Giant
Eagle upon completion in 1999. This facility will be located in the Giant
Eagle store and be open extended hours on the weekends and evenings to better
serve the growing Slippery Rock community.
The challenge for the Management of your bank is to offer new products
and services as they become feasible and profitable and yet continue to offer
traditional walk-in banking services that many of our customers still enjoy.
We believe that we will be able to do this as we have a very qualified and
dedicated staff. The future of banking continues to be one of change with
reduction in regulation and a blending of the entire financial services
industry. Many banks are now selling insurance and annuities and are
beginning to establish banking on the internet. Your Officers, Directors, and
staff will continue to explore all these possibilities and when such new
services can be offered profitably we will introduce them to our customers.
I am pleased to report these financial results and expansion plans. Our
growth and progress would not be possible without the support of all the
employees and shareholders. I would like to personally thank everyone
involved with our Corporation this past year and pledge to continue to promote
community banking throughout our market area. I encourage all of you to
attend the Annual Meeting on April 21, 1998 at the Slippery Rock Township
Building. We look forward to seeing you there.
Sincerely,
/s/ William C. Sonntag
William C. Sonntag
President & CEO
1
<PAGE>
SLIPPERY ROCK FINANCIAL CORPORATION
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Five Years Ended December 31,
-----------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(Dollars in thousands except per share data)
<S> <C> <C> <C> <C> <C>
SUMMARY OF EARNINGS
Interest income. . . . . . . . . . . . . .$ 15,152 $ 13,744 $ 12,486 $ 11,042 $ 10,241
Interest expense . . . . . . . . . . . . . 6,515 5,761 4,878 4,049 3,871
-----------------------------------------------------------------
Net interest income. . . . . . . . . . . . 8,637 7,983 7,608 6,993 6,370
Provision for loan losses. . . . . . . . . 275 200 275 163 250
-----------------------------------------------------------------
Net interest income after
provision for loan losses. . . . . . . 8,362 7,783 7,333 6,830 6,120
Other income . . . . . . . . . . . . . . . 1,053 846 902 809 917
Other expense. . . . . . . . . . . . . . . 5,432 4,964 4,680 4,534 4,080
-----------------------------------------------------------------
Income before income taxes . . . . . . . . 3,983 3,665 3,555 3,105 2,957
Applicable income tax expense. . . . . . . 1,100 995 1,056 839 748
-----------------------------------------------------------------
NET INCOME . . . . . . . . . . . . . . . .$ 2,883 $ 2,670 $ 2,499 $ 2,266 $ 2,209
=================================================================
PER SHARE DATA (1)
Earnings per share . . . . . . . . . . . .$ 2.09 $ 1.94 $ 1.81 $ 1.64 $ 1.60
Dividends paid . . . . . . . . . . . . . .$ 0.70 $ 0.57 $ 0.48 $ 0.39 $ 0.34
Book value per share at period end . . . .$ 16.08 $ 14.73 $ 13.29 $ 11.85 $ 10.69
Average number of shares outstanding . . 1,379,324 1,378,124 1,378,124 1,378,124 1,378,124
STATEMENT OF
CONDITION STATISTICS
(At end of period)
Assets . . . . . . . . . . . . . . . . . .$ 207,148 $ 195,713 $ 162,011 $ 147,374 $ 141,268
Deposits . . . . . . . . . . . . . . . . .$ 181,225 $ 164,779 $ 140,664 $ 129,322 $ 124,471
Loans. . . . . . . . . . . . . . . . . . .$ 157,501 $ 141,286 $ 122,747 $ 112,613 $ 99,845
Allowance for loan losses. . . . . . . . .$ 1,299 $ 1,177 $ 1,098 $ 1,037 $ 981
Interest-bearing deposits in other banks $ 68 $ 287 $ 118 $ 127 $ 210
Investment securities. . . . . . . . . . .$ 20,030 $ 37,346 $ 25,755 $ 19,638 $ 23,307
Short-term borrowings. . . . . . . . . . .$ 2,000 $ 9,000 $ 1,300 - -
Long term debt . . . . . . . . . . . . . .$ 552 $ 754 $ 939 $ 1,109 $ 1,440
Stockholders' equity . . . . . . . . . . .$ 22,175 $ 20,297 $ 18,313 $ 16,330 $ 14,739
SIGNIFICANT RATIOS (2)
Return on average equity . . . . . . . . . 13.52% 13.78% 14.32% 14.51% 15.78%
Return on average assets . . . . . . . . . 1.46% 1.52% 1.64% 1.56% 1.66%
Loans as a percent of deposits . . . . . . 86.91% 85.74% 87.26% 87.08% 80.22%
Ratio of average equity to average assets. 10.83% 11.05% 11.43% 10.75% 10.55%
Dividends as a percent of net income . . . 33.49% 29.38% 26.52% 23.78% 21.25%
</TABLE>
(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, and 1993.
(2) Loans as a percent of deposits calculations use actual period end volume
data, all other ratios use average daily volume data.
2
<PAGE>
SLIPPERY ROCK FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET
December 31,
1997 1996
------------- -------------
ASSETS
Cash and due from banks $ 12,948,894 $ 8,481,808
Interest-bearing deposits in other banks 68,200 286,727
Federal funds sold 8,800,000 -
Mortgage loans held for sale 898,000 1,296,047
Investment securities available for sale 13,080,018 26,291,321
Investment securities held to maturity (market value
of $7,029,625 and $11,107,779) 6,950,367 11,055,096
Loans 157,501,063 141,285,519
Less allowance for loan losses 1,298,981 1,176,951
------------- -------------
Net loans 156,202,082 140,108,568
Premises and equipment 3,647,420 3,637,030
Accrued interest and other assets 4,553,065 4,556,827
------------- -------------
TOTAL ASSETS $ 207,148,046 $ 195,713,424
============= =============
LIABILITIES
Deposits:
Noninterest-bearing demand $ 27,861,267 $ 24,737,745
Interest-bearing demand 22,841,536 20,696,978
Savings 19,410,397 18,260,189
Money market 20,789,596 23,942,880
Time 90,321,772 77,141,411
------------- -------------
Total deposits 181,224,568 164,779,203
Short-term borrowings 2,000,000 9,000,000
Other borrowings 552,252 753,649
Accrued interest and other liabilities 1,196,100 883,872
------------- -------------
TOTAL LIABILITIES 184,972,920 175,416,724
------------- -------------
STOCKHOLDERS' EQUITY
Common stock, par value $.25, authorized
shares 12,000,000, issued and outstanding
1,379,324 and 1,378,124 344,831 344,531
Capital surplus 10,710,629 10,676,129
Retained earnings 11,052,496 9,134,585
Net unrealized gain on securities 67,170 141,455
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 22,175,126 20,296,700
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 207,148,046 $ 195,713,424
============= =============
See accompanying notes to the consolidated financial statements.
3
<PAGE>
SLIPPERY ROCK FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31,
1997 1996
------------- -------------
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $ 13,318,221 $ 12,055,139
Interest-bearing deposits in other banks 7,427 10,275
Federal funds sold 347,358 172,601
Interest and dividends on investment securities:
Taxable interest 685,142 611,851
Tax exempt interest 738,424 841,668
Dividends 55,711 51,934
------------- -------------
Total interest and dividend income 15,152,283 13,743,468
------------- -------------
INTEREST EXPENSE
Deposits 6,439,824 5,562,371
Short-term borrowings 29,038 141,194
Other borrowings 46,212 57,060
------------- -------------
Total interest expense 6,515,074 5,760,625
------------- -------------
NET INTEREST INCOME 8,637,209 7,982,843
PROVISION FOR LOAN LOSSES 275,000 200,000
------------- -------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 8,362,209 7,782,843
------------- -------------
OTHER INCOME
Service charges on deposit accounts 539,122 496,583
Trust department income 75,882 53,310
Net gains (losses) on loan sales 66,062 (21,223)
Investment securities losses, net (14,872) -
Other income 387,416 317,631
------------- -------------
Total other income 1,053,610 846,301
------------- -------------
OTHER EXPENSE
Salaries and employee benefits 2,641,258 2,371,117
Net occupancy expense 355,920 415,319
Equipment expense 636,231 597,915
Data processing expense 176,584 177,438
Pennsylvania shares tax 182,898 164,430
Stationery, printing, and supplies 160,405 156,126
Other expense 1,279,108 1,081,188
------------- -------------
Total other expense 5,432,404 4,963,533
------------- -------------
Income before income taxes 3,983,415 3,665,611
Income tax expense 1,100,214 995,123
------------- -------------
NET INCOME $ 2,883,201 $ 2,670,488
============= =============
EARNINGS PER SHARE:
Basic $ 2.09 $ 1.94
Diluted $ 2.09 $ 1.94
See accompanying notes to the consolidated financial statements.
4
<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, 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
Net income 2,883,201 2,883,201
Cash dividends ($.70 per share) (965,290) (965,290)
Stock options exercised 300 34,500 34,800
Net unrealized loss on securities (74,285) (74,285)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 $ 344,831 $10,710,629 $11,052,496 $ 67,170 $22,175,126
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
5
<PAGE>
SLIPPERY ROCK FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31,
1997 1996
------------- -------------
OPERATING ACTIVITIES
Net income $ 2,883,201 $ 2,670,488
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 275,000 200,000
Depreciation and amortization 757,725 632,478
Mortgage loans held for sale (8,915,878) (4,898,732)
Proceeds from sales of mortgage loans 9,379,987 5,174,413
Net (gains) losses on loan sales (66,062) 21,223
Investment securities losses, net 14,872 -
Decrease (increase) in accrued interest
receivable 50,549 (328,939)
Increase in accrued interest payable 214,720 25,807
Other, net 86,977 (94,360)
------------- -------------
Net cash provided by operating
activities 4,681,091 3,402,378
------------- -------------
INVESTING ACTIVITIES
Decrease in time deposits in other banks 99,000 -
Investment securities available for sale:
Proceeds from sales 11,521,498 -
Proceeds from maturities and repayments 2,204,295 2,792,298
Purchases (650,790) (16,568,897)
Investment securities held to maturity:
Proceeds from maturities and repayments 4,400,876 4,560,283
Purchases (323,705) (2,231,508)
Increase in loans, net (16,435,867) (18,587,048)
Purchases of premises and equipment (524,603) (489,333)
Premium paid on branch acquisition (325,310) (2,093,982)
Proceeds from sales of other real estate 187,597 -
------------- -------------
Net cash provided by (used for)
investing activities 152,991 (32,618,187)
------------- -------------
FINANCING ACTIVITIES
Increase in deposits, net 16,445,364 24,114,808
Proceeds from short-term borrowings - 22,110,000
Repayments of short-term borrowings (7,000,000) (14,410,000)
Payments on other borrowings (201,397) (185,214)
Proceeds from stock options exercised 34,800 -
Cash dividends paid including fractional
shares cash paid (965,290) (791,825)
------------- -------------
Net cash provided by financing
activities 8,313,477 30,837,769
------------- -------------
Increase in cash and cash
equivalents 13,147,559 1,621,960
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 8,669,535 7,047,575
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 21,817,094 $ 8,669,535
============= =============
See accompanying notes to the consolidated financial statements.
6
<PAGE>
SLIPPERY ROCK FINANCIAL CORPORATION
NOTES TO THE 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:
NATURE OF OPERATIONS AND BASIS OF PRESENTATION
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.
The Company is a Pennsylvania company organized to become the holding company
of the Bank. The Bank 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
Investment securities are classified, at the time of purchase, based upon
management's intentions, as securities held to maturity or securities
available for sale. Debt securities acquired with the intent and ability to
hold to maturity are stated at cost adjusted for amortization of premium and
accretion of discount which are computed using a method which approximates a
level yield and recognized as adjustments of interest income. Certain other
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 securities gains and losses, if any, are
computed using the specific identification method. Interest and dividends on
investment securities are recognized as income when earned.
Common stock of the Federal Home Loan Bank and Federal Reserve Bank represent
ownership in institutions which are wholly-owned by other financial
institutions. These securities are accounted for at cost and are classified
with equity securities available for sale.
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.
Income is subsequently recognized only to the extent that cash payments are
received until the loan is current and, in management's judgment, the borrower
has the ability and intent to make periodic interest and principal payments,
at which time the loan is returned to accrual status.
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.
ALLOWANCE FOR LOAN LOSSES
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 credited to it.
The allowance for loan losses is established
7
<PAGE>
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.
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.
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 by foreclosure is classified as a component of
other assets at the lower of the recorded investment in the property or its
fair value minus estimated costs of sale. Prior to foreclosure, the value of
the underlying collateral is written down by a charge to the allowance for
loan losses if necessary. Any subsequent write-downs are charged against
operating expenses. Operating expenses of such properties, net of related
income and losses on their disposition, are included in operations of other
real estate.
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. and from the September 4, 1997 purchase of the
Slippery Rock, Pennsylvania office of First Western Bank, F.S.B.
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.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
Statement No. 128 replaced the previously reported primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any
8
<PAGE>
dilutive effects of options, warrants, and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share.
All earnings per share amounts for all periods have been presented, and where
necessary, restated to conform to the Statement No. 128 requirements.
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 1997 and 1996 were $6,300,354 and $5,734,818,
respectively. Cash payments for income taxes for 1997 and 1996 amounted to
$1,013,000 and $972,000, respectively.
PENDING ACCOUNTING PRONOUNCEMENT
In June 1996, the FASB issued Statement No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." The
statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings
based on a control-oriented financial-components" approach. Under this
approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and liabilities it has incurred,
derecognizes financial assets when control has been surrendered and
derecognizes liabilities when extinguished. The provisions of Statement No.
125 are effective for transactions occurring after December 31, 1996, except
those provisions relating to repurchase agreements, securities lending, and
other similar transactions and pledged collateral, which have been delayed
until after December 31, 1997 by Statement No. 127, "Deferral of the Effective
Date of Certain Provisions of Statement No. 125, an amendment of Statement
No. 125." The adoption of the provisions of Statement No. 127 is not expected
to have a material impact on financial position or results of operations.
In July 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income." The Statement establishes standards for reporting and presentation
of comprehensive income and its components (revenue, expenses, gains and
losses) in a full set of general purpose financial statements. It requires
that all items that are required to be recognized under accounting standards
as components of comprehensive income be reported in a financial statement
that is presented with the same prominence as other financial statements. The
provisions of the statement are effective for all fiscal years beginning after
December 15, 1997. The adoption of this statement is not expected to have a
material impact on financial position or results of operations.
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. EARNINGS PER SHARE
There are no convertible securities which would affect the net income required
to be used in calculating basic and diluted earnings per share, as such, net
income as presented on the consolidated statement of income is used for
computation purposes.
The average shares outstanding for both basic and diluted earnings per share
are 1,378,139 and 1,378,124 for the years ended December 31, 1997 and 1996,
respectively. As described in Note 12, the Company implemented a stock option
plan during 1997. Although stock options were granted in September, there is
no dilutive effect since the option exercise prices approximate the average
market price for the Company's stock during 1997.
3. INVESTMENT SECURITIES
Amortized cost and estimated market values of investment securities are
summarized as follows:
<TABLE>
<CAPTION>
1997
--------------------------------------------------------------
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
agency securities $ 5,653,359 $ 36,806 $ (1,210) $ 5,688,955
Obligations of states and
political subdivision 5,039,208 80,065 - 5,119,273
Mortgage-backed securities 1,394,778 14,969 (28,857) 1,380,890
------------ ------------ ------------- -------------
Total debt securities 12,087,345 131,840 (30,067) 12,189,118
Common stocks 890,900 - - 890,900
------------ ------------ ------------- -------------
Total $ 12,978,245 $ 131,840 $ (30,067) $ 13,080,018
============ ============ ============= =============
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
1997
--------------------------------------------------------------
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
agency securities $ 1,000,390 $ 1,640 $ - $ 1,002,030
Obligations of states and
political subdivisions 5,839,559 76,848 - 5,916,407
Mortgage-backed securities 110,418 770 - 111,188
------------ ------------ ------------- -------------
Total $ 6,950,367 $ 79,258 $ - $ 7,029,625
============ ============ ============= =============
</TABLE>
<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
agency securities $ 6,657,208 $ 32,541 $ (7,668) $ 6,682,081
Obligations of states and
political subdivisions 16,648,723 224,005 (17,941) 16,854,787
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>
<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
agency securities $ 2,624,653 $ 446 $ (2,006) $ 2,623,093
Obligations of states and
political subdivisions 8,254,334 56,593 (3,690) 8,307,237
Mortgage-backed securities 176,109 1,340 - 177,449
------------ ------------ ------------- -------------
Total $ 11,055,096 $ 58,379 $ (5,696) $ 11,107,779
============ ============ ============= =============
</TABLE>
The amortized cost and estimated market value of debt securities at
December 31, 1997, 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.
<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 l $ 3,134,778 $ 3,140,639 $ 2,600,390 $ 2,607,424
Due after 1 year through 5 years 3,610,108 3,643,411 1,878,711 1,909,644
Due after 5 years through 10 years 3,967,426 4,037,363 2,261,518 2,299,470
Due after 10 years 1,375,033 1,367,705 209,748 213,087
------------ ------------ ------------- -------------
Total $ 12,087,345 $ 12,189,118 $ 6,950,367 $ 7,029,625
============ ============ ============= =============
</TABLE>
The following is a summary of proceeds received, gross gains, and gross losses
realized on the sale of investment securities during the year ended
December 31, 1997. There were no security sales during the year ended
December 31, 1996.
1997
-------------
Proceeds from sales $ 11,521,498
Gross gains 55,574
Gross losses 70,446
10
<PAGE>
Investment securities with an amortized cost and estimated market value of
$15,293,000 and $15,457,812, respectively, at December 31, 1997, and
$14,358,262 and $14,495,220, respectively, at December 31, 1996 were
pledged to secure public deposits and other purposes as required by law.
4. LOANS
Major classifications of loans are summarized as follows:
1997 1996
------------- -------------
Real Estate:
Construction $ 2,587,193 $ 1,465,853
Residential 82,009,195 70,900,718
Commercial, financial, and agricultural 24,299,164 23,312,222
Commercial 18,222,841 18,083,744
Consumer 30,382,670 27,522,982
------------- -------------
157,501,063 141,285,519
Less allowance for loan losses 1,298,981 1,176,951
------------- -------------
Net loans $ 156,202,082 $ 140,108,568
============= =============
Real estate loans serviced for Freddie Mac, which are not included in the
consolidated balance sheet, totaled $27,116,482 and $20,341,070 at
December 31, 1997 and 1996, 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,
1997, is as follows:
Amounts
1996 Additions Collected 1997
----------- ----------- ----------- -----------
$ 1,985,105 $10,363,478 $10,899,431 $ 1,449,152
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, 1997, loans outstanding to individuals and businesses are
dependent upon the local economic conditions in the immediate trade area.
At December 31, 1997 and 1996, the recorded investment in loans which are
considered to be impaired was $738,227 and $738,551, of which $738,227 and
$142,093 was considered to be nonaccrual. In addition, $110,734 and $110,783
of the related allowance for loan losses has been allocated for these impaired
loans. At December 31, 1996 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, 1997 and 1996, was approximately $736,805 and $824,611. For the
years ended December 31, 1997 and 1996, interest income totaling $5,491 and
$62,799 was recognized on impaired loans, of which $5,491 and $39,310 was
recognized using the cash basis method of income recognition.
5. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the years ended December 31, 1997
and 1996, are as follows:
1997 1996
------------- -------------
Balance, January 1 $ 1,176,951 $ 1,098,298
Add:
Provision charged to operations 275,000 200,000
Recoveries 35,459 30,447
Less loans charged off 188,429 151,794
------------- -------------
Balance, December 31 $ 1,298,981 $ 1,176,951
============= =============
11
<PAGE>
6. PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as follows:
1997 1996
------------- -------------
Land $ 694,134 $ 544,134
Bank buildings 3,993,244 3,739,186
Furniture, fixtures, and equipment 2,909,653 3,614,432
------------- -------------
7,597,031 7,897,752
Less accumulated depreciation 3,949,611 4,260,722
------------- -------------
Total $ 3,647,420 $ 3,637,030
============= =============
Depreciation charged to operations was $514,213 in 1997 and $552,788 in 1996.
7. DEPOSITS
Time deposits include certificates of deposit and other time deposits in
denominations of $100,000 or more. Such deposits totaled $23,181,972 and
$15,077,000 at December 31, 1997 and 1996, respectively. Interest expense on
certificates of deposit over $100,000 amounted to $1,057,378 and $884,822.
The following table sets forth the remaining maturity of time certificates of
deposits of $100,000 or more at December 31, 1997.
3 months or less $ 7,026,626
Over 3 through 6 months 5,202,279
Over 6 through 12 months 2,777,260
Over 12 months 8,175,807
-------------
Total $ 23,181,972
=============
8. SHORT-TERM BORROWINGS
The outstanding balances and related information for short-term borrowings are
summarized as follows:
1997 1996
------------------ ------------------
Amount Rate Amount Rate
---------- ----- ---------- -----
Balance at year end $2,000,000 6.86% $9,000,000 5.60%
Average balance outstanding
during the year 489,247 5.93 2,366,943 5.96
Maximum amount outstanding
at any month end 2,000,000 13,110,000
Short-term borrowings include two types of borrowings with the Federal Home
Loan Bank ("FHLB") 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, 1997, the Company's total
borrowing limit was $55,153,000 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, 1997, the Company's total
borrowing limit was $4,940,000 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, 1997 short-term borrowings were comprised of $2,000,000 in
Flexline advances. FHLB RepoPlus advances in the amount of $9,000,000 were
outstanding as of December 31, 1996.
9. OTHER BORROWINGS
Other borrowings consists of the following:
1997 1996
------------- -------------
Long-term FHLB advances $ 527,422 $ 720,568
Real estate mortgage payable, due in monthly
installments of $945, including
interest of 10.5% 24,830 33,081
------------- -------------
Total $ 552,252 $ 753,649
============= =============
Long-term advances from the FHLB consist of a series of borrowings with
maturities ranging from one to three years, each with fixed interest rates
ranging from 5.35% to 6.91%. The weighted average interest rate as of
December 31, 1997, was 6.21%. Pursuant to a collateral agreement entered into
with the FHLB, these advances are secured by stock in the FHLB and qualifying
first mortgage loans.
12
<PAGE>
Principal repayments on advances from the FHLB are scheduled as follows:
Weighted
Average
Year Principal Rate
-------- ------------ ----------
1998 $ 209,838 6.23%
1999 227,996 6.39%
2000 89,588 5.73%
------------
Total $ 527,422
============
10.INCOME TAXES
The provision for Federal income taxes consists of:
1997 1996
------------- -------------
Currently payable $ 1,105,150 $ 985,253
Deferred (4,936) 9,870
------------- -------------
Total provision $ 1,100,214 $ 995,123
============= =============
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, 1997 and 1996, are as follows:
1997 1996
------------- -------------
Deferred tax assets:
Allowance for loan losses $ 350,550 $ 337,421
Deferred loan origination fees, net 71,858 71,261
Premises and equipment 12,053 12,650
Fair market value in excess of carrying
value of loans held for sale 38,551 41,466
Other, net 26,979 6,493
------------- -------------
Total 499,991 469,291
------------- -------------
Deferred tax liabilities:
Unrealized gain on securities 34,603 72,871
Prepaid pension asset 122,559 96,795
Other 3,714 3,714
------------- -------------
Total 160,876 173,380
------------- -------------
Net deferred tax assets $ 339,115 $ 295,911
============= =============
No valuation allowance was established at December 31, 1997, in view of the
Company's ability to carryback taxes paid in previous years and certain tax
strategies and anticipated future taxable income as evidenced by the Company's
earnings potential.
The reconciliation between the federal statutory rate and the Company's
effective consolidated income tax rate is as follows:
1997 1996
-------------------- --------------------
% of % of
Pre-tax Pre-tax
Amount Income Amount Income
----------- ------ ----------- ------
Federal income tax at
statutory rate $ 1,354,361 34.0% $ 1,246,308 34.0%
Tax-exempt income (306,171) (7.7) (310,905) (8.5)
Non-deductible interest to carry
tax exempt assets 40,138 1.0 43,129 1.2
Other 11,886 0.3 16,591 0.4
----------- ------ ----------- ------
Actual expense and
effective rate $ 1,100,214 27.6% $ 995,123 27.1%
=========== ====== =========== ======
11.PENSION 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.
13
<PAGE>
Pension expense includes the following components:
1997 1996
------------- -------------
Service cost of the current period $ 109,855 $ 100,086
Interest cost on projected benefit
obligation 81,855 73,403
Return on plan assets (251,244) (141,713)
Net amortization and deferral 147,315 68,681
------------- -------------
Net periodic pension cost $ 87,781 $ 100,457
============= =============
The actuarial present value of accumulated benefit obligations at December 31,
1997 and 1996 was $719,444 and $573,573 including vested benefit obligations
of $711,154 and $566,219. The following table sets forth the unfunded status
and amounts recognized in the balance sheets at December 31, 1997 and 1996:
1997 1996
------------- -------------
Plan assets at fair value $ 1,682,945 $ 1,263,886
Projected benefit obligation 1,268,681 1,091,394
------------- -------------
Funded status 414,264 172,492
Unrecognized prior service cost 10,203 11,610
Unrecognized net loss (gain) from past experience
different from that assumed (37,651) 126,931
Unrecognized net transition asset (32,549) (36,799)
------------- -------------
Prepaid pension cost $ 354,267 $ 274,234
============= =============
Plan assets primarily consist 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.
12.STOCK OPTION PLAN
In 1997, the Company adopted an Incentive Stock Option Plan ("ISOP") and a
Directors Stock Option Plan ("Directors Plan"). The ISOP provides for
granting up to 100,000 shares of authorized but unissued common stock to
eligible salaried employees. The Directors Plan provides 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.
Effective January 21, 1997, the Company adopted Statement of Financial
Accounting Standards Statement No. 123, "Accounting for Stock-Based
Compensation." This statement encourages, but does not require the Company
to recognize compensation expense for all awards of equity instruments issued.
The statement establishes a fair value based method of accounting for
stock-based compensation plans. The standard applies to all transactions in
which an entity acquires goods or services by issuing equity instruments or by
incurring liabilities in amounts based on the price of the entity's common
stock or other equity instruments. Statement No. 123 permits companies
to continue to account for such transactions under Accounting Principles Board
No. 25, "Accounting for Stock Issued to Employees," but requires disclosure in
a note to the financial statements pro forma net income and earnings per share
as if the Company had applied the new method of accounting.
Under Accounting Principles Board Opinion No. 25, no compensation expense has
been recognized with respect to the options granted under the stock option
plans. Had compensation expense been determined on the basis of fair value
pursuant to Statement No. 123, net income and earnings per share would have
been reduced as follows:
1997
-------------
Net Income:
As reported $ 2,883,201
=============
Pro forma $ 2,874,205
=============
Basic Earnings Per Share:
As reported $ 2.09
=============
Pro forma $ 2.09
=============
Diluted Earnings Per Share:
As reported $ 2.09
=============
Pro forma $ 2.09
=============
14
<PAGE>
The following table presents share data related to the stock option plans:
1997
-------------
Outstanding, January 1 -
Granted 11,700
Exercised 1,200
Forfeited -
-------------
Outstanding, December 31 (at $29 per share) 10,500
=============
13.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, 1997 and 1996:
1997 1996
------------- -------------
Commitments to extend credit $ 18,965,701 $ 23,097,600
Standby letters of credit and financial
guarantees 706,544 539,400
------------- -------------
Total $ 19,672,245 $ 23,637,000
============= =============
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.
14.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.
15.REGULATORY RESTRICTIONS
Cash and Due from Banks
Included in cash and due from banks are reserves required by the district
Federal Reserve Bank of $1,250,000 and $1,215,000 at December 31, 1997 and
1996. 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 $3,797,324 plus net profits retained up to the date of the dividend
declaration.
15
<PAGE>
16.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 entity'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, 1997 that the Company and the Bank meet
all capital adequacy requirements to which they are subject.
As of December 31, 1997, the most recent notification from the Company's and
Bank's primary regulatory authorities have categorized the entity 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 or the Bank'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>
1997 1996
---------------------------- ----------------------------
Amount Ratio Amount Ratio
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total Capital (to Risk-weighted Assets)
Company $ 21,260,353 14.88% $ 19,303,842 14.52%
For Capital Adequacy Purposes 11,432,640 8.00 10,638,800 8.00
To be "Well Capitalized" 14,290,800 10.00 13,298,500 10.00
Tier I Capital (to Risk-weighted Assets)
Company $ 19,961,372 13.97% $ 18,126,891 13.63%
For Capital Adequacy Purposes 5,716,320 4.00 5,319,400 4.00
To be "Well Capitalized" 8,574,480 6.00 7,979,100 6.00
Tier I Capital (to Average Total Assets)
Company $ 19,961,372 9.98% $ 18,126,891 9.55%
For Capital Adequacy Purposes 8,000,012 4.00 7,592,880 4.00
To be "Well Capitalized" 10,000,015 5.00 9,491,100 5.00
</TABLE>
17.FAIR VALUE DISCLOSURE
The estimated fair value of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------- ----------------------------
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 sold $ 21,817,094 $ 21,817,094 $ 8,768,535 $ 8,768,535
Mortgage loans held for sale 898,000 898,000 1,296,047 1,296,047
Investment securities 20,030,385 20,109,643 37,346,417 37,399,100
Net loans 156,202,082 157,036,856 140,108,568 140,249,835
Accrued interest receivable 1,383,797 1,383,797 1,434,346 1,434,346
------------ ------------ ------------ ------------
Total $200,331,358 $201,245,390 $188,953,913 $189,147,863
============ ============ ============ ============
Financial liabilities:
Deposits $181,224,568 $181,115,377 $164,779,203 $165,319,536
Short-term borrowings 2,000,000 2,000,000 9,000,000 9,000,000
Other borrowings 552,252 478,091 753,649 753,649
Accrued interest payable 781,879 781,879 567,159 567,159
------------ ------------ ------------ ------------
Total $184,558,699 $184,375,347 $175,100,011 $175,640,344
============ ============ ============ ============
</TABLE>
16
<PAGE>
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 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.
LOANS, DEPOSITS, AND OTHER BORROWINGS
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 other borrowings 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 13.
18.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.
On September 4, 1997, the Bank acquired certain assets and deposit liabilities
of the Slippery Rock, Pennsylvania office of First Western Bank, F.S.B. The
transaction was accounted for as a purchase. The Bank assumed deposit
liabilities of $3,730,857 and acquired premises and equipment totaling
$77,331. The purchased branch was subsequently closed with all assets and
liabilities being combined with the Bank's Main Street branch.
17
<PAGE>
19.PARENT COMPANY
Following are condensed financial statements for the parent company:
CONDENSED BALANCE SHEET
December 31,
1997 1996
------------- -------------
ASSETS
Cash $ 52,009 $ 4,988
Investment in bank subsidiary 22,106,313 20,267,361
Other assets 17,888 24,351
------------- -------------
TOTAL ASSETS $ 22,176,210 $ 20,296,700
============= =============
LIABILITIES
Other liabilities $ 1,084 $ -
STOCKHOLDERS' EQUITY 22,175,126 20,296,700
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 22,176,210 $ 20,296,700
============= =============
CONDENSED STATEMENT OF INCOME
Year Ended December 31,
1997 1996
------------- -------------
INCOME
Dividends from subsidiary $ 1,004,687 $ 822,428
EXPENSES 52,611 54,586
------------- -------------
Income before income tax benefit 952,076 767,842
Income tax benefit (17,888) (18,559)
------------- -------------
Income before equity in undistributed net income
of subsidiary 969,964 786,401
Equity in undistributed net income of subsidiary 1,913,237 1,884,087
------------- -------------
NET INCOME $ 2,883,201 $ 2,670,488
============= =============
CONDENSED STATEMENT OF CASH FLOWS
Year Ended December 31,
1997 1996
------------- -------------
OPERATING ACTIVITIES
Net Income $ 2,883,201 $ 2,670,488
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed net income
of subsidiary (1,913,237) (1,884,087)
Amortization 5,788 11,584
Other 36,559 (5,354)
------------- -------------
Net cash provided by operating
activities 1,012,311 792,631
------------- -------------
FINANCING ACTIVITIES
Cash dividends (965,290) (791,825)
------------- -------------
Net cash used for financing
activities (965,290) (791,825)
------------- -------------
Increase in cash 47,021 806
CASH AT BEGINNING OF PERIOD 4,988 4,182
------------- -------------
CASH AT END OF PERIOD $ 52,009 $ 4,988
============= =============
18
<PAGE>
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, 1997 and 1996, 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, 1997 and 1996,
and the results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
/s/ S.R. Snodgrass, A.C.
Wexford, PA
February 13, 1998
S.R. Snodgrass, A.C.
101 Bradford Road Wexford, PA 15090-6909 Phone: 412-934-0344
Facsimile: 412-934-0345
19
<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, 1997
and 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 audited consolidated financial statements and the related notes.
RESULTS OF OPERATIONS
Net income for 1997 was $2,883,000, an increase of $213,000 from 1996's
earnings of $2,670,000. An increase in net interest income after provision
for loan losses of $579,000 and a net increase in total other income of
$207,000 was offset by a net increase in total other expense of $468,000 and
an increase in federal income tax expense of $105,000. Income before taxes at
December 31, 1997 was $3,983,000 an increase of $318,000 or 8.68% from the
$3,665,000 reported at December 31, 1996. Federal income taxes of $1,100,000
at December 31, 1997 represents an increase of $105,000 from the $995,000
reported at December 31, 1996.
Earnings per share, on a fully diluted basis, of $2.09 at December 31, 1997
compares to $1.94 at December 31, 1996 an increase of $0.15 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 and the related yields on interest earning assets is presented
on a taxable-equivalent basis and have been computed using the federal income
tax statutory rate of 34%. Net interest income, on a tax equivalent basis,
which is the primary component of earnings, was $9,099,000 for 1997, as
compared to $8,450,000 for 1996.
(BAR GRAPH AT BOTTOM OF PAGE - LEFT SIDE)
Annual Net Income
Thousands
$2,209 $2,266 $2,499 $2,670 $2,883
- --------------------------------------------------
1993 1994 1995 1996 1997
(BAR GRAPH AT BOTTOM OF PAGE - CENTER)
Earnings Per Share
Dollars
$1.60 $1.64 $1.81 $1.94 $2.09
- ---------------------------------------------
1993 1994 1995 1996 1997
(GRAPH AT BOTTOM OF PAGE - RIGHT SIDE)
Dividends Paid Per Share
Dollars
$0.34 $0.39 $0.48 $0.57 $0.70
- ---------------------------------------------
1993 1994 1995 1996 1997
20
<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 years ended December 31,
1997, 1996 and 1995.
<TABLE>
<CAPTION>
Slippery Rock Financial Corporation
AVERAGE BALANCE SHEETS AND NET INTEREST ANALYSIS
1997 1996 1995
----------------------------- ----------------------------- -----------------------------
Average Average Average
Volume Interest Yield Volume Interest Yield Volume Interest Yield
--------- --------- ------- --------- --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS (Dollars in Thousands)
Interest-earning assets
Investment securities:
Taxable $ 11,828 $ 741 6.26% $ 10,614 $ 663 6.25% $ 8,374 $ 531 6.34%
Non-taxable (2) 15,315 1,118 7.30 17,573 1,275 7.26 11,312 817 7.22
Interest-bearing deposits in
other banks 290 8 2.76 233 10 4.29 115 10 8.70
Loans (1), (2), (3) 149,370 13,400 8.97 132,278 12,090 9.14 118,201 11,137 9.42
Federal funds sold 6,349 347 5.47 3,260 173 5.31 4,615 271 5.87
--------- --------- --------- --------- --------- ---------
Total interest-earning assets 183,152 15,614 8.53 163,958 14,211 8.67 142,617 12,766 8.95
--------- --------- ---------
Noninterest-earning assets
Cash and due from banks 6,906 5,896 5,541
Allowance for loan losses (1,205) (1,153) (1,020)
Other assets 8,033 6,663 5,511
--------- --------- ---------
Total assets $ 196,886 $ 175,364 $ 152,649
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
Interest bearing checking $ 22,780 492 2.16 $ 18,717 407 2.17 $ 16,137 367 2.27
Money market accounts 23,842 912 3.83 21,609 828 3.83 15,442 438 2.84
Savings deposits 18,709 462 2.47 17,904 450 2.51 17,500 470 2.69
Time deposits 81,840 4,574 5.59 70,481 3,878 5.50 63,080 3,531 5.60
Borrowed funds 1,216 75 6.17 3,297 198 6.01 1,121 72 6.42
--------- --------- --------- --------- --------- ---------
Total interest-bearing
liabilities 148,387 6,515 4.39 132,008 5,761 4.36 113,280 4,878 4.31
--------- --------- ---------
Noninterest-bearing liabilities
Demand deposits 26,195 23,227 21,311
Other liabilities 983 750 609
Stockholders' equity 21,321 19,379 17,449
--------- --------- ---------
Total liabilities and
stockholders' equity $ 196,886 $ 175,364 $ 152,649
========= ========= =========
Net interest income and net yield on
interest-earning assets $ 9,099 4.97% $ 8,450 5.15% $ 7,888 5.53%
========= ========= =========
Net interest rate spread 4.13% 4.30% 4.64%
======= ======= =======
</TABLE>
(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.
21
<PAGE>
<TABLE>
<CAPTION>
ANALYSIS OF CHANGES IN NET INTEREST INCOME
(Dollars in Thousands)
1997 CHANGE FROM 1996 1996 CHANGE FROM 1995
---------------------------- ----------------------------
CHANGE DUE TO CHANGE DUE TO
TOTAL ------------------ TOTAL ------------------
CHANGE VOLUME(1) RATE(1) CHANGE VOLUME(1) RATE(1)
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME ON:
Taxable investment securities $ 78 $ 77 $ 1 $ 132 $ 140 $ (8)
Non-taxable investments (157) (164) 7 458 453 5
Interest-bearing deposits in
other banks (2) 3 (5) - 7 (7)
Loans 1,310 1,539 (229) 953 1,292 (339)
Federal funds sold 174 169 5 (98) (74) (24)
-------- -------- -------- -------- -------- --------
Total interest income 1,403 1,624 (221) 1,445 1,818 (373)
======== ======== ======== ======== ======== ========
INTEREST EXPENSE ON:
Interest-bearing checking 85 87 (2) 40 57 (17)
Money market accounts 84 84 - 390 209 181
Savings deposits 12 19 (7) (20) 12 (32)
Time deposits 696 632 64 347 411 (64)
Borrowed funds (123) (128) 5 126 131 (5)
-------- -------- -------- -------- -------- --------
Total interest expense 754 694 60 883 820 63
-------- -------- -------- -------- -------- --------
NET INTEREST INCOME $ 649 $ 930 $ (281) $ 562 $ 998 $ (436)
======== ======== ======== ======== ======== ========
</TABLE>
(1) Changes in interest income/expense not arising from volume or rate
variances are allocated proportionately to rate and volume.
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 $19.1 million in 1997, principally
due to an increase in loans of $17.1 million, while interest-bearing
liabilities increased $16.4 million. In addition to normal annual growth
within the earning asset and paying liability categories, 1997's statistics
were also affected by branch acquisitions. On August 19, 1996, the Bank
acquired approximately $19.8 million in deposits from the former Harrisville,
Pennsylvania office of Mellon Bank, N.A.. On September 4, 1997, the Bank
acquired approximately $3.7 million in deposits from the former Slippery Rock
office of First Western Bank, F.S.B. Each of these transactions increased the
interest-bearing liabilities of the Bank and provided the funding for the
growth within the loan portfolio. Although the most significant growth, $11.0
million, occurred within the residential real estate segment of the loan
portfolio, there were no concentrated efforts on managements part to target
growth within any one particular segment of the loan portfolio.
Although total average earning assets and average loans increased during 1997,
the yield on average interest-earning assets decreased in 1997 to 8.53% from a
level of 8.67% in 1996. The decline occurred despite the fact that interest
rates in general remained relatively stable. The downward pressure was brought
about by demand in the market place among various financial institutions
competing for loan growth. As in the case of the national economy, the
Bank's local economy was strong in 1997, consumer and commercial credit demand
was also strong with loan business being awarded to the lowest (rate) bidder
among financial institutions. Mortgage rates also hit a record low during the
period. Accordingly, loan yields declined from a level of 9.14% for the
twelve month period ended December 31, 1996 to a level of 8.97% at December
31, 1997. The analysis of changes in net interest income indicates that the
total change in interest income on loans of $1,310,000, is comprised of an
increase in loan income of $1,539,000, due to volume increases with in the
loan portfolio, and a reduction in loan income of $229,000 due to changes in
interest rates.
The yield on interest-bearing liabilities increased 3 basis points (0.03%)
during the twelve month period ended December 31, 1997 from a level of 4.36%
at December 31,1996 to 4.39% at December 31,1997. The net yield paid ("cost
of funds") for interest-bearing checking, money market accounts and savings
all were virtually unchanged during the period. The most notable
(BAR GRAPH AT BOTTOM OF PAGE - LEFT SIDE)
Total Assets
Millions
$141,268 $147,374 $162,011 $195,713 $207,148
- --------------------------------------------------------
1993 1994 1995 1996 1997
(BAR GRAPH AT BOTTOM OF PAGE - CENTER)
Return on Average Assets
Percentage
1.66% 1.56% 1.64% 1.52% 1.46%
- ---------------------------------------------
1993 1994 1995 1996 1997
(GRAPH AT BOTTOM OF PAGE - RIGHT SIDE)
Return on Average Equity
Percentage
15.78% 14.51% 14.32% 13.78% 13.52%
- --------------------------------------------------
1993 1994 1995 1996 1997
22
<PAGE>
increase occurred within the certificate of deposit area which had a net
increase of 9 basis points from 5.50% at December 31, 1996 to 5.59% at
December 31, 1997. In addition, the time certificate product was the deposit
product to have the most significant growth during the period. Average time
deposits increased $11.4 million, from a level of $70.4 million at December
31,1996 to $81.8 million at December 31, 1997. The Bank's total interest
expense increased $754,000 in 1997 with $696,000 of that increase due to
increased interest expense on certificates of deposit. The $696,000 increase
in certificate interest expense is allocated to an increase in volume of
$632,000 and $64,000 due to an increase in rates.
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, 1997 decreased from that of December 31, 1996. Net
interest margin at December 31, 1997 was 4.97%, as compared to 5.15% at
December 31, 1996. It should also be noted that there is a time lag between
changes in interest rates and their effect on the Bank's yield on earning
assets and its 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.
OTHER INCOME
Other operating income for 1997 totaled $1,053,000 an increase of $207,000 or
24.5% from $846,000 at December 31, 1996. The principal sources of other
income are service charges, fees and commissions. Income from service charges
on deposit accounts increased $42,000 for the twelve month period ended
December 31, 1997 due to pricing restructurings that took effect during the
second quarter of 1997. Trust department fee income increased $23,000 from
$53,000 at December 31, 1996 to $76,000 at December 31, 1997 due to growth of
trust assets within the department. Trust assets, which are not included in
the Bank's balance sheet, increased $4.4 million in 1997.
Gains recorded on the sale of fixed rate, 1-4 family residential mortgages
totaled $66,000 at December 31, 1997, an increase of $87,000 from the net loss
of $21,000 recorded at December 31, 1996. Mortgage sales to the Federal Home
Loan Mortgage Corporation ("Freddie Mac") were $9.3 million and $5.3 million
in 1997 and 1996 respectively. The Bank retains the servicing on all loans
sold to Freddie Mac. Serviced loans totalled $27.1 million at December 31,
1997. Other miscellaneous fee income of $387,000 at December 31, 1997 compared
to $317,000 at December 31, 1996, an increase of $70,000. The increase is
comprised of an increase in miscellaneous fee income of $42,000 due to pricing
increases in the second quarter, an increase in loan servicing fees of $14,000
due to volume increases in the serviced loan portfolio and to an increase in
ATM surcharge fee income of $22,000. The Bank began surcharging foreign ATM
activity in August in an effort to offset costs associated with providing ATM
services to its customers.
OTHER EXPENSE
Total other expenses of $5,432,000 at December 31, 1997 represents an increase
of $469,000 from $4,963,000 at December 31, 1996. The increase in other
expenses was brought about by those items that are generally thought to be
recurring in nature. Those items would include occupancy expense and supply
expense. In addition to the normal, recurring increases, salary and benefit
expense increased $270,000 or 11.4% in 1997, due to increased costs associated
with the branch office acquisitions mentioned earlier and to operational staff
additions in the lending and trust areas to facilitate growth within those
departments.
Other miscellaneous expense at December 31, 1997 of $1.3 million compared to
$1.1 million at December 31, 1996, an increase of $200,000 or 18.2%. The
increase is attributed principally to increased amortization expense resulting
from the branch acquisitions and to a loss recorded on the disbandonment of
computer software. Intangible asset amortization, the excess of cost over
fair value of the net assets acquired in the branch acquisitions is amortized
to expense annually. Intangible amortization expense at December 31, 1997 was
$207,000 an increase of $141,000 from $66,000 at December 31, 1996. During
the fourth quarter of 1997, the Bank purchased a new computer software system
for processing teller transactions. Although no hardware changes were
required, the Bank did have a $25,000, before tax, loss on the disbandonment
of the existing computer system.
INCOME TAXES
Federal income taxes for 1997 of $1,100,000 represented a 10.6% increase from
the $995,000 reported in 1996. The increase is due to an increase in taxable
income which increased $323,000 or 10.89% to $3.3 million in 1997. As a
result, the Company's effective tax rate increased to 27.6% in 1997 as
compared to 27.1% in 1996.
FINANCIAL CONDITION
Average total assets at December 31, 1997 were $196.9 million, an increase of
$21.5 million or 12.3% from $175.4 million at December 31,1996. Average total
interest-earning assets increased $19.2 million in 1997, primarily from
increases in average loan balances, which increased $17.1 million or 12.9%.
Although growth occurred within all loan products, the most significant
growth occurred within the residential real estate portfolio and the consumer
loan portfolio. Residential real estate loans, which includes first and
secondary lien positions, increased $11.1 million from $70.9 million at
December 31, 1996 to $82.0 million at
23
<PAGE>
December 31, 1997. Consumer loans increased $2.9 million or 10.39% from $27.5
million at December 31, 1996 to $30.4 million at December 31,1997. As
previously mentioned, the increase within the loan portfolio was due to
general demand within the local market place and not due to specific
management growth objectives. The growth in average assets and in average
loan balances specifically were funded by an increase in average deposit
liabilities.
Average deposit liabilities at December 31, 1997 were $173.4 million, an
increase of $21.4 million or 14.10% from $151.9 million at December 31,1996.
While the average balance increased across all deposit products, the product
which had the largest net average increase occurred within the time
certificate product, which increased $11.4 million or 16.1% from $70.4 million
at December 31, 1996 to $81.8 million at December 31, 1997.
Total assets at December 31, 1997 were $207.1 million, an increase of $11.4
million or 5.8% from $195.7 million at December 31, 1996. Total deposits at
December 31, 1997 were $181.2 million, an increase of $16.4 million from
$164.8 million at December 31, 1996. Exclusive of the branch acquisition,
total deposits at December 31, 1997 were $177.5 million.
As part of the Bank's strategies for liquidity and managing interest rate risk
exposure in the loan portfolio, the Bank sold $9.3 million in fixed rate, 1-4
family mortgages in 1997. The ratio of total net loans (including loans held
for sale) to total deposits of 86.6% at December 31, 1997 compared to 85.7% at
December 31, 1996, an increase of 0.9%.
DATA PROCESSING ISSUES FOR THE YEAR 2000
Many older computer systems use two digits to identify the year. These
systems, if not adapted to accurately identify years beyond 1999, could fail
or produce erroneous results for the year 2000 and beyond. The Company's
primary computer processing system was purchased from and is maintained by a
national computer software vendor that produces software for financial
institutions. As a result, the Company is significantly dependent upon their
progress toward a resolution of this problem. The Company plans to monitor
the progress of the vendor and will implement a testing procedure to verify
year 2000 compliance of its core loan and deposit applications.
In addition to its core processing applications, management has begun an
overall assessment of the potential impact to ancillary computer processing
systems as well. The Company's plan will also address potential issues with
the various vendors and customers of the Company. Although management does
not anticipate them to be material, costs for development and implementation
of the plan have yet to be determined, as well as any potential impact to the
future earnings, capital or liquidity of the Company.
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 7.3% of total assets as of December 31, 1997 compared to 3.7% at
December 31, 1996. The increase was due primarily to an increase in daily
federal funds sold, which is a component of the liquidity ratio. Federal
funds sold increased $8.8 million.
The Statement of Cash Flows in the Company's 1997 annual report indicates
that net cash was provided from operating activities and financing activities
of $4.7 million and $8.3 million respectively. Cash provided by operating
activities was generated principally from net income, while cash provided by
financing activities was generated from a net increase in deposits of $16.4
million, of which $7.0 million was used to repay short-term borrowings from
the Federal Home Loan Bank. Investing activities for the twelve month period
ended December 31, 1997 indicated that proceeds from the sale of investment
securities available for sale of $11.5 million, net maturities of investment
securities available for sale of $2.2 million and maturities of investment
securities held to maturity of $4.4 million funded the net increase in loans
of $16.4 million. Cash dividends paid in 1997 were $965,000, an increase of
$173,000 from the $792,000 paid in 1996.
The Company's liquidity plan allows for the use of long-term advances or
short-term lines of credit with the FHLB as a source of funds. Borrowing from
FHLB not only provides a source of liquidity for the Company, but also serves
as a tool to reduce interest 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. FHLB
borrowings, generally, have a lower cost than deposits. At December 31,
1997, the Company continued to have one such matched funding loan outstanding
totaling $527,000.
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, 1997, the Company's total borrowing limit
was $50,213,000 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 of 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, 1997, the Company's borrowing limit was
$4,940,000 for 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,
1997 short-term borrowings were comprised of $2.0 million in Flexline advances
used for general liquidity purposes.
24
<PAGE>
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 1997 were $9.3 million, with gains recorded of $67,000. In 1996,
sales totaled $5.2 million with a net loss of $21,000. The Bank continues to
service all loans sold to Freddie Mac. The retaining of the servicing
provides a source of fee income, which totalled $60,000 and $46,000 in 1997
and 1996 respectively. Although the Company anticipates the sale of
approximately $900,000 in the first quarter of 1998, there were no unfunded
commitments to sell at December 31, 1997.
The following table is a schedule of the maturity distributions and weighted
average yield of investment securities as of December 31, 1997:
<TABLE>
<CAPTION>
Available for Sale
- ------------------
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 $ 2,495 $ 2,430 $ - $ - $ - $ 4,925
Securities of U. S.
Government agencies - 728 - - - 728
Obligations of states and political
subdivisions 640 353 3,776 270 - 5,039
Other
Mortgage-backed securities (2) - 97 192 1,106 - 1,395
--------- --------- --------- --------- --------- ---------
Total debt securities 3,135 3,608 3,968 1,376 - 12,087
Common Stocks 891 891
--------- --------- --------- --------- --------- ---------
Total $ 3,135 $ 3,608 $ 3,968 $ 1,376 $ 891 $ 12,978
========= ========= ========= ========= ========= =========
Weighted average yield (1) 5.66% 6.87% 7.38% 7.25% =% 6.77%
========= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Held to Maturity
- ----------------
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 $ 500 $ - $ - $ - $ - $ 500
Securities of U.S.
Government agencies 500 - - - - 500
Obligations of states and political
subdivisions 1,600 1,879 2,262 99 - 5,840
Mortgage-backed securities (2) - - - 110 - 110
--------- --------- --------- --------- --------- ---------
Total $ 2,600 $ 1,879 $ 2,262 $ 209 $ - $ 6,950
========= ========= ========= ========= ========= =========
Weighted average yield (1) 6.35% 5.57% 7.51% 7.38% -% 7.13%
========= ========= ========= ========= ========= =========
</TABLE>
(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 7.05%
of total assets at December 31, 1997, an increase from 2.23% in 1996 . The
increase is due primarily to an increase in federal funds sold, which
increased $8.8 million.
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 "gap", provide an
indication of the extent that the Company's net interest income is effected by
future changes in interest rates. During a period of rising interest rates, a
positive gap, a position
25
<PAGE>
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.
The following table shows the Company's gap position for December 31, 1997,
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:
<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
Investments (2) (3) $ 2,444 $ 5,020 $ 8,143 $ 4,423 $ 20,030
Federal funds sold 8,800 - - - 8,800
Loans (1) 48,838 32,319 20,122 56,222 157,501
----------- ----------- ----------- ----------- -----------
Total 60,082 37,339 28,265 60,645 186,331
----------- ----------- ----------- ----------- -----------
Liabilities
Interest-bearing demand 22,842 - - - 22,842
Savings 19,410 - - - 19,410
Money market 20,790 - - - 20,790
Certificates > $100,000 7,027 7,979 7,489 698 23,193
Other time deposits 14,684 28,836 18,444 5,165 67,129
Borrowed funds 2,003 218 331 - 2,552
----------- ----------- ----------- ----------- -----------
Total 86,756 37,033 26,264 5,863 155,916
----------- ----------- ----------- ----------- -----------
Interest sensitivity gap $ (26,674) $ 306 $ 2,001 $ 54,782 $ 30,415
=========== =========== =========== =========== ===========
Cumulative interest sensitivity gap (26,674) (26,368) (24,367) 30,415 -
=========== =========== =========== =========== ===========
Rate sensitive assets/rate
sensitive liabilities 0.69 1.01 1.08 - 1.20
Cumulative gap/Total assets (0.13) (0.13) (0.12) 0.15 -
</TABLE>
(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, 1997, the Company had a cumulative negative gap of $26,368,000
at the one year horizon. This value compares to a negative gap of $41,656,000
at December 31, 1996. The gap analysis indicates that if interest rates were
to rise 100 basis points (1.00%), the Company's net interest income would
decline $263,000 at the one year horizon because the Company's rate sensitive
liabilities would reprice faster than rate sensitive assets. Conversely, if
rates were to fall 100 basis points, the Company would earn $263,000 more in
net interest income. 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 change in interest rate sensitivity from December 31, 1996 to December 31,
1997 is due to an increase in loan volumes, especially variable rate loans and
an increase in daily federal funds sold of $8.8 million which increased the
Company's rate sensitive assets within the one year horizon.
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 $1.9 million or 9.25% in
1997. 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. For 1997, 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, 1997:
Actual
------------------- Minimum Well
Amount Ratio Ratio Capitalized
--------- ------- ------- -------
Tier 1 risk-based capital $ 19,961 13.97% 4.00% 6.00%
Total risk-based capital 21,260 14.88 8.00 10.00
Leverage capital 19,961 9.98 3.00 5.00
As the above table illustrates, the Company exceeds both the minimum and "well
capitalized" regulatory capital requirements at December 31, 1997. Management
does not anticipate any future activity that would have a negative impact on
any of these ratios. Also, management is not aware of any current
recommendations by the regulatory agencies that will have a material effect on
future earnings, liquidity or capital of the Company.
26
<PAGE>
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
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:
Amortized Cost
------------------------------------------
December 31,
------------------------------------------
1997 1996
-------------------- --------------------
Available Held to Available Held to
for Sale Maturity for Sale Maturity
--------- --------- --------- ---------
U.S. Treasury securities $ 4,925 $ 500 $ 4,929 $ 2,125
Securities of U.S.
Government agencies 728 500 1,728 500
Obligation of states and
political subdivisions 5,039 5,840 16,649 8,254
Mortgage backed securities 1,395 110 1,797 176
--------- --------- --------- ---------
12,087 6,950 25,103 11,055
Restricted common stock 891 - 974 -
--------- --------- --------- ---------
Total $ 12,978 $ 6,950 $ 26,077 $ 11,055
========= ========= ========= =========
There are no securities in excess of 10% of stockholders' equity at
December 31, 1997, 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,
---------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Commercial, financial and
agricultural $ 18,223 $ 18,084 $ 13,283 $ 9,677 $ 9,807
Real estate construction 2,587 1,466 2,967 4,516 2,862
Real estate mortgage 106,308 94,213 81,717 76,012 63,019
Loans to individuals 30,385 27,539 24,852 22,638 24,551
----------- ----------- ----------- ----------- -----------
157,503 141,302 122,819 112,843 100,239
Less unearned income 2 17 72 230 394
----------- ----------- ----------- ----------- -----------
Total loans $ 157,501 $ 141,285 $ 122,747 $ 112,613 $ 99,845
=========== =========== =========== =========== ===========
</TABLE>
The following table presents the maturity distribution sensitivity of real
estate construction and commercial loans:
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------------
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 $ 5,703 $ 7,491 $ 5,029 $ 18,223
Real estate construction 2,587 - - 2,587
----------- ----------- ----------- -----------
$ 8,290 $ 7,491 $ 5,029 $ 20,810
=========== =========== =========== ===========
Predetermined interest rates $ 2,298 $ 4,472 $ 2,717 $ 9,487
Floating interest rates 5,992 3,019 2,312 11,323
----------- ----------- ----------- -----------
$ 8,290 $ 7,491 $ 5,029 $ 20,810
=========== =========== =========== ===========
</TABLE>
27
<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, 1997:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loans outstanding at
end of period $ 157,501 $ 141,285 $ 122,747 $ 112,613 $ 99,845
=========== =========== =========== =========== ===========
Average loans outstanding (1) $ 149,370 $ 132,278 $ 118,201 $ 110,261 $ 98,648
=========== =========== =========== =========== ===========
Allowance for loan losses:
Balance, beginning of period $ 1,177 $ 1,098 $ 1,037 $ 981 $ 937
Loans charged off:
Commercial, financial and agricultural 35 8 - 38 125
Real estate mortgages - 5 50 4 23
Consumer 153 139 190 89 85
----------- ----------- ----------- ----------- -----------
Total loans charged off 188 152 240 131 233
Recoveries:
Commercial, financial and agricultural 5 5 4 5 6
Real estate mortgages - 4 1 - -
Consumer 30 22 21 19 21
----------- ----------- ----------- ----------- -----------
Total recoveries 35 31 26 24 27
----------- ----------- ----------- ----------- -----------
Net loans charged off 153 121 214 107 206
----------- ----------- ----------- ----------- -----------
Provision charged to expense 275 200 275 163 250
----------- ----------- ----------- ----------- -----------
Balance, end of period $ 1,299 $ 1,177 $ 1,098 $ 1,037 $ 981
=========== =========== =========== =========== ===========
Ratio of net charge offs during
the period to average loans
outstanding during the period 0.10% 0.09% 0.18% 0.10% 0.21%
</TABLE>
(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,
1997 is also presented:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-performing and restructured
loans:
Loans past due 90 days or more $ 18 $ 177 $ 87 $ 78 $ 175
Nonaccrual loans 1,335 798 783 733 850
Restructured loans - 597 306 - -
----------- ----------- ----------- ----------- -----------
Total non-performing and
restructured loans 1,353 1,572 1,176 811 1,025
----------- ----------- ----------- ----------- -----------
Other non-performing assets
Other real estate owned 1 221 149 20 83
Repossessed assets 24 24 24 5 53
----------- ----------- ----------- ----------- -----------
Total other non-performing
assets 25 245 173 25 136
----------- ----------- ----------- ----------- -----------
Total non-performing assets $ 1,378 $ 1,817 $ 1,349 $ 836 $ 1,161
=========== =========== =========== =========== ===========
Non-performing and restructured
loans as a percentage of total loans: 0.9% 1.1% 1.0% 0.7% 1.0%
Non-performing assets as a
percentage of total assets 0.7% 0.9% 0.8% 0.6% 0.8%
Non-performing and restructured
loans as a percentage of loan loss
allowance 104.2% 133.6% 107.1% 78.2% 104.5%
Allowance for loan losses/loans 0.82% 0.83% 0.89% 0.92% 0.98%
Nonaccrual and restructured loan
interest data:
Interest computed at
original terms: $ 124
===========
Interest recognized in income $ 24
===========
</TABLE>
28
<PAGE>
Other real estate owned declined $220,000 during 1997 as a result of the
disposition of several properties. No additions were made to other real
estate owned in 1997. Net gains recorded on the sales totaled $32,000.
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, 1997, the Company had impaired loans of $738,000,
all of which were restructured and considered to be nonaccrual. In addition,
$111,000 of the related allowance for loan losses has been allocated for these
impaired loans. There were no impaired loans at December 31, 1997 for which
there were no allowance for loan loss allocations.
Of the total impaired loans, $593,000 were restructured loans which consisted
of loans to a single borrower. The average recorded investment in impaired
loans during the year ended December 31, 1997 was approximately $737,000.
Non-performing loans as a percentage of total loans at December 31, 1997 were
0.9% compared to 1.1% at December 31, 1996. Management does not consider any
of the non-performing loans to pose any significant risk to the capital
position or 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 analysis, each year provisions are charged against earnings to
maintain the allowance for loan losses at a level sufficient to recognize this
potential risk. For 1997, management provided $275,000 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, 1997 is
adequate. Management believes the allowance can be allocated to commercial,
real estate and consumer categories as follows:
1997 1996
------------------ ------------------
% of % of
Loans in Loans in
Category Category
to Total to Total
Amount Loans Amount Loans
-------- -------- -------- --------
(Dollars in Thousands)
Commercial, financial and
agricultural $ 269 11.6% $ 139 12.8%
Real estate-construction - 1.6 - 1.0
Real estate mortgage 247 67.5 315 66.7
Consumer 271 19.3 299 19.5
Unallocated 512 - 424 -
-------- -------- -------- --------
$ 1,299 100.0% $ 1,177 100.0%
======== ======== ======== ========
29
<PAGE>
Deposits
The following table presents average deposits by type and the average interest
rates paid as of 1997, 1996 and 1995:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------
1997 1996 1995
------------------------ ------------------------ ------------------------
(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>
Non interest-bearing
demand $ 26,195 -% $ 23,227 -% $ 21,311 -%
Interest-bearing demand 22,780 2.16 18,717 2.17 16,137 2.27
Money market 23,842 3.83 21,609 3.83 15,442 2.84
Savings 18,709 2.47 17,904 2.51 17,500 2.69
Time 81,840 5.59 70,481 5.50 63,080 5.60
----------- ----------- -----------
Total $ 173,366 4.38% $ 151,938 4.32% $ 133,470 4.28%
=========== =========== =========== =========== =========== ===========
</TABLE>
The following table presents the maturity schedule of time deposits of
$100,000 and over:
Three months or less $ 7,027
Over three through six months 5,202
Over six months through twelve months 2,777
Over twelve months 8,176
-----------
Total $ 23,182
===========
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, 1996. Prices are based on information made
available to the Company. Cash dividends were declared on a quarterly basis
in 1997 and on a semi-annual basis in 1996.
<TABLE>
<CAPTION>
1997 1996
------------------------------ ------------------------------
Stock Price Stock Price
-------------------- Dividend -------------------- Dividend
High Low Declared High Low Declared
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $ 35.00 $ 26.00 $ 0.150 $ 25.38 $ 24.63 $ None
Second Quarter 35.00 32.50 0.150 25.38 24.63 0.275
Third Quarter 40.50 32.50 0.150 29.50 22.00 None
Fourth Quarter 43.75 32.50 0.250 N/A N/A 0.300
</TABLE>
The Company paid cash dividends of $0.70 per share in 1997 and $0.575 per
share in 1996, adjusted for the four for one split on June 28, 1996, as
appropriate. 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, 1997, the Company had approximately 562 shareholders of
record.
30
<PAGE>
NEW PRODUCTS
XPRESS24...
the bank's 24 hour customer service line was implemented in early 1997.
The toll-free number, 1-888-794-BANK(2265) and the local access number,
794-BANK(2265) provide customers with immediate access to the
information they need. Over 77,000 calls were logged to the system
throughout the year by people checking account information and the
bank's rates. In addition, customers may make account balance inquiries,
verify transactions, and make transfers and loan payments.
The bank also introduced the MasterMoney debit card in 1997. The card is
the convenient way to pay for purchases directly from a checking
account. The debit card is used like a check, without the hassle of
check writing. Customers can use the card to get cash at thousands of
ATMs and at millions of MasterCard locations worldwide.
31
<PAGE>
EXPANSION AND GROWTH
(DRAWING IN THIS AREA OF NEW BRANCH)
In 1998, the Bank plans to break ground for the relocation of its Slippery
Rock Plaza Branch. The new branch will be located across from where the bank
is situated currently on route 173. The Plaza Office will convert from a
limited service facility to a full service branch, with lending and safe
deposit boxes being added to its list of services. The Bank also plans to
begin operation of a grocery store branch when the Slippery Rock Giant Eagle
completes its expansion. That branch will be open seven days a week. These
expanded hours will provide The First National Bank of Slippery Rock's
customers with more convenience than ever.
(DRAWING IN THIS AREA OF NEW BUILDING)
Another site of growth is the new Trust Division building which will be
located at 234 South Main Street in Slippery Rock. At this office, customers
will have the opportunity to meet with Trust Officers and gather information
on traditional trust services and estate planning as well as alternative
investment products.
32
<PAGE>
OFFICERS
WILLIAM C. SONNTAG, President and MICHELLE L. KAYS, Loan Operations
Chief Executive Officer Supervisor
DALE R. WIMER, Executive Vice KARA S. MAXWELL, Document/Loan Support
President Officer
ELEANOR L. CRESS, Vice President, SHARON E. McCLUSKEY, Manager Customer
Branch Administration Service
MARK A. VOLPONI, Controller LINDA L. McDOWELL, Loan Officer
DAWM BALDAUFF, Management Trainee WILLIAM R. McKEE, Senior Mortgage Loan
DORIS R. BLACKWOOD, Executive Officer
Secretary MARTIN B. PRESSAU, Auditor
HOLLY A. DALTON, Marketing Officer SANDRA M. RODGERS, Deposit Operations
DEBRA G. DIXON, Collection Manager Supervisor
Michael R. Hemmerlin, Management WILLIAM A. STANLEY, Manager Information
Trainee Systems
DIANE E. HOGG, Accounting Supervisor H. KEITH WARCUP, Senior Commercial Loan
Officer
TRUST DEPARTMENT GROVE CITY OFFICE
SANDRA D. CIMINI, Trust Officer BRADLEY W. CRAWSHAW, Manager
Mark F. Lumley, Assistant Trust DONALD I. OILL, Assistant Manager
Officer
PROSPECT OFFICE
CONSUMER LOAN DEPARTMENT JEFFREY A. DANIELS, Manager
SUZANNE BARRON, Assistant Vice PAMELA C. STOOPS, Assistant Manager
President Consumer Lending
ETHEL L. MAXWELL, Assistant Manager PORTERSVILLE OFFICE
Consumer Lending MICHAEL A. HUFNAGEL, Manager
NORMA J. MARTIN, Assistant Manager
MAIN OFFICE
RUTH E. WIGTON, Assistant Vice HARRISVILLE OFFICE
President and Manager DEBORAH S. CORNER, Manager
KATHLEEN D. LOWERS, Assistant Cashier BETTE J. SOMMERS, Assistant Manager
and Savings Officer
PLAZA OFFICE
K. SUE BARKLEY, Manager
33
<PAGE>
Exhibit 21
List of Subsidiaries
The First National Bank of Slippery Rock
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1997
<CASH> 12,949
<INT-BEARING-DEPOSITS> 68
<FED-FUNDS-SOLD> 8,800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 13,080
<INVESTMENTS-CARRYING> 6,950
<INVESTMENTS-MARKET> 7,030
<LOANS> 158,399
<ALLOWANCE> 1,299
<TOTAL-ASSETS> 207,148
<DEPOSITS> 181,225
<SHORT-TERM> 2,000
<LIABILITIES-OTHER> 1,196
<LONG-TERM> 552
0
0
<COMMON> 345
<OTHER-SE> 21,831
<TOTAL-LIABILITIES-AND-EQUITY> 207,148
<INTEREST-LOAN> 13,318
<INTEREST-INVEST> 1,479
<INTEREST-OTHER> 355
<INTEREST-TOTAL> 15,152
<INTEREST-DEPOSIT> 6,440
<INTEREST-EXPENSE> 6,515
<INTEREST-INCOME-NET> 8,637
<LOAN-LOSSES> 275
<SECURITIES-GAINS> (15)
<EXPENSE-OTHER> 5,432
<INCOME-PRETAX> 3,983
<INCOME-PRE-EXTRAORDINARY> 3,983
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,883
<EPS-PRIMARY> 2.09
<EPS-DILUTED> 2.09
<YIELD-ACTUAL> 8.53
<LOANS-NON> 1,335
<LOANS-PAST> 18
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,177
<CHARGE-OFFS> 88
<RECOVERIES> 35
<ALLOWANCE-CLOSE> 1,99
<ALLOWANCE-DOMESTIC> 787
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 512
</TABLE>
<PAGE>
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, 1997 and 1996, and the
related consolidated statement 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, 1997 and 1996,
and the results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
/s/ S.R. Snodgrass, A.C.
Wexford, PA
February 13, 1998
S.R. Snodgrass, A.C.
101 Bradford Road Wexford, PA 15090-6909 Phone: 412-934-0344
Facsimile: 412-934-0345
