-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LmHkgfBT49mTlG9CcuSWeGW/GfOM6ZXNlJBs4B6KveC2qCRoNsbRaZCDnTq+xeC7 uzAu4BiFU9/8QS5s5mb3wA== 0001018712-00-000016.txt : 20000403 0001018712-00-000016.hdr.sgml : 20000403 ACCESSION NUMBER: 0001018712-00-000016 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SLIPPERY ROCK FINANCIAL CORP CENTRAL INDEX KEY: 0000884782 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 251674381 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-21720 FILM NUMBER: 589492 BUSINESS ADDRESS: STREET 1: 100 SOUTH MAIN ST CITY: SLIPPERY ROCK STATE: PA ZIP: 16057 BUSINESS PHONE: 7247942210 MAIL ADDRESS: STREET 1: 100 SOUTH MAIN STREET CITY: SLIPPERY ROCK STATE: PA ZIP: 16057 10-K 1 FORM 10-K-ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] ANNUAL REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended DECEMBER 31, 1999 ----------------- TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to Commission file Number: 0-21720 SLIPPERY ROCK FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) PENNSYLVANIA 25 - 1674381 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 100 SOUTH MAIN STREET SLIPPERY ROCK, PENNSYLVANIA 16057 - 1245 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) Registrant's telephone number, including area code: (724) 794-2210 Securities registered pursuant to Section 12(b) of the Act: Not Applicable Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.25 per share. Indicate by check mark whether the registrant (I) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. Yes X - -------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K contained is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part Ill of this Form 10- K or any amendment to this Form 10-K. The aggregate market value of the voting stock held by non-affiliates computed by reference to the price as of December 31,1999, is $37,164,040. The number of shares outstanding of the issuer's Common Stock, as of March 30, 2000, was 2,769,048 shares of Common Stock, par value $0.25 per share. DOCUMENTS INCORPORATED BY REFERENCE Part I Annual Report to Shareholders for Fiscal year Ended December 31, 1999 Part II Proxy statement for the 2000 Annual Meeting of shareholders to be held April 18, 2000 Page 1 of 66 Pages with Exhibits Page 1 of 12 Pages without Exhibits Exhibit Index on Page 10 Slippery Rock Financial Corporation Form 10-K Index Part I Page ------ Item 1. Business 4-6 Item 2. Properties 6 Item 3. Legal Proceedings 6 Item 4. Submission of Matters to a Vote of Security Holders 6 Part II Item 5. Market for Registrant's Common Equity and Related Stockholders Matters 7 Item 6. Selected Financial Data 7 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 7-8 Item 8. Financial Statements and Supplementary Data 9 Item 9. Changes in and disagreements with Accountants on Accounting and Financial Disclosures 9 Part III Item 10. Directors and Executive Officers of the Registrant 9 Item 11. Executive Compensation 9 Item 12. Security Ownership of Certain Beneficial Owners and Management 9 Item 13. Certain Relationships and Related Transactions 9 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 10 Signatures 11-12 Index to Exhibits 13 3 SLIPPERY ROCK FINANCIAL CORPORATION FORM 10K Part I ITEM 1. Business General - ------- Slippery Rock Financial Corporation ("Company") is a one bank holding company organized under the laws of the Commonwealth of Pennsylvania. In addition, the Company is registered with and supervised by the Board of Governors of the Federal Reserve System (the Federal Reserve Board). On June 30,1992, The First National Bank of Slippery Rock (Bank) completed the reorganization of the Bank into a holding company structure through the exchange of the outstanding shares of common stock for shares of common stock of Slippery Rock Financial Corporation (Company). The Company's primary business is the holding of all of the outstanding common shares of its wholly owned subsidiary, The First National Bank of Slippery Rock. The Company's primary source of income has been dividends paid by the Bank. The Bank is nationally chartered and is a member of the Federal Reserve System. The Bank's deposit are insured by the Federal Deposit Insurance Corporation (FDIC) and is a full-service institution that offers various demand and time deposit products and originates secured and unsecured commercial, consumer and mortgage loans. The Bank has two offices located in Slippery Rock, Pennsylvania and one each in the communities of Prospect, Portersville, Grove City, Harrisville, and New Wilmington, Pennsylvania. The Bank's Trust Division operates from a separate freestanding facility, which also is located in Slippery Rock. In addition to its retail locations, the Bank has an operations center located in Slippery Rock Township. Supervision and Regulation - -------------------------- The Company is subject to the jurisdiction of the Securities and Exchange Commission ("SEC"). In addition, Slippery Rock Financial Corporation is also subject to the provisions of the Bank Holding Company Act of 1956 as amended ("Bank Holding Company Act") and to the supervision of the Federal Reserve Board. The Bank Holding Company Act requires Slippery Rock Financial Corporation to receive prior approval of the Federal Reserve Board before it owns or controls more than 5% of the voting shares of any financial institution. A bank holding company is prohibited from engaging in or acquiring control of more than 5% of the voting shares of any company engaged in non-banking activities unless the Federal Reserve Board views the activities to be closely related to banking or managing or controlling banks. In addition, the Bank Holding Company Act prohibits changes in control of a bank holding company without prior notice to the Federal Reserve Board. Slippery Rock Financial Corporation is required to file an annual report with the Federal Reserve Board and any additional information as required. The Federal Reserve Board may also require examinations of Slippery Rock Financial Corporation or any or all of its subsidiaries. The Federal Reserve Act applies certain restrictions on a bank subsidiary of a bank holding company regarding extensions of credit to the bank holding company or any of its other subsidiaries, investments in stocks or other securities of the bank holding company or the use of such stocks or securities as collateral to any borrower. 4 Legislation and Regulatory Changes - ---------------------------------- The various legislative and regulatory bodies frequently make changes and proposed changes to laws and regulations applicable to banks and bank holding companies. No predictions as to the impact these changes may have on Slippery Rock Financial Corporation or its subsidiary can be made. On September 29,1994, the President signed into law the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Banking Act"). Under the Interstate Banking Act, the Federal Reserve Board, subsequent to analytical review, may approve an application by the Company to acquire all or substantially all of the assets of a bank located outside of the Commonwealth of Pennsylvania regardless of whether such a transaction is prohibited under the law of any state. In addition, the Interstate Banking Act provides that, beginning June 1,1997, federal supervisory agencies may approve a merger of the Bank with another bank located in a different state or the establishment of a new branch office either by acquisition or "de novo" unless the Commonwealth of Pennsylvania enacts legislation prior to that date which specifically allows or prohibits a merger with a financial institution in another state. Management currently has no plans to engage in interstate banking activities. FINANCIAL SERVICES MODERNIZATION ACT OF 1999 - -------------------------------------------- On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act (better known as the Financial Services Modernization Act of 1999) which will, effective March 11, 2000, permit bank holding companies to become financial holding companies and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. A bank holding company may become a financial holding company if each of its subsidiary banks is well capitalized under the Federal Deposit Insurance Corporation Act of 1991 prompt corrective action provisions, is well managed, and has at least a satisfactory rating under the Community Reinvestment Act by filing a declaration that the bank holding company wished to become a financial holding company. No regulatory approval will be required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board. The Financial Services Modernization Act defines "financial in nature" to include: securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; and activities that the Federal Reserve Board has determined to be closely related to banking. In addition, a financial holding company may not acquire a company that is engaged in activities that are financial in nature unless each of the subsidiary banks of the financial holding company has a Community Reinvestment Act rating of satisfactory or better. The specific effects of the enactment of the Financial Services Modernization Act on the banking industry in general and on the Company and the Bank in particular have yet to be determined due to the fact that the Financial Services Modernization Act was only recently adopted. The United States Congress has periodically considered and adopted legislation, such as the Gramm-Leach-Bliley Act, which has resulted in further deregulation of both banks and other financial institutions, including mutual funds, securities brokerage firms and investment banking firms. No assurance can be given as to whether any additional legislation will be adopted or as to the effect such legislation would have on the business of the Bank or the Company Government Monetary Policy - -------------------------- Financial institutions may be affected by legislative changes and by the monetary and fiscal policies of various legislative and regulatory bodies. A primary function of the Federal Reserve Board is to promote economic growth by influencing interest rates and the national supply of money and credit. The Federal Reserve Board accomplishes this through the use of open market activities of the buying and selling of U. S. Government securities, by changing the discount rate on bank borrowings and by changing the level of reserve requirements on bank deposits. All of these instruments of monetary policy are used in various combinations to influence the volume of bank lending activity, the volume of investment and deposit activity and the interest rates charged on loans and paid on deposits. Because these instruments significantly influence short-term interest rates, the monetary policies of the Federal Reserve Board have had a significant effect on the operating results of banks in the past and are expected to continue to do so in the future. 5 History and Business - Bank - --------------------------- The Bank's headquarters are located at 100 South Main Street, Slippery Rock, Pennsylvania 16057. The Bank had total assets, total liabilities, and total equity of $233,022,000, $207,602,000 and $25,420,000 respectively at December 31, 1999. The Bank is a full service financial institution, whose products and services include the accepting of time and demand deposits, and the origination of secured and unsecured commercial, mortgage and consumer loans. In addition to these services, the Bank also has a full service trust division that not only offers traditional trust services, but the sale of mutual funds and annuities as well. The Bank's business is not seasonal in nature. At December 31,1999, the Bank had 93 full-time employees and 22 part- time employees. Competition - ----------- The Bank competes with other area commercial banks, savings and loan institutions and credit unions. In addition, the Bank competes with major regional financial institutions headquartered in other areas of Pennsylvania. The Bank also competes for deposits with other non-financial institutions such as those firms that offer mutual funds or insurance annuities. Interest charged on loans, interest paid on deposits and service charges on deposit accounts are all comparable to competitors in the general market place. ITEM 2. Properties The Bank has a full service drive through branch facility in addition to the Main banking facility in Slippery Rock, Pennsylvania, as well as one full service branch facility each in the communities of Prospect, Portersville, Harrisville, New Wilmington, and Grove City, Pennsylvania. The Bank also has an operations center located in Slippery Rock Township. In addition, in 1998, the Bank moved its trust department to a freestanding facility in Slippery Rock. While the Bank owns all of its facilities, it is subject to a real estate mortgage obligation at its Prospect, Pennsylvania location. The details of which can be found in note 9 of the notes to financial statements on page 13 of the Company's 1999 annual report. In 1999, the Bank acquired land in New Wilmington Borough and Hickory Township, Lawrence County, Pennsylvania for the construction of two new full service branch facilities. Construction of the New Wilmington facility began in the third quarter of 1999 and was completed in March 2000. Total project costs, for the New Wilmington office, including land acquisition, approximated $1.0 million. Construction of the Hickory Township facility is anticipated to begin in the second quarter of 2000 with a targeted completion of fourth quarter 2000. In addition, the Bank anticipates opening a grocery store branch in a local Slippery Rock establishment in third quarter 2000. Management does not anticipate that the projects will pose any significant risk to the capital position or future earnings of the Company. Slippery Rock Financial Corporation's headquarters are located at the Bank's Main office facility at 100 South Main Street, Slippery Rock, Pennsylvania, 16057. The Company pays no rent or other form of consideration for the use of the facility as its corporate headquarters. ITEM 3. Legal Proceedings (Not Applicable) ITEM 4. Submission of Matters to a Vote of Security Holders (Not Applicable) 6 PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters The information required by this Item pertaining to Market for Common Equity and Related Stockholder Matters is included in the Company's 1999 Annual report on page 34, and is incorporated herein by reference . ITEM 6. Selected Financial Data The information required by this Item pertaining to Selected Financial Data is included in the Company's 1999 Annual report on page 2, and is incorporated herein by reference. ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information required by this Item pertaining to Management's Discussion and Analysis of Operating Results and Financial Condition is included in the Company's 1999 Annual report on pages 21 through 34, and is incorporated herein by reference ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk. Market risk for the Company is comprised primarily from interest rate risk exposure and liquidity risk. Since virtually all of the interest-earning assets and paying liabilities are at the Bank, virtually all of the interest rate risk and liquidity risk lies at the Bank level. The Bank is not subject to currency exchange risk or commodity price risk, and has no trading portfolio, and therefore, is not subject to any trading risk. In addition, the Bank does not participate in hedging transactions such as interest rate swaps and caps. Changes in interest rates will impact both income and expense recorded and also the market value of long-term interest-earning assets. Interest rate risk and liquidity risk management is performed at the Bank level. Although the Bank has a diversified loan portfolio, loans outstanding to individuals and businesses are dependent upon the local economic conditions in the immediate trade area. One of the principal functions of the Company's asset/liability management program is to monitor the level to which the balance sheet is subject to interest rate risk. The goal of the asset/liability program is to manage the relationship between interest rate sensitive assets and liabilities, thereby minimizing the fluctuations in the net interest margin, which achieves consistent growth of net interest income during periods of changing interest rates. Interest rate sensitivity is the result of differences in the amounts and repricing dates of a bank's rate sensitive assets land rate sensitive liabilities. These differences, or interest rate repricing "gap", provide an indication of the extent that the Company's net interest income is affected by future changes in interest rates. During a period of rising interest rates, a positive gap, a position of more rate sensitive assets than rate sensitive liabilities, is desired. During a falling interest rate environment, a negative gap is desired, that is, a position in which rate sensitive liabilities exceed rate sensitive assets. At December 31,1999, the Company had a cumulative negative gap of $49,044,000 at the one year horizon. The gap analysis indicates that if interest rates were to rise 100 basis points (1.00%), the Company's net interest income would decline at the one year horizon because the Company's rate sensitive liabilities would reprice faster than rate sensitive assets. Conversely, if rates were to fall 100 basis points, the Company would earn more in net interest income. Management also manages interest rate risk with the use of simulation modeling which measures the sensitivity of future net interest income as a result of changes in interest rates. The analysis is based on repricing opportunities for variable rate assets and liabilities and upon contractual maturities of fixed rate instruments 7 The simulation also calculates net interest income based upon estimates of the largest foreseeable rate increase or decrease, (+ or - 200 basis points or 2.00%). The current analysis indicates that, given a 200 basis point overnight movement in interest rates, the Bank would experience a potential $868,000 or 8% change in net interest income. It is important to note, however, that this exercise would be of a worst case scenario. It would be more likely to have incremental changes in interest rates, rather than a single significant increase or decrease. When management believes interest rate movements will occur, it can restructure the balance sheet and thereby the ratio of rate sensitive assets to rate sensitive liabilities which in turn will effect the net interest income. It is important to note; however, not all assets and liabilities with similar maturities and repricing opportunities will reprice at the same time or to the same degree and therefore, could effect forecasted results. Much of the Bank's deposits have the ability to reprice immediately; however, deposit rates are not tied to an external index. As a result, although changing market interest rates impact repricing, the Bank retains much of the control over repricing by determining itself the extent and timing of repricing of deposit products. In addition, the Bank maintains a significant portion of its investment portfolio as available for sale securities and also has a significant variable rate loan portfolio, which is used to offset rate sensitive liabilities. Changes in market interest rates can also affect the Bank's liquidity position through the impact rate changes may have on the market value of the available for sale portion of the investment portfolio. Increases in market rates can adversely impact the market values and therefore, make it more difficult for the Bank to sell available for sale securities needed for general liquidity purposes without incurring a loss on the sale. This issue is addressed by the Bank with the use of borrowings from the Federal Home Loan Bank ("FHLB") and the selling of fixed rate mortgages as a source of liquidity to the Bank. The Company's liquidity plan allows for the use of long-term advances or short-term lines of credit with the FHLB as a source of funds. Borrowing from FHLB not only provides a source of liquidity for the Company, but also serves as a tool to reduce interest risk as well. The Company may structure borrowings from FHLB to match those of customer credit requests, and therefore, lock in interest rate spreads over the lives of the loans. In addition to borrowing from the FHLB as a source for liquidity, the Company also participates in the secondary mortgage market. Specifically, the Company sells fixed rate, residential real estate mortgages to the Federal Home Loan Mortgage Corporation ("Freddie Mac"). The sales to Freddie Mac not only provide an opportunity for the Bank to remain competitive in the market place, by allowing it to offer a fixed rate mortgage product, but also provide an additional source of liquidity and an additional tool for management to limit interest rate risk exposure. The Bank continues to service all loans sold to Freddie Mac. 8 ITEM 8. Financial Statement and Supplementary Data The Company's consolidated financial statements and notes thereto contained in the 1999 Annual Report are filed as Exhibit 13 hereto and are incorporated in their entirety by reference under this item. Annual Report -Page- Consolidated Balance Sheet 3 Consolidated Statement of Income 4 Consolidated Statement of Changes in Stockholders equity 5 Consolidated Statement of Cash Flows 6 Notes to Consolidated Financial Statements 7 -19 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure (Not Applicable) PART III ITEM 10. Directors and Executive Officers of the Registrant The information required by this Item pertaining to directors of the Company is included in the Company's Proxy Statement for its 2000 Annual Meeting of Shareholders on pages 4 and 5 and page 11 and is incorporated herein by reference ITEM 11. Executive Compensation The information required by this Item is included in the 2000 Proxy Statement in the Executive Compensation section on pages 6 through 11, and is incorporated herein by reference. ITEM 12. Security Ownership of Certain Beneficial Owners and Management. The information required by this Item is included in the 2000 Proxy Statement in the Voting Securities section on pages 1 through 3, and is incorporated herein by reference. ITEM 13. Certain Relationships and Related Transactions. The information required by this Item is included in the 2000 Proxy Statement in the Transactions with Management section on page 12, and is incorporated herein by reference. 9 ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) The following table presents those exhibits required by Item 601 of Regulation S - K Slippery Rock Financial Corporation FORM 10-K EXHIBIT LIST (a) Exhibits required by Item 601 of Regulation S - K: Exhibit Number - -------------- 2 N/A 3(i) Articles of Incorporation filed on March 6, 1992 as Exhibit 3(i) to Registration Statement on Form S-4 (No. 33-46164) and incorporated herein by reference. 3(ii) By-laws filed on March 6, 1992 as Exhibit 3(ii) to Registration Statement on Form S-4 (No. 33-46164) and incorporated herein by reference. 4 N/A 9 N/A 10 N/A 11 N/A 12 N/A 13 Annual Report to Shareholders for Fiscal Year Ended December 31, 1999 filed with the Commission on March 31, 2000 and incorporated reference. 16 N/A 18 N/A 21 List of Subsidiaries 22 N/A 23 N/A 24 N/A 27 Financial Data Table 28 N/A 9.1 Notice of Annual Meeting, Proxy Statement and form of Proxy for Annual Meeting of Shareholders to be held on April 18, 2000 filed with the Commission on March 31, 2000 and incorporated herein by reference. 9.2 Accountant's Opinion (b) Reports on Form 8-K None 10 Signatures Pursuant to the requitements of Section 13 or 15(d) of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Slippery Rock Financial Corporation By : /s/ William C. Sonntag ---------------------- William C. Sonntag President & CEO Date: March 21, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ Mark A. Volponi ------------------- Mark A. Volponi Treasurer Date: March 21, 2000 By: /s/ Eleanor L. Cress -------------------- Eleanor L. Cress Secretary Date: March 21, 2000 11 Signatures (Continued) By: /s/ John W. Conway ------------------ John W. Conway Director Date: March 21, 2000 By: /s/ Robert M. Greenberger ------------------------- Robert M. Greenberger Director Date: March 21, 2000 By: /s/ Robert E. Gregg -------------------- Robert E. Gregg Director Date: March 21, 2000 By: /s/ Paul M. Montgomery ---------------------- Paul M. Montgomery Director Date: March 21, 2000 By: /s/ S.P. Snyder --------------- S. P. Snyder Director Date: March 21, 2000 By: /s/ William C. Sonntag ---------------------- William C. Sonntag Director Date: March 21, 2000 By: /s/ Charles C. Stoops, Jr. -------------------------- Charles C. Stoops, Jr. Director Date: March 21, 2000 By: /s/ Norman P. Sundell --------------------- Norman P. Sundell Director Date: March 21, 2000 By: /s/ Kenneth D. Wimer -------------------- Kenneth D. Wimer Director Date: March 21, 2000 12 Index to Exhibits Item Number Description Page - -------------------------------------------------------- 21 List of Subsidiaries XX 99.2 Report of Independent Auditors XX-XX 13 EX-13 2 ANNUAL REPORT Dear Shareholders: I am pleased to report that total assets reached a new high of $233,019,000 compared to $215,773,000 at year-end 1998. Consolidated net income was $3,097,000 in 1999, an increase of $43,000 or 1.4% from the $3,054,000 reported at December 31, 1998. Earnings per share of $1.12 at December 31, 1999 compared to $1.11 per share for the same twelve-month period in 1998. Total deposits of $197,124,000 at December 31, 1999 compared to $190,149,000 at December 31, 1998, an increase of $6,975,000 or 3.7%. Profitability measures produced a return on average assets of 1.37% for 1999 compared 1.45% for 1998, and a return on average equity of 12.34% compared to 13.06% at December 31, 1998. No discussion of 1999 would be complete without mentioning Y2K. Thanks to the diligent efforts of your bank's staff and our software provider, year-end 1999 came and passed without incident. The intense review of our software and hardware configurations has prepared us well to enter the next century. As I indicated last year in my comments, our bank has implemented a sales training program for every employee in our institution. In addition, The First National Bank of Slippery Rock now employs a full-time training officer, devoted not only to operations training but to sales training as well. The traditional banker can no longer wait for the customer to ask about services. We must continue to enhance our selling skills as competition increases from all parts of the financial services industry. In October 1999, we began construction of our first Lawrence County office in New Wilmington, Pennsylvania. Today, this full service branch is open and operational and has been very well received by the New Wilmington community. Due to mergers of several Lawrence County banks with out of state institutions, your Board of Directors and management believe that a locally owned community bank can compete very effectively in the Lawrence County market. With that in mind, construction will begin early this summer on a second Lawrence County office at the intersection of Routes 388 and 108 in Hickory Township. The Laurel office will also be a full service branch and will be able to serve a very large geographic portion of Lawrence County. All indications are that the Laurel office is a much needed, much desired addition to that community. Construction will begin in June on our first ever supermarket branch in the newly expanded Giant Eagle in Slippery Rock. When finished the office will be open extended hours in the evenings and on the weekends to better serve the modern American family lifestyle. Another service geared toward the busy American family is Internet banking. Currently your bank is in the test phase for our first Internet banking product called "NetTeller". With "NetTeller" the customers will be able to access their account balances and account histories, transfer between accounts, view images of their checks, and be able to pay bills directly through the Internet. This is one of the most technologically exciting products that we have ever offered and with the growth of the Internet, we believe that it will be well received by those interested in banking on the Internet. We must continue to offer traditional banking services but at the same time keep pace with the rapidly changing Internet environment. The Trust Division continues to grow with both traditional trust services and alternative investment products. I am pleased to report the addition of two staff members to that department to meet the increased demand by our customers for financial planning and alternative investments. Entering the next millennium, your Board of Directors and management are committed to traditional community banking while at the same time, keeping current with ever changing technological innovations. I would like to thank the shareholders, directors, and dedicated employees for all of their support this past year and I encourage all of you to attend the Annual Meeting on April 18, 2000 at the Slippery Rock Township Building. We look forward to seeing you there. Sincerely, William C. Sonntag President & CEO Slippery Rock Financial Corporation SELECTED FINANCIAL DATA
Five Years Ended December 31, -------------------------------------------------------------- 1999 1998 1997 1996 1995 -------------------------------------------------------------- (Dollars in thousands except per share data) SUMMARY OF EARNINGS Interest income 16,619 16,091 15,152 13,744 $12,486 Interest expense 6,796 6,986 6,515 5,761 4,878 -------------------------------------------------------------- Net interest income 9,823 9,105 8,637 7,983 7,608 Provision for loan losses 720 310 275 200 275 -------------------------------------------------------------- Net interest income after provision for loan losses 9,103 8,795 8,362 7,783 7,333 Other income 1,735 1,629 1,053 846 902 Other expense 6,485 6,017 5,432 4,964 4,680 -------------------------------------------------------------- Income before income taxes 4,353 4,407 3,983 3,665 3,555 Applicable income tax expense 1,256 1,353 1,100 995 1,056 -------------------------------------------------------------- NET INCOME $3,097 $3,054 $2,883 $2,670 $2,499 ============================================================== PER SHARE DATA (1) Earnings per share $1.12 $1.11 $1.05 $0.97 $0.91 Dividends paid $0.43 $0.39 $0.35 $0.29 $0.24 Book value per share at period end $9.26 $8.79 $8.05 $7.36 $6.64 Average number of shares outstanding 2,765,086 2,759,802 2,756,278 2,756,248 2,756,248 STATEMENT OF CONDITION STATISTICS (At end of period) Assets $233,019 $215,773 $207,148 $195,713 $162,011 Deposits $197,124 $190,149 $181,225 $164,779 $140,664 Loans $183,142 $160,854 $157,501 $141,286 $122,747 Allowance for loan losses $ 1,681 $ 1,410 $ 1,299 $ 1,177 $ 1,098 Interest-bearing deposits in other banks $ 38 $ 8,016 $ 68 $ 287 $ 118 Investment securities $ 29,573 $ 21,841 $ 20,030 $ 37,346 $ 25,755 Short - term borrowings $ 9,000 - $ 2,000 $ 9,000 $ 1,300 Long term debt $ 304 $ 333 $ 552 $ 754 $ 939 Stockholders' equity $ 25,610 $ 24,255 $ 22,175 $ 20,297 $ 18,313 SIGNIFICANT RATIOS (2) Return on average equity 12.34% 13.06% 13.52% 13.78% 14.32% Return on average assets 1.37% 1.45% 1.46% 1.52% 1.64% Loans as a percent of deposits 92.91% 84.59% 86.91% 85.74% 87.26% Ratio of average equity to average assets 11.11% 11.07% 10.83% 11.05% 11.43% Dividends as a percent of net income 38.39% 35.14% 33.33% 29.90% 26.37%
(1) Per share data restated for the effects of 10% stock dividends paid during 1995, and for the effects of a four for one stock split in 1996 and a two for one split in 1998. (2) Loans as a percent of deposits calculations use actual period end volume data, all other ratios use average daily volume data. 2 SLIPPERY ROCK FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEET
December 31, 1999 1998 --------------- -------------- ASSETS Cash and due from banks $ 10,067,615 $ 8,619,657 Interest-bearing deposits in other banks 38,018 8,015,617 Federal funds sold 1,200,000 6,400,000 Mortgage loans held for sale - 2,467,803 Investment securities available for sale 26,600,031 18,196,864 Investment securities held to maturity (market value of $2,985,634 and $3,735,582) 2,972,549 3,644,197 Loans 183,142,466 160,853,908 Less allowance for loan losses 1,681,172 1,410,309 --------------- -------------- Net loans 181,461,294 159,443,599 Premises and equipment 5,177,550 4,404,766 Accrued interest and other assets 5,502,232 4,580,645 --------------- -------------- TOTAL ASSETS $ 233,019,289 $ 215,773,148 =============== ============== LIABILITIES Deposits: Noninterest-bearing demand $ 32,469,443 $ 31,244,022 Interest-bearing demand 24,547,131 22,821,004 Savings 22,187,257 20,698,137 Money market 27,349,379 23,703,562 Time 90,570,491 91,682,212 --------------- -------------- Total deposits 197,123,701 190,148,937 Short-term borrowings 9,000,000 - Other borrowings 303,705 333,254 Accrued interest and other liabilities 982,177 1,035,883 --------------- -------------- TOTAL LIABILITIES 207,409,583 191,518,074 --------------- -------------- STOCKHOLDERS' EQUITY Common stock, par value $.25; 12,000,000 shares authorized; 2,769,048 and 2,763,648 issued and outstanding 692,262 690,912 Capital surplus 10,547,408 10,447,869 Retained earnings 14,937,380 13,029,794 Accumulated other comprehensive income (loss) (567,344) 86,499 --------------- -------------- TOTAL STOCKHOLDERS' EQUITY 25,609,706 24,255,074 --------------- -------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 233,019,289 $ 215,773,148 =============== ==============
See accompanying notes to the consolidated financial statements. 3 SLIPPERY ROCK FINANCIAL CORPORATION CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31, 1999 1998 1997 ------------- -------------- ------------- INTEREST AND DIVIDEND INCOME Interest and fees on loans $ 14,694,862 $ 14,139,576 $ 13,318,221 Interest-bearing deposits in other banks 185,339 1,996 20,852 Federal funds sold 266,915 745,412 347,358 Interest and dividends on investment securities: Taxable interest 640,032 692,959 671,717 Tax-exempt interest 765,205 449,258 738,424 Dividends 66,528 62,016 55,711 -------------- -------------- -------------- Total interest and dividend income 16,618,881 16,091,217 15,152,283 -------------- -------------- -------------- INTEREST EXPENSE Deposits 6,693,959 6,949,151 6,439,824 Short-term borrowings 76,513 2,374 29,038 Other borrowings 25,959 34,227 46,212 -------------- -------------- -------------- Total interest expense 6,796,431 6,985,752 6,515,074 -------------- -------------- -------------- NET INTEREST INCOME 9,822,450 9,105,465 8,637,209 PROVISION FOR LOAN LOSSES 720,000 310,000 275,000 -------------- -------------- -------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 9,102,450 8,795,465 8,362,209 -------------- -------------- -------------- OTHER INCOME Service charges on deposit accounts 640,387 593,112 539,122 Trust Department income 122,928 75,452 75,882 Net gains on loan sales 219,636 289,932 66,062 Investment securities losses, net - - (14,872) Other income 752,145 670,340 387,416 ------------- -------------- -------------- Total other income 1,735,096 1,628,836 1,053,610 ------------- -------------- -------------- OTHER EXPENSE Salaries and employee benefits 3,142,051 2,857,553 2,641,258 Occupancy expense 371,050 242,570 355,920 Equipment expense 812,032 756,845 636,231 Data processing expense 226,087 292,761 176,584 Pennsylvania shares tax 224,889 203,272 182,898 Stationery, printing, and supplies 156,131 156,896 160,405 Other expense 1,552,463 1,506,921 1,279,108 ------------- -------------- -------------- Total other expense 6,484,703 6,016,818 5,432,404 ------------- -------------- -------------- Income before income taxes 4,352,843 4,407,483 3,983,415 Income tax expense 1,255,863 1,353,457 1,100,214 ------------- -------------- -------------- NET INCOME $ 3,096,980 $ 3,054,026 $ 2,883,201 ============= ============== ============== EARNINGS PER SHARE Basic $ 1.12 $ 1.11 $ 1.05 Diluted $ 1.12 $ 1.11 $ 1.05
See accompanying notes to the consolidated financial statements. 4 SLIPPERY ROCK FINANCIAL CORPORATION CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated Other Common Capital Retained Comprehensive Comprehensive Stock Surplus Earnings Income (Loss) Total Income ------------ ------------ ------------ ------------ ------------ ------------ 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 $ 2,883,201 Other comprehensive income (loss): Net unrealized loss on available for sale securities, net of tax benefit of $38,268 (74,285) (74,285) (74,285) ------------ Comprehensive income $ 2,808,916 ============ Cash dividends ($.35 per share) (965,290) (965,290) Stock options exercised 300 34,500 34,800 ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1997 344,831 10,710,629 11,052,496 67,170 22,175,126 Net income 3,054,026 3,054,026 $ 3,054,026 Other comprehensive income: Net unrealized gain on available for sale securities, net of taxes of $9,957 19,329 19,329 19,329 ------------ Comprehensive income $ 3,073,355 ============ Cash dividends ($.39 per share) (1,076,728) (1,076,728) Stock options exercised 625 82,696 83,321 Stock split 345,456 (345,456) - ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1998 690,912 10,447,869 13,029,794 86,499 24,255,074 Net income 3,096,980 3,096,980 $ 3,096,980 Other comprehensive income (loss): Net unrealized loss on available for sale securities, net of tax benefit of $336,827 (653,843) (653,843) (653,843) ----------- Comprehensive income 2,443,137 =========== Cash dividends ($.43 per share) (1,189,394) (1,189,394) Stock options exercised 1,350 99,539 100,889 ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1999 $ 692,262 $ 10,547,408 $ 14,937,380 $ (567,344) $ 25,609,706 ============ ============ ============ ============ ============ 1999 1998 1997 --------------- --------------- -------------- Components of other comprehensive income (loss): Change in net unrealized gain (loss) on investment available for sale securities $ (653,843) $ 19,329 $ (84,101) Realized losses included in net income, net of taxes of $5,057 in 1997 - - 9,816 --------------- --------------- -------------- Total $ (653,843) $ 19,329 $ (74,285) =============== =============== ==============
See accompanying notes to the consolidated financial statements. 5 SLIPPERY ROCK FINANCIAL CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31, 1999 1998 1997 ------------ ------------ ------------ OPERATING ACTIVITIES Net income $ 3,096,980 $ 3,054,026 $ 2,883,201 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 720,000 310,000 275,000 Depreciation and amortization 606,838 812,004 757,725 Originations of mortgage loans held for sale (12,024,053) (15,528,429) (8,915,878) Proceeds from sales of mortgage loans 14,498,222 14,248,558 9,379,987 Net gains on mortgage loan sales (219,636) (289,932) (66,062) Investment securities losses, net - - 14,872 Decrease in accrued interest receivable 35,198 2,079 50,549 Increase (decrease) in accrued interest payable (26,583) (48,215) 214,720 Other, net (358,849) (334,363) 86,977 ------------ ------------ ------------ Net cash provided by operating activities 6,328,117 2,225,728 4,681,091 ------------ ------------ ------------ INVESTING ACTIVITIES Decrease (increase) in time deposits in other banks, net 8,000,000 (8,000,000) 99,000 Investment securities available for sale: Proceeds from sales - - 11,521,498 Proceeds from maturities and repayments 5,512,358 8,021,601 2,204,295 Purchases (14,913,651) (13,133,296) (650,790) Investment securities held to maturity: Proceeds from maturities and repayments 672,341 3,306,670 4,400,876 Purchases - - (323,705) Increase in loans, net (32,192,223) (3,689,028) (16,435,867) Purchases of premises and equipment (1,409,130) (1,225,459) (524,603) Premium paid on branch acquisition - - (325,310) Proceeds from loan sales 9,181,939 - - Proceeds from sales of other real estate owned 235,366 - 187,597 ------------ ------------ ------------ Net cash provided by (used for) investing activities (24,913,000) (14,719,512) 152,991 ------------ ------------ ------------ FINANCING ACTIVITIES Increase in deposits, net 6,974,766 8,924,368 16,445,364 Increase (decrease) in short-term borrowings, net 9,000,000 (2,000,000) (7,000,000) Proceeds from other borrowings 223,000 - - Payments on other borrowings (252,549) (218,998) (201,397) Proceeds from stock options exercised 99,420 83,321 34,800 Cash dividends paid (1,189,394) (1,076,728) (965,290) ------------ ------------ ------------ Net cash provided by financing activities 14,855,243 5,711,963 8,313,477 ------------ ------------ ------------ Increase (decrease) in cash and cash equivalents (3,729,640) (6,781,821) 13,147,559 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 15,035,273 21,817,094 8,669,535 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 11,305,633 $ 15,035,273 $ 21,817,094 ============ ============ ============
See accompanying notes to the consolidated financial statements. 6 SLIPPERY ROCK FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A summary of the significant accounting and reporting policies applied in the presentation of the accompanying financial statements follows: 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 corporation 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 revenue emanate from interest earnings on its portfolio of residential real estate, commercial mortgage, and commercial and consumer loans as well as interest earnings on investment securities and a variety of deposit and trust 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 balance sheet date 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 and ability, 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 the level yield interest method 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 on the accrual method. Common stock of the Federal Home Loan Bank, Federal Reserve Bank, and Atlantic Central Bankers Bank represents ownership in institutions which are wholly-owned by other financial institutions. These securities are accounted for at cost and are classified as equity securities available for sale. LOANS - ----- Loans are reported at their principal amount net of the allowance for loan losses. Interest on 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 a reasonable doubt exists as to the collectibility of additional interest. Income is subsequently recognized only to the extent that cash payments are received provided the loan is not delinquent in payment and, in management's judgment, the borrower has the ability and intent to make future interest and principal payments. Loan origination fees and certain direct loan origination costs are being deferred and the net amount amortized as an adjustment of the related loan's 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 in the aggregate at the 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 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. 7 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 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 - ----------------- Such assets are comprised of branch acquisition core deposit premiums. These core deposit premiums, which were quantified by specific core deposit life studies, are amortized using the straight-line method over the estimated average lives of the deposit accounts. Annual assessments of the carrying values and remaining amortization periods of intangible assets are made to determine possible carrying value impairment and appropriate adjustments as deemed necessary. Intangible assets are a component of other assets on the balance sheet. 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 consolidated balance sheet since such items are not assets of the Company. 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. EARNINGS PER SHARE - ------------------ The Company provides dual presentation of basic and diluted earnings per share. Basic earnings per share is calculated utilizing net income as reported as the numerator and average shares outstanding as the denominator. The computation of diluted earnings per share differs in that the dilutive effects of any stock options, warrants, and convertible securities are adjusted in the denominator. 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 that it is deductible under existing federal tax regulations. Pension and other employee benefits also include contributions to a defined contribution Section 401(k) plan covering eligible employees. Contributions matching those made by eligible employees and an elective contribution are made annually at the discretion of the Board of Directors. 8 STOCK OPTIONS - ------------- The Company maintains a stock option plan for the directors, officers, and employees. When the exercise price of the Company's stock options is greater than or equal to the market price of the underlying stock on the date of the grant, no compensation expense is recognized in the Company's financial statements. Pro forma net income and earnings per share are presented to reflect the impact of the stock option plan assuming compensation expense had been recognized based on the fair value of the stock options granted under the plan. MORTGAGE SERVICING RIGHTS ("MSRs") - ---------------------------------- The Company has loan agreements for the express purpose of selling these loans in the secondary market. The Company maintains all servicing rights for these loans. Originated MSRs are recorded by allocating total costs incurred between the loan and servicing rights based on their relative fair values. MSRs are amortized in proportion to the estimated servicing income over the estimated life of the servicing portfolio. MSRs are a component of other assets on the consolidated balance sheet. COMPREHENSIVE INCOME - -------------------- The Company is required to present comprehensive income in a full set of general purpose financial statements for all periods presented. Other comprehensive income is comprised exclusively of unrealized holding gains (losses) on the available for sale securities portfolio. The Company has elected to report the effects of other comprehensive income as part of the Statement of Changes in Stockholders' Equity. 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 1999, 1998, and 1997 were $6,823,014, $7,033,967, and $6,300,354, respectively. Cash payments for income taxes for 1999, 1998, and 1997 amounted to $1,472,000, $1,353,000, and $1,013,000, respectively. PENDING ACCOUNTING PRONOUNCEMENTS - --------------------------------- In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended in June 1999 by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities Deferral of the Effective Date of FASB Statement No. 133." The Statement provides accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, by requiring the recognition of those items as assets or liabilities in the statement of financial position, recorded at fair value. Statement No. 133 precludes a held to maturity security from being designated as a hedged item; however, at the date of initial application of this Statement, an entity is permitted to transfer any held to maturity security into the available for sale or trading categories. The unrealized holding gain or loss on such transferred securities shall be reported consistent with the requirements of Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Such transfers do not raise an issue regarding an entity's intent to hold other debt securities to maturity in the future. This Statement applies prospectively for all fiscal quarters of all years beginning after June 15, 2000. Earlier adoption is permitted for any fiscal quarter that begins after the issue date of this Statement. 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 or stockholders' equity. 2. EARNINGS PER SHARE There are no convertible securities which would affect the numerator in calculating basic and diluted earnings per share; therefore, net income as presented on the Consolidated Statement of Income will be used as the numerator. The following table sets forth the composition of the weighted-average common shares (denominator) used in the basic and diluted earnings per share computation. 1999 1998 1997 --------- --------- --------- Weighted-average common shares outstanding used to calculate basic earnings per share 2,765,086 2,759,802 2,756,278 Additional common stock equivalents (stock options) used to calculate diluted earnings per share 4,637 2,167 - --------- --------- --------- Weighted-average common shares and common stock equivalents used to calculate diluted earnings per share 2,769,723 2,761,969 2,756,278 ========= ========= ========= 9 3. INVESTMENT SECURITIES Amortized cost and estimated market values of investment securities are summarized as follows:
1999 --------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ------------- ---------- ------------ ------------- AVAILABLE FOR SALE - ------------------ U.S. Government agency securities $ 7,287,943 $ 1,096 $ (92,503) $ 7,196,536 Obligations of states and political subdivisions 15,513,032 8,319 (705,726) 14,815,625 Other debt securities 1,027,092 - (12,535) 1,014,557 Mortgage-backed securities 2,603,977 4,293 (62,557) 2,545,713 ------------- ---------- ------------ ------------- Total debt securities 26,432,044 13,708 (873,321) 25,572,431 Common stocks 1,027,600 - - 1,027,600 ------------- ---------- ------------ ------------- Total $ 27,459,644 $ 13,708 $ (873,321) $ 26,600,031 ============= ========== ============ ============= 1999 --------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ------------- ---------- ------------ ------------- HELD TO MATURITY - ---------------- Obligations of states and political subdivisions $ 2,720,987 $ 20,257 $ (2,424) $ 2,738,820 Other debt securities 200,000 - (4,219) 195,781 Mortgage-backed securities 51,562 - (529) 51,033 ------------- ---------- ------------ ------------- Total $ 2,972,549 $ 20,257 $ (7,172) $ 2,985,634 ============= ========== ============ ============= 1998 --------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ------------- ---------- ------------ ------------- AVAILABLE FOR SALE - ------------------ U.S. Treasury securities $ 2,415,227 $ 30,741 $ - $ 2,445,968 U.S. Government agency securities 6,032,733 15,908 (11,510) 6,037,131 Obligations of states and political subdivisions 7,518,126 110,602 (16,974) 7,611,754 Other debt securities 100,000 - - 100,000 Mortgage-backed securities 1,007,820 11,971 (9,680) 1,010,111 ------------- ---------- ------------ ------------- Total debt securities 17,073,906 169,222 (38,164) 17,204,964 Common stocks 991,900 - - 991,900 ------------- ---------- ------------ ------------- Total $ 18,065,806 $ 169,222 $ (38,164) $ 18,196,864 ============= ========== ============ =============
1998 --------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ------------- ---------- ------------ ------------- HELD TO MATURITY - ---------------- Obligations of states and political subdivisions $ 3,365,361 $ 85,798 $ - $ 3,451,159 Other debt securities 200,000 4,218 - 204,218 Mortgage-backed securities 78,836 1,369 - 80,205 ------------- ---------- ------------ ------------- Total $ 3,644,197 $ 91,385 $ - $ 3,735,582 ============= ========== ============ =============
The amortized cost and estimated market value of debt securities at December 31, 1999, 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. 10
Available for Sale Held to Maturity ----------------------------------------------------------------------- Estimated Estimated Amortized Market Amortized Market Cost Value Cost Value ------------- ------------- ------------- ------------- Due in one year or less $ 1,827,615 $ 1,823,750 $ - $ - Due after one year through five years 6,501,542 6,395,462 1,263,398 1,274,075 Due after five years through ten years 10,436,319 10,133,830 1,657,589 1,660,526 Due after ten years 7,666,568 7,219,389 51,562 51,033 ------------- ------------- ------------- ------------- Total $ 26,432,044 $ 25,572,431 $ 2,972,549 $ 2,985,634 ============= ============= ============= =============
During the year ended December 31, 1997, proceeds from security sales totaled $11,521,498 resulting in gross gains of $55,574 and gross losses of $70,446. There were no security sales during the years ended December 31, 1999 and 1998. Investment securities with an amortized cost and estimated market value of $22,159,763 and $21,545,025 respectively, at December 31, 1999, and $14,243,162 and $14,475,512, respectively, at December 31, 1998, were pledged to secure public deposits and other purposes as required by law. 4. LOANS Major classifications of loans are summarized as follows: 1999 1998 -------------- -------------- Real estate: Construction $ 4,662,680 $ 2,693,310 Residential 100,426,388 84,379,052 Commercial 36,426,608 27,793,438 Commercial, financial, and agricultural 17,727,489 15,761,254 Consumer 23,899,301 30,226,854 -------------- -------------- 183,142,466 160,853,908 Less allowance for loan losses 1,681,172 1,410,309 -------------- -------------- Net loans $ 181,461,294 $ 159,443,599 ============== ============== Real estate loans serviced for Freddie Mac, which are not included in the consolidated balance sheet, totaled $42,834,475 and $34,009,862 at December 31, 1999 and 1998, respectively. In the normal course of business, loans are extended to directors, executive officers, and their associates. 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, 1999 is as follows: Amounts 1998 Advances Collected 1999 ------------ ------------ ------------ ------------ $ 1,076,666 $ 14,567,572 $ 14,336,749 $ 1,307,489 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, 1999 and 1998, loans outstanding to individuals and businesses are dependent upon the local economic conditions in the immediate trade area. The Company had nonaccrual loans, exclusive of impaired loans, of $376,391 and $1,278,262 at December 31, 1999 and 1998, respectively. Interest income on loans would have increased by approximately $33,560 and $72,012 during 1999 and 1998, respectively, if these loans had performed in accordance with their original terms. Information with respect to impaired loans as of and for the years ended December 31, is as follows: 1999 1998 ------------ ------------ Impaired loans $ 2,149,846 $ 592,787 Related allowance for loan losses 322,477 88,918 Average recorded balance of impaired loans 947,725 651,047 Interest income recognized on impaired loans 6,125 - 11 5. ALLOWANCE FOR LOAN LOSSES Changes in the allowance for loan losses for the years ended December 31, are as follows: 1999 1998 1997 ----------- ----------- ----------- Balance, January 1 $ 1,410,309 $ 1,298,981 $ 1,176,951 Add: Provision charged to operations 720,000 310,000 275,000 Recoveries 73,477 44,246 35,459 Less loans charged off 522,614 242,918 188,429 ----------- ----------- ----------- Balance, December 31 $ 1,681,172 $ 1,410,309 $ 1,298,981 =========== =========== =========== 6. PREMISES AND EQUIPMENT Major classifications of premises and equipment are summarized as follows: 1999 1998 ---------------- --------------- Land $ 1,107,484 $ 654,134 Bank buildings 5,280,262 4,732,771 Furniture, fixtures, and equipment 3,743,561 3,335,273 ---------------- --------------- 10,131,307 8,722,178 Less accumulated depreciation 4,953,757 4,317,412 ---------------- --------------- Total $ 5,177,550 $ 4,404,766 ================ =============== Depreciation charged to operations was $636,345, $553,848, and $514,213 in 1999, 1998, and 1997, respectively. 7. DEPOSITS Time deposits include certificates of deposit and other time deposits in denominations of $100,000 or more. Such deposits totaled $23,599,092 and $22,682,188 at December 31, 1999 and 1998, respectively. Interest expense on certificates of deposit over $100,000 amounted to $1,252,337, $1,291,458, and $1,057,378 for the years ended December 31, 1999, 1998, and 1997, respectively. The following table sets forth the remaining maturity of time certificates of deposit of $100,000 or more at December 31, 1999. Three months or less $ 7,506,686 Over three months through six months 3,654,971 Over six months through twelve months 5,655,025 Over twelve months 6,782,410 ---------------- Total $ 23,599,092 ================ 8. SHORT-TERM BORROWINGS The outstanding balances and related information for short-term borrowings are summarized as follows: 1999 1998 ------------------------------------------------ Amount Rate Amount Rate ----------- ------- --------- ------- Balance at year-end $ 9,000,000 5.81% $ - - Average balance outstanding during the year 1,367,671 5.59% 38,356 6.19% Maximum amount outstanding at any month-end 9,000,000 - - - Short-term borrowings include "RepoPlus" advances with the Federal Home Loan Bank of Pittsburgh ("FHLB"). RepoPlus advances are subject to annual renewal, incur no service charges, bear a fixed rate of interest, and are secured by a blanket security agreement on qualifying residential mortgages. 12 9. OTHER BORROWINGS Other borrowings consists of the following:
1999 1998 ------------- --------------- Long-term FHLB advances $ 89,588 $ 317,584 Real estate mortgage payable, due in monthly installments of $3,157 including interest at 8.5 percent 97,552 - Real estate mortgage payable, due in monthly installments of $2,521 including interest at 8.5 percent 111,065 - Real estate mortgage payable, due in monthly installments of $945 including interest at 10.5 percent 5,500 15,670 ------------- --------------- Total $ 303,705 $ 333,254 ============= ===============
Long-term advances from the FHLB consist of a borrowing maturing within one year with a fixed interest rate of 5.73 percent. Pursuant to a collateral agreement entered into with the FHLB, these advances are secured by stock in the FHLB and qualifying first mortgage loans. As December 31, 1999, the Company's remaining borrowing capacity was $56 million. 10. INCOME TAXES The provision for federal income taxes consists of:
1999 1998 1997 ---------------- ----------------- ----------------- Currently payable $ 1,392,429 $ 1,353,202 $ 1,105,150 Deferred (136,566) 255 (4,936) ---------------- ----------------- ----------------- Total provision $ 1,255,863 $ 1,353,457 $ 1,100,214 ================ ================= =================
The tax effects of deductible and taxable temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:
1999 1998 -------------- --------------- Deferred tax assets: Allowance for loan losses $ 480,495 $ 388,401 Unrealized loss on securities 292,268 - Premises and equipment 54,154 22,240 Fair market value in excess of carrying value of loans held for sale 26,472 36,011 Other 71,985 49,482 -------------- --------------- Total 925,374 496,134 -------------- --------------- Deferred tax liabilities: Unrealized gain on securities - 44,559 Prepaid pension asset 120,286 114,515 Deferred loan origination fees, net 2,791 3,469 Other - 4,687 -------------- --------------- Total 123,077 167,230 -------------- --------------- Net deferred tax assets $ 802,297 $ 328,904 ============== ===============
No valuation allowance was established at December 31, 1999 and 1998 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. 13 The reconciliation between the federal statutory rate and the Company's effective consolidated income tax rate is as follows:
1999 1998 1997 ------------------------ ------------------------ ------------------------ % of % of % of Pre-tax Pre-tax Pre-tax Amount Income Amount Income Amount Income ------------ ------- ------------- ------- ------------ ------- Federal income tax at statutory rate $ 1,479,967 34.0 % $ 1,498,544 34.0 % $ 1,354,361 34.0 % Tax-exempt income (270,636) (6.2) (177,373) (4.0) (306,171) (7.7) Nondeductible interest to carry tax-exempt assets 35,956 0.8 23,799 0.5 40,138 1.0 Other 10,576 0.3 8,487 0.2 11,886 0.3 ------------ ------- ------------- ------- ------------ ------- Actual expense and effective rate $ 1,255,863 28.9 % $ 1,353,457 30.7 % $ 1,100,214 27.6 % ============ ======= ============= ======= ============ =======
11. EMPLOYEE BENEFITS DEFINED BENEFIT PLAN - -------------------- The Bank sponsors a trusteed, noncontributory defined benefit pension plan covering substantially all employees and officers. The plan calls for benefits to be paid to eligible employees at retirement based primarily upon years of service with the Bank and compensation rates near retirement. The Bank's policy is to make annual contributions, if needed, based upon the funding formula developed by the plan's actuary. The following table sets forth the change in plan assets and benefit obligation at December 31: 1999 1998 ------------- ------------- Plan assets at fair value, beginning of year $ 1,742,177 $ 1,682,945 Actual return on plan assets 283,727 255,354 Employer contribution 158,587 72,542 Benefits paid (26,133) (268,664) ------------- ------------- Plan assets at fair value, end of year 2,158,358 1,742,177 ------------- ------------- Benefit obligation, beginning of year 1,823,757 1,268,681 Service cost 137,433 134,789 Interest cost 118,544 82,464 Actuarial adjustments 136,130 606,487 Benefits paid (26,133) (268,664) ------------- ------------- Benefit obligation, end of year 2,189,731 1,823,757 ------------- ------------- Funded status (31,373) (81,580) Prior service cost 7,391 8,797 Unrecognized transition asset (24,049) (28,299) Unrecognized net (gain) loss from past experience different from that assumed 401,121 428,275 ------------- ------------- Prepaid pension cost $ 353,090 $ 27,193 ============= ============= Plan assets consist primarily of certificates of deposit, money market, and equity mutual funds. Assumptions used in determining net period pension cost are as follows: 1999 1998 1997 ------ ------ ------ Discount rate 6.50% 6.50% 7.50% Expected return on plan assets 7.50% 6.50% 7.50% Rate of compensation increase 5.00% 5.00% 5.00% Net period pension costs include the following components:
1999 1998 1997 --------- --------- --------- Service cost of the current period $ 137,433 $ 134,789 $ 109,855 Interest cost on projected benefit obligation 118,544 82,464 81,855 Actual return on plan assets (283,727) (255,354) (251,244) Net amortization and deferral 188,190 137,717 147,315 --------- --------- --------- Net periodic pension cost $ 160,440 $ 99,616 $ 87,781 ========= ========= =========
14 401(K) PLAN - ----------- The Bank maintains a trusteed Section 401(k) plan. The Bank makes matching contributions of 50 percent of eligible officers and employees contributions annually, to a maximum of four percent of base salary. Substantially all officers and employees are eligible to participate in the plan. The Bank's contribution to this plan was $40,418, $33,503, and $31,679 for the years ended December 31, 1999, 1998, and 1997, respectively. 12. STOCK OPTION PLAN The Company maintains an Incentive Stock Option Plan ("ISOP") and a Directors Stock Option Plan ("Directors Plan"). The ISOP provides for granting up to 200,000 shares of authorized but unissued common stock to eligible salaried officers and employees. The Directors Plan provides for 72,000 authorized but unissued shares of common stock to be granted to nonemployee directors. The per share exercise price of an option granted cannot be less than the fair value of a share of common stock on the date the option is granted. The options granted under the Directors Plan are immediately vested while the option granted under the ISOP are not exercisable for two years and then are vested in equal installments in years three through five. The stock options typically have expiration terms of ten years subject to certain extensions and terminations. The following table presents share data related to the outstanding options:
Weighted- Weighted- average average Exercise Exercise 1999 Price 1998 Price ------ ---------- ------- ---------- Outstanding, January 1 39,650 $ 16.70 21,000 $ 14.50 Granted 24,100 19.30 23,650 18.50 Exercised 5,400 18.41 5,000 15.94 Forfeited - - - - ------ ------- Outstanding, December 31 58,350 18.37 39,650 16.70 ====== =======
The following table summarizes the characteristics of stock options outstanding at December 31, 1999:
Outstanding Exercisable ------------------------------------ ---------------------- Average Average Average exercise exercise Exercise price Shares life price Shares price -------------- ------- ------- -------- ------- -------- $14.50 17,200 7.75 $14.50 5,719 $14.50 18.50 19,450 8.75 18.50 1,800 18.50 19.30 21,700 9.75 19.30 3,600 19.30 ------- ------- 58,350 11,119 ======= ======
For purposes of computing pro forma results, the Company estimated the fair values of stock options using the Black-Scholes option pricing model. The model requires the use of subjective assumptions which can materially effect fair value estimates. Therefore, the pro forma results are estimates of results of operations as if compensation expense had been recognized for the stock option plans. The fair value of each stock option granted was estimated using the following weighted-average assumptions for grants in 1999, 1998, and 1997: (1) expected dividend yields ranged from 2.0 percent to 2.3 percent; (2) risk-free interest rates ranging from 6.4 percent to 6.5 percent; (3) expected volatility of 3.0; and (4) expected lives of options ranged from 7.75 to 9.75 years. The Company accounts for its stock option plans under provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Under this Opinion, no compensation expense has been recognized with respect to the plans because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the grant date. Had compensation expense for the stock option plans been recognized in accordance with the fair value accounting provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-based Compensation," net income applicable to common stock and basic and diluted net income per common share for the years ended December 31, 1999, 1998, and 1997 would have been as follows: 15
1999 1998 1997 ------------ ------------ ------------ Net income applicable to common stock: As reported $ 3,096,980 $ 3,054,026 $ 2,883,201 Pro forma 3,060,619 3,049,812 2,874,205 Basic net income per common share: As reported $ 1.12 $ 1.11 $ 1.05 Pro forma 1.11 1.10 1.04 Diluted net income per common share: As reported $ 1.12 $ 1.11 $ 1.05 Pro forma 1.11 1.10 1.04
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 consolidated financial statements. These commitments were comprised of the following at December 31:
1999 1998 ------------- ------------- Commitments to extend credit $ 34,904,154 $ 33,871,291 Standby letters of credit and financial guarantees 1,214,087 620,231 ------------- ------------- Total $ 36,118,241 $ 34,491,522 ============= =============
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 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 Company 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 On November 17, 1998, the Board of Directors of the Company approved a two-for-one stock split to shareholders of record December 4, 1998. The par value of the stock was maintained at $.25 per share. As a result of the stock split the outstanding shares increased by 1,381,824. All references to per share amounts in the accompanying financial statements for 1997 have been restated to reflect the stock split. 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 $2,606,000 and $1,969,000 and at December 31, 1999 and 1998. 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. 16 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 2000, without approval of the Comptroller, will be limited to approximately $3,948,000 plus net profits retained up to the date of the dividend declaration. 16. REGULATORY CAPITAL REQUIREMENTS Federal regulations require the Company and the Bank to maintain minimum amounts of capital. Specifically, each is required to maintain certain minimum dollar amounts and ratios of Total and Tier I capital to risk-weighted assets and of Tier I capital to average total assets. In addition to the capital requirements, the Federal Deposit Insurance Corporation Improvement Act ("FDICIA") established five capital categories ranging from "well capitalized" to "critically undercapitalized." Should any institution fail to meet the requirements to be considered "adequately capitalized," it would become subject to a series of increasingly restrictive regulatory actions. As of December 31, 1999 and 1998, the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be classified as a well capitalized financial institution, Total risk-based, Tier 1 risk-based, and Tier 1 Leverage capital ratios must be at least ten percent, six percent, and five percent, respectively. The Company's actual capital ratios are presented in the following table which shows that both met all regulatory capital requirements. The capital position of the Bank does not differ significantly from the Company's.
1999 1998 ---------------------------- --------------------------- Amount Ratio Amount Ratio ------------- --------- ------------- --------- Total Capital (to Risk-weighted Assets) Company $ 26,164,754 15.70 % $ 23,659,772 15.83 % For Capital Adequacy Purposes 13,333,280 8.00 11,956,160 8.00 To Be Well Capitalized 16,666,600 10.00 14,945,200 10.00 Tier I Capital (to Risk-weighted Assets) Company $ 24,483,582 14.69 % $ 22,249,463 14.89 % For Capital Adequacy Purposes 6,666,640 4.00 5,978,080 4.00 To Be Well Capitalized 9,999,960 6.00 8,967,120 6.00 Tier I Capital (to Average Assets) Company $ 24,483,582 10.63 % $ 22,249,463 10.43 % For Capital Adequacy Purposes 9,217,342 4.00 8,530,676 4.00 To Be Well Capitalized 11,521,678 5.00 10,663,344 5.00
17. FAIR VALUE DISCLOSURE The estimated fair value of the Company's financial instruments are as follows:
1999 1998 --------------------------------- --------------------------------- Carrying Fair Carrying Fair Value Value Value Value ------------- ------------- ------------- ------------- Financial assets: Cash, interest-bearing deposits in other banks, and federal funds sold $ 11,305,633 $ 11,305,633 $ 23,035,274 $ 23,035,274 Mortgage loans held for sale - - 2,467,803 2,467,803 Investment securities 29,572,580 29,585,665 21,841,061 21,932,446 Net loans 181,461,294 180,460,824 159,443,599 159,945,904 Accrued interest receivable 1,346,521 1,346,521 1,381,719 1,381,719 ------------- ------------- ------------- ------------- Total $ 223,686,028 $ 222,698,643 $ 208,169,456 $ 208,763,146 ============= ============= ============= ============= Financial liabilities: Deposits $ 197,123,701 $ 197,546,534 $ 190,148,937 $ 191,773,942 Short-term borrowings 9,000,000 9,000,000 - - Other borrowings 303,705 303,705 333,254 205,513 Accrued interest payable 707,081 707,081 733,664 733,664 ------------- ------------- ------------- ------------- Total $ 207,134,487 $ 207,557,320 $ 191,215,855 $ 192,713,119 ============= ============= ============= =============
17 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, noninterest 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 18. PARENT COMPANY Following are condensed financial statements for the parent company: CONDENSED BALANCE SHEET
December 31, 1999 1998 ------------- ------------- ASSETS Cash in subsidiary bank $ 169,131 $ 103,119 Investment in bank subsidiary 25,419,846 24,130,966 Other assets 22,132 22,391 ------------- ------------- TOTAL ASSETS $ 25,611,109 $ 24,256,476 ============= ============= LIABILITIES Other liabilities $ 1,403 $ 1,402 STOCKHOLDERS' EQUITY 25,609,706 24,255,074 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 25,611,109 $ 24,256,476 ============= =============
CONDENSED STATEMENT OF INCOME
Year Ended December 31, 1999 1998 1997 ------------ ------------ ------------ INCOME Dividends from subsidiary $ 1,189,395 $ 1,076,728 $ 1,004,687 EXPENSES 53,240 42,463 52,611 ------------ ------------ ------------ Income before income tax benefit 1,136,155 1,034,265 952,076 Income tax benefit (18,102) (14,437) (17,888) ------------ ------------ ------------ Income before equity in undistributed net income of subsidiary 1,154,257 1,048,702 969,964 Equity in undistributed net income of subsidiary 1,942,723 2,005,324 1,913,237 ------------ ------------ ------------ NET INCOME $ 3,096,980 $ 3,054,026 $ 2,883,201 ============ ============ ============
CONDENSED STATEMENT OF CASH Year Ended December 31, 1999 1998 1997 ------------- ------------- ------------- OPERATING ACTIVITIES Net income $ 3,096,980 $ 3,054,026 $ 2,883,201 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of subsidiary (1,942,723) (2,005,324) (1,913,237) Other 1,729 (4,185) 7,547 ------------- ------------- ------------- Net cash provided by operating activities 1,155,986 1,044,517 977,511 ------------- ------------- ------------- FINANCING ACTIVITIES Proceeds from stock options exercised 99,420 83,321 34,800 Cash dividends paid (1,189,394) (1,076,728) (965,290) ------------- ------------- ------------- Net cash used for financing activities (1,089,974) (993,407) (930,490) ------------- ------------- ------------- Increase in cash 66,012 51,110 47,021 CASH AT BEGINNING OF PERIOD 103,119 52,009 4,988 ------------- ------------- ------------- CASH AT END OF PERIOD $ 169,131 $ 103,119 $ 52,009 ============= ============= =============
19 REPORT OF INDEPENDENT AUDITORS 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, 1999 and 1998, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the three years in the period ended December 31, 1999. 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, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. /s/ S.R. Snodgrass, A.C. Wexford, PA February 4, 2000 S.R. Snodgrass, A.C. 1000 Stonewood Drive Suite 200 Wexford, PA 15090-8399 Phone: 724-934-0344 Facsimile: 724-934-0345 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATING RESULTS AND FINANCIAL - ----------------------------------------------------------------------- CONDITION - --------- FORWARD LOOKING STATEMENT The Private Securities Litigation Act of 1995 contains safe harbor provisions regarding forward looking statements. When used in this discussion, the words "believes," "anticipates," "contemplates," "expects," and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Those risks and uncertainties include changes in interest rates, the ability to control costs and expenses, and general economic conditions. The Company undertakes no obligation to publicly release the results of any revisions to those forward looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. OVERVIEW Slippery Rock Financial Corporation ("Company") is the parent holding company for The First National Bank of Slippery Annual Net Income Rock ("Bank"). This discussion and the $ in thousands related financial data represent the financial condition and results of (Bar graph belongs in this area) operations of the Bank for the three years ended December 31, 1999, and is $2,499 $2,670 $2,883 $3,054 $3,097 presented to assist in the understanding -------------------------------------- and evaluation of the financial 1995 1996 1997 1998 1999 condition and the results of operations of the Company and is intended to supplement, and should be read in conjunction with, the consolidated financial statements and the related notes. Management is not aware of any current recommendations by the regulatory agencies that will have a material effect on future earnings, liquidity or capital of the Company. RESULTS OF OPERATIONS Net income for 1999 was $3,097,000, an increase of $43,000 from 1998's earnings of $3,054,000. An increase in Earnings Per Share net interest income after provision for Dollars loan losses of $307,000 and a net increase in total other income of (Bar graph belongs in this area) $106,000 was offset by a net increase in total other expense of $468,000. $0.91 $0.97 $1.05 $1.11 $1.12 Income before taxes at December 31, --------------------------------- 1999 was $4,353,000 a decrease of 1995 1996 1997 1998 1999 $55,000 or 1.24% from the $4,408,000 reported at December 31, 1998. Federal income taxes of $1,256,000 at December 31, 1999 represents a decrease of $98,000 from the $1,354,000 reported at December 31, 1998. Net income for 1998 was $3,054,000, an increase of $171,000 from 1997's earnings of $2,883,000. An increase in Dividends Paid Per Share net interest income after provision for Dollars loan losses of $433,000 and a net increase in total other income of (Bar graph belongs in this area) $575,000 was offset by a net increase in total other expense of $585,000 and $0.24 $0.29 $0.35 $0.39 $0.43 an increase in federal income tax -------------------------------- expense of $253,000. 1995 1996 1997 1998 1999 21 Earnings per share, on a fully diluted basis, of $1.12 at December 31,1999 compared to $1.11 at December 31, 1998 and $1.05 at December 31, 1997, increases of $0.01 and $0.06 per share respectively. NET INTEREST INCOME Net interest income is the amount by which interest generated from interest earning assets exceeds interest paid on interest-bearing liabilities. Net interest income, on a tax equivalent basis, which is the primary component of earnings, was $10,239,000 for 1999, as compared to $9,375,000 for 1998 and $9,099,000 for 1997. Slippery Rock Financial Corporation AVERAGE BALANCE SHEETS AND NET INTEREST ANALYSIS (Dollars in Thousands)
1999 1998 1997 ----------------------------------------------------------------------- Average Average Average Volume Interest Yield Volume Interest Yield Volume Interest Yield ----------------------------------------------------------------------- ASSETS Interest-earning assets Taxable investment securities $ 11,497 $ 707 6.15% $ 12,565 755 6.01% $ 11,828 $ 741 6.26% Non-taxable investment securities (2) 16,688 1,159 6.95 9,246 680 7.35 15,315 1,118 7.30 Interest-bearing deposits in other banks 3,781 185 4.89 33 2 6.06 290 8 2.76 Loans (1, (3) 171,974 14,717 8.56 160,218 14,179 8.85 149,370 13,400 8.97 Federal funds sold 5,241 267 5.09 13,955 746 5.35 6,349 347 5.47 ---------------- ---------------- --------------- Total interest-earning assets 209,181 17,035 8.14% 196,017 16,362 8.34% 183,152 15,614 8.53% ------- ------- ------- Noninterest-earning assets Cash and due from banks 8,769 7,918 6,906 Allowance for loan losses (1,533) (1,353) (1,205) Other assets 9,606 8,706 8,033 -------- -------- -------- Total assets $226,023 $211,288 $196,886 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities Interest bearing checking $ 25,691 434 1.69% $ 24,052 523 2.17% $ 22,780 492 2.16% Money market accounts 25,994 911 3.50 22,694 866 3.82 23,842 912 3.83 Savings deposits 22,324 478 2.14 20,736 508 2.45 18,709 462 2.47 Time deposits 91,512 4,871 5.32 88,928 5,053 5.68 81,840 4,574 5.59 Borrowed funds 1,779 102 5.73 551 37 6.72 1,216 75 6.17 ---------------- ---------------- --------------- Total interest-bearing liabilities 167,300 6,796 4.06 156,961 6,987 4.45 148,387 6,515 4.39 ------- ------- ------ Noninterest-bearing liabilities Demand deposits 32,699 29,910 26,195 Other liabilities 917 1,028 983 Capital 25,107 23,389 21,321 -------- -------- -------- Total liabilities and stockholders' equity $226,023 $211,288 $196,886 ======== ======== -------- Net interest income and net yield on interest-earning assets $ 10,239 4.89% $ 9,375 4.78% $ 9,099 4.97% ======== ====== ======= ====== ======= ====== Net interest spread 4.08% 3.89% 4.13% ====== ====== ======
(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) - Non-accrual loans and loans held for sale included. 22 ANALYSIS OF CHANGES IN NET INTEREST INCOME (Dollars in Thousands)
1999 CHANGE FROM 1998 1998 CHANGE FROM 1997 ------------------------------- ---------------------------- TOTAL CHANGE DUE TO TOTAL CHANGE DUE TO CHANGE VOLUME(1) RATE(1) CHANGE VOLUME(1) RATE(1) ------ --------- ------- ------ --------- ------- INTEREST INCOME ON: Taxable investment securities $ (48) $ (66) $ 18 $ 14 $ 45 $ (31) Non-taxable investments 479 518 (39) (438) (446) 8 Interest-bearing deposits in other banks 183 148 35 (6) (2) (4) Loans 538 1,014 (476) 779 960 (181) Federal funds sold (479) (445) (34) 399 407 (8) ------------------------------- ----------------------------- TOTAL INTEREST INCOME 673 1,169 (496) 748 964 (216) ------------------------------- ----------------------------- INTEREST EXPENSE ON: Interest-bearing checking (89) 32 (121) 31 29 2 Money market accounts 45 122 (77) (46) (44) (2) Savings deposits (30) 37 (67) 46 50 (4) Time deposits (182) 144 (326) 479 404 75 Borrowed funds 65 71 (6) (38) (44) 6 ------------------------------- ----------------------------- TOTAL INTEREST EXPENSE (191) 406 (597) 472 395 77 ------------------------------- ----------------------------- NET INTEREST INCOME $ 864 $ 763 $ 101 $ 276 $ 569 $(293) =============================== =============================
(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 $13.0 million in 1999, principally due to an increase in average loans of $11.8 million. Although the most significant growth, $ 6.9 million, occurred within the commercial real estate segment of the loan portfolio, there were no concentrated efforts on management's part to target growth within any one particular segment of the loan portfolio. In additon to the increase in average loans, average non-taxable investments increased $7.4 million and average interest-bearing balances with others increased $3.6 million. These increases were offset by a decline in average federal funds sold balances, which declined $8.7 million during the period. The changes were brought about by the use of general liquidity available in federal funds sold, which was used to fund the net increases in loans and tax-free investments. Average interest-bearing liabilities increased $10.3 million for the period ended December 31,1999. Although each of interest-bearing products had net increases for the period, average money market accounts, which increased $3.3 million, had the most significant growth. Money market accounts were followed by net increases in average time deposits of $2.6 million and interest-bearing checking of $1.6 million. Average interest-bearing deposits increased $9.1 million or 5.8% without any concentrated efforts on management's part to target growth within any one particular product. As in 1999, average interest-earning assets increased $13.0 million in 1998, principally due to an increase in average loans of $10.8 million. The most significant average loan growth, $7.9 million, occurred within the residential real estate portfolio. There were no concentrated efforts on management's part to target growth within any one particular segment of the portfolio. Average interest-bearing liabilities increased $8.6 million in 1998, with the most significant growth, $7.1 million, occurring in average certificates of deposits. Growth within the certificate product resulted from various short-term special offerings throughout the year. The specials resulted from market pressures from competing institutions vying for deposit growth. As a result, the bank offered an eleven month and a nineteen month certificate, both of which offered aggressive interest rates relative to certificates of more traditional terms and pricing. At December 31, 1998, the Bank had $5.9 million in the eleven month certificate and $3.0 million in the nineteen month product. (3 Bar graphs side by side in this area) Total Assets $ in Millions $162.011 $195.713 $207.148 $215.773 $233.019 - ------------------------------------------------ 1995 1996 1997 1998 1999 Return on Average Assets Percentage 1.64% 1.52% 1.46% 1.45% 1.37% - --------------------------------- 1995 1996 1997 1998 1999 Return on Average Equity Percentage 14.32% 13.78% 13.52% 13.06% 12.34% - -------------------------------------- 1995 1996 1997 1998 1999 23 Although total average earning assets and average loans increased during 1999, the yield on average interest-earning assets decreased in 1999 to 8.14% from a level of 8.34% in 1998. The decline occurred principally from a reduction on loan yields which fell from a level of 8.97% at December 31,1997 to 8.85% at December 31, 1998 to 8.56% at December 31,1999. Lower interest rate pricings for new loan ordinations brought about by general market pressures as well as lower interest rate repricings within the Bank's existing adjustable rate products contributed to the decline in loan yields. Downward pressure continued on yields on earning assets despite Federal Reserve Board ("Fed") action in the third quarter to raise interest rates. The Bank's existing portfolio of adjustable rate loans, specifically mortgages, continued to reprice downward due to natural repricing time lags that occur within the portfolio. Given that it takes the Bank's adjustable rate mortgage portfolio a full year to reprice in its entirety, management anticipates that loan yields will continue to decline, although the extent to which the portfolio reprices will be dependent on future Fed action and the overall condition of the National and local economies. The analysis of changes in net interest income indicates that the total change in interest income on loans of $538,000 is comprised of an increase in loan income of $1,014,000 due to volume increases within the loan portfolio, and a reduction in loan income of $476,000 due to changes in interest rates. The yield on interest-bearing liabilities decreased 39 basis points (0.39%) during the twelve month period ended December 31,1999 from a level of 4.45% at December 31,1998 to 4.06% at December 31,1999. The decrease was due to reductions in the yield paid on all interest bearing deposit products. The yield paid on certificates of deposit declined from a level of 5.68% at December 31, 1998 to a level of 5.32 at December 31, 1999, principally due to market activity. The reductions in other "core" interest-bearing products, specifically interest bearing checking, money market accounts, and savings accounts were brought about by management's interest rate risk management program. In June of 1999, management strategically reduced the rates paid on these core products in management of the Bank's net interest margin. Although these core deposit products are variable rate and fluctuate with market activity, management has limited ability to control the timing and extent of these repricings. The rate volume table indicates a decrease in interest expense of $191,000 in 1999 due primarily to a decrease in interest expense on certificates of deposit of $182,000. Interest expense on certificates increased $144,000 due to volume but declined $326,000 due to reductions in interest rates. The effect of the reduction in yields on interest-earning assets and the decrease in cost of interest-bearing liabilities was that the net yield on interest-earning assets ("net interest margin") at December 31,1999 increased from that of December 31,1998. Net interest margin at December 31,1999 was 4.89% as compared to 4.78% at December 31,1998 and 4.97% at December 31, 1997. It should 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 - ------------ 1999- 1998 - ---------- The principal sources of other income are service charges, fees and commissions. Other income for 1999 totaled $1,735,000 an increase of $106,000 or 6.5% from $1,629,000 at December 31,1998. Total other income increased due to increases in service charges on deposit accounts of $47,000, an increase in trust fees of $47,000 and an increase in other miscellaneous income of $101,000. These items were offset by a decline on net gains recorded on loan sales of $89,000. The increase in service charges on deposit accounts is due to volume activity and pricing changes that became effective during the third quarter. Trust fee income increased due to volume activity within the department. The increase in other miscellaneous income is comprised of several items; an increase in mortgage servicing fees of $20,000, an increase in insurance commissions of $46,000, an increase in fees associated with the Bank's debit card program of $147,000 and an increase in brokerage commission fees of $26,000. These items were offset by a one-time gain recorded in 1998 pertaining to the sale of the Bank's former Plaza office of $145,000. No such gains were recorded in 1999. Income from mortgage servicing increased due to volume increases within the sold loan portfolio. Commissions from insurance sales increased due to greater marketing efforts on the part of the Bank's lenders to sell life and accident and health insurance on consumer and mortgage loans. The increase in debit card fee income is due to the implementation of an annual fee assessment and due to increased volumes. In October 1999, in an effort to offset costs associated with the product, the Bank implemented an annual fee for customers using the debit card product. In addition, the Bank records interchange fees from merchants who accept the debit card as a payment method. The fee, which is transaction based, increases as the volume and average ticket amount increase. In 1999, The Bank recorded gains of $7,000 on the sale of $14.0 million of fixed rate, 1-4 family, residential mortgages, a decline of $142,000 from 1998. Gains recorded on the sale of $14.1 million of residential mortgages in 1998 totaled $149,000. Because the Bank maintains the servicing on the sold loans, additional income of $145,000 was recorded in 1999 pertaining to mortgage servicing rights ("MSR"). MSRs are amortized to expense in proportion to 24 the estimated servicing income over the estimated life of the servicing portfolio. In addition to mortgage sales, the Bank also sold approximately $9.2 million in student loans in 1999 and recorded net gains of $68,000 on the sale. 1998 - 1997 - ----------- Other income for 1998 totaled $1,629,000, an increase of $575,000 or 54.6% from $1,054,000 at December 31, 1997. The increase is derived principally from three sources, an increase in service charges on deposit accounts, an increase in net gains recorded on the sale of loans and an increase in other miscellaneous income. Income from service charges on deposit accounts increased $54,000 from $539,000 at December 31, 1997 to $593,000 at December 31,1998 due to volume activity. In 1998, The Bank recorded gains of $149,000 on the sale of $14.1 million of fixed rate, 1-4 family, residential mortgages. Gains recorded on the sale of $9.3 million of residential mortgages in 1997 totaled $66,000. MSR income totaled $141,000 in 1998. Other miscellaneous income of $670,000 at December 31,1998 compared to $387,000 at December 31,1997 an increase of $283,000. The increase is due to an increase in mortgage loan servicing fee income of $21,000 due to volume increases in the loan servicing portfolio, an increase in ATM surcharge fee income of $52,000 and an increase in debit card interchange fee income of $68,000. ATM surcharge income of $74,000 at December 31,1998 compared to $22,000 at December 31,1997. The Bank began surcharging other bank's ATM cardholders using the Bank's ATM machines in August of 1997, therefore, 1998 represents the first full year of the fee's implementation. In December of 1997, the Bank introduced a debit card product. Fee income to the Bank for this product, based on volume and paid by participating merchants, totaled $72,000 at December 31, 1998 compared to $4,000 at December 31,1997. The Bank also recorded a gain of $145,000 from the sale of its former Plaza office as part of a general reconstruction project at the local shopping plaza where the office was located. A new office was subsequently constructed directly across the street from the former location. OTHER EXPENSE - ------------- 1999-1998 - --------- Total other expenses of $6,485,000 at December 31,1999 represented an increase of $468,000 from $6,017,000 at December 31, 1998. The major contributors of the increase are salary and employee benefits of $285,000, net occupancy expense of $129,000, and equipment expense of $55,000. The increase in salary and employee benefits is attributed to normal annual increases and staff additions to accommodate three new offices anticipated to open in 2000. In 1999, the Bank acquired land in New Wilmington Borough and Hickory Township, Lawrence County, Pennsylvania for the construction of two new full service branch facilities. In addition, the Bank anticipates opening a grocery store branch in a local Slippery Rock establishment in third quarter 2000. Occupancy expense and equipment expense increased in 1999 due to increased costs associated with the new Plaza facility and the new Trust Division building. These increases were offset by a decline in data processing expense of $67,000 which was due to one-time, third party data processing charges recorded in 1998 associated with the Bank's debit card product. 1998 - 1997 - ----------- Total other expenses of $6,017,000 at December 31,1998 represented an increase of $585,000 from $5,432,000 at December 31, 1997. The major contributors of the increase are salary and employee benefits of $217,000, equipment expense of $121,000, data processing expense of $117,000 and miscellaneous expense of $232,000. The increase in salary and employee benefits is attributed to normal annual increases. Equipment expense increased due to acquisitions and increased depreciation expense. Data processing increased due to increased processing costs of $39,000 for volume increases in the Bank's ATM and debit card products and due to one-time fee assessments of $45,000 pertaining to the debit card program. In addition, the Bank incurred direct billings of $18,000 pertaining to year 2000 testing of its core data processing system. The increase in other miscellaneous expense is comprised of several items. One is a $ 34,000 increase in net losses recorded on the disbandondment of computer hardware and software. Legal and professional expense increased $29,000 in 1998 due to costs incurred for the expansion of trust services to include the sales of mutual funds and annuities. Also included in the increase in legal and professional fees were costs associated with a site study performed for possible branch locations. An increase in collection expense of $44,000 in 1998 pertaining to foreclosure proceedings on a single parcel also contributed to the overall increase in other miscellaneous expense. The Bank uses a third party data processor for its student loan portfolio, accordingly, processing fees are based on the size of the loan portfolio being serviced and increased $19,000 in 1998. The increase in servicing fee expense is attributed to increased volumes within the Bank's student loan portfolio. Another item contributing to the overall increase in other miscellaneous expense was an increase in net losses on the sale of other real estate owned. Net gains of $32,000 were recorded on sales of property in 1997, however, there were no gains or losses recorded on the sale of other real estate in 1998. The final item to affect the increase in other expense was an increase in amortization expense for intangible assets. Intangible asset amortization increased $20,000 for the period ended December 31, 1998. The increase was due to increased amortization pertaining to acquisition of the Slippery Rock office of First Western Bank, F.S.B. 25 INCOME TAXES - ------------ Federal income taxes for 1999 of $1,256,000 represented a 7.2% decrease from the $1,353,000 reported in 1998. The decrease is due to a decrease in taxable income, which decreased $295,000 or 7.4% to $3,690,000 in 1999. The decrease in taxable income resulted from an increase in tax-exempt income. Tax-exempt income increased $308,000 in 1999 as a result of net increases in average non-taxable municipal securities. These changes resulted in the Company's effective tax rate decreasing to 28.9% in 1999 from 30.7% in 1998. Federal income taxes for 1998 of $1,353,000 represented a 23.0% increase from the $1,100,000 reported in 1997. The increase is due to an increase in taxable income, which increased $745,000 or 23.0% to $4.0 million in 1998. The increase in taxable income not only resulted from an increase in total earnings, but also from a reduction in tax-exempt income. Tax-exempt income declined $289,000 in 1998 as a result of net declines in average non-taxable municipal securities. As a result, the Company's effective tax rate increased to 30.7% in 1998 compared to 27.6% in 1997. FINANCIAL CONDITION - ------------------- 1999 - 1998 - ----------- Average total assets at December 31,1999 were $226.0 million, an increase of $14.7 million or 7.0% from $211.3 million at December 31,1998. Average total interest-earning assets increased $12.9 million in 1998, primarily from increases in average loan balances, which increased $11.8 million or 7.3% and an increase in average non-taxable securities, which increased $7.4 million or 80.5 %. The most significant growth in the loan portfolio occurred within the commercial real estate portfolio and the 1-4 family residential real estate portfolio. Commercial real estate loans increased $5.7 million or 20.5% from $27.8 million at December 31,1998 to $33.5 million at December 31, 1999. Residential real estate loans, which includes first and secondary lien positions, increased $12.2 million from $80.6 million at December 31, 1998 to $92.8 million at December 31, 1999. 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 was funded by an increase in average deposit liabilities and short-term borrowings. Average deposit liabilities at December 31,1999 were $198.2 million, an increase of $11.9 million or 6.4% from $186.3 million at December 31, 1998. Average balances increased across all deposit products. The greatest net increase occurred within the average money market accounts, which increased $3.3 million or 14.5% from $22.7 million at December 31,1998 to $26.0 million at December 31,1999. This was followed by an increase in average certificates of deposit of $2.6 million or 2.9%. Average short-term borrowings increased $1.4 million for the period ended December 31, 1999. The increase in average borrowed funds resulted from short-term advances from the Federal Home Loan Bank ("FHLB") used for general liquidity purposes. Total period end assets at December 31,1999 were $233.0 million, an increase of $17.2 million or 7.0% from $215.8 million at December 31, 1998. Total deposits at December 31, 1999 were $197.1 million, an increase of $7.0 million or 3.7% from $190.1 million at December 31.1998. Short-term borrowings at December 31, 1999 totaled $9.0 million. The Bank continued to sell fixed rate, 1-4 family, residential mortgages as part of its strategies for managing liquidity and interest rate risk within the loan portfolio. In 1999, the Bank sold approximately $14.0 million of these loans to the Federal Home Loan Mortgage Corporation ("Freddie Mac"). The ratio of total loans to total deposits of 92.9% at December 31,1999, compared to 84.6% at December 31,1998. 1998 - 1997 - ----------- Average total assets at December 31,1998 were $211.3 million, an increase of $14.4 million or 7.3% from $196.9 million at December 31,1997. Average total interest-earning assets increased $13.0 million in 1998, primarily from increases in average loan balances, which increased $10.8 million or 7.3%. The most significant growth in the loan portfolio occurred within the commercial real estate portfolio and the 1-4 family residential real estate portfolio. Commercial real estate loans increased $3.5 million or 14.4% from $24.3 million at December 31,1997 to $27.8 million at December 31, 1998. Residential real estate loans, which includes first and secondary lien positions, increased $5.6 million from $75.0 million at December 31, 1997 to $80.6 million at December 31, 1998. 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 was funded by an increase in average deposit liabilities. Average deposit liabilities at December 31,1998 were $186.3 million, an increase of $12.9 million or 7.4% from $173.4 million at December 31, 1997. Average balances increased across all deposit products except average money markets, which declined $1 .2 million during the period. The greatest net increase occurred within the average time certificate product, which increased $7.0 million or 8.7% form $81.8 million at December 31,1997 to $88.9 million at December 31,1998. The increase is due to the offering of the 11 month and 19 month certificate specials discussed earlier. 26 Total assets at December 31,1998 were $215.8 million, an increase of $8.7 million or 4.2% from $207.1 million at December 31, 1997. Total deposits at December 31, 1998 were $190.1 million, an increase of $8.9 million or 4.9% from $181.2 million at December 31.1997. The Bank sold approximately $14.1 million of fixed rate real estate loans to the Federal Home Loan Mortgage Corporation ("Freddie Mac"). The ratio of total loans to total deposits of 84.6% at December 31,1998, compared to 86.9% at December 31, 1997. LIQUIDITY - --------- Liquidity represents the ability of the Company to meet normal cash flow requirements of both borrowers and depositors efficiently. Repayments of and the management of maturity distributions for loans and securities provide asset liquidity. 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 2.6% of total assets as of December 31,1999 compared to 8.9% at December 31,1998. The decrease was due primarily to a decrease in daily federal funds sold and a decrease in certificates of deposit with others. These items decreased $5.2 million and $8.0 million respectively for the period ended December 31, 1999. In 1999, the Bank used two short-term certificates of deposit at the Federal Home Loan Bank ("FHLB") totaling $8.0 million as well as excess liquidity in the daily federal funds sold account to fund investment purchases and loan growth. Daily federal funds sold at December 31,1999 totaled $1.2 million, a decline of $5.2 million from $6.4 million at December 31,1998. The Statement of Cash Flows indicates that net cash was provided from operating activities and financing activities of $6.3 million and $14.9 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 $6.9 million and an increase in short-term borrowings of $9.0 million. Investing activities for the twelve month period ended December 31,1999 indicated that net maturities of investment securities available for sale of $5.5 million, a decrease in time deposits in other banks of $8.0 million, and proceeds from the sale of student loans of $9.2 million offset the net purchases of investment securities available for sale of $14.9 million and the net increase in loans of $32.2 million. In addition, cash was used for an increase in premises and equipment of $1.4 million. Cash dividends paid in 1999 were $1.2 million, an increase of $113,000 from the $1.1 million paid in 1998. For the period ended December 31, 1998, the Statement of Cash Flows indicates that net cash was provided from operating activities and financing activities of $2.2 million and $5.7 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 $8.9 million, of which $2.0 million was used to repay short-term borrowings from the Federal Home Loan Bank. Investing activities for the twelve month period ended December 31,1998 indicated that net maturities of investment securities available for sale of $8.0 million and maturities of investment securities held to maturity of $3.3 million offset the net purchases of investment securities available for sale of $13.1 million and the net increase in loans of $3.7 million. Cash dividends paid in 1998 were $1.1 million, an increase of $111,000 from the $965,000 paid in 1997. The Company's liquidity plan allows for the use of long-term advances or a short-term line of credit with the FHLB as a source of funds. Borrowing from FHLB not only provides a source of liquidity for the Company, but also serves as a tool to reduce interest risk as well. The Company may structure borrowings from FHLB to match those of customer credit requests, and therefore, lock in interest rate spreads over the lives of the loans. FHLB borrowings, generally, have a lower cost than deposits. At December 31, 1999, the Company continued to have one such matched funding loan outstanding totaling $90,000. The Company's short-term borrowings with FHLB are "RepoPlus" advances. "RepoPlus" advances are short-term advances subject to annual renewal, incur no service charges, bear a fixed rate of interest, and are secured by a blanket security agreement on qualifying residential mortgages. The Company had $9.0 million of RepoPlus advances outstanding at December 31, 1999. At December 31,1998, the Company had no advances outstanding. The Company's remaining borrowing capacity with FHLB was $56.0 million at December 31,1999. 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 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 1999 were $14.0 million, with gains of $7,000. In 1998, sales totaled $14.1 million with gains of $149,000. The Bank continues to service all loans sold to Freddie Mac. As discussed earlier, the Bank recorded approximately $145,000 in income for the establishment of mortgage servicing rights ("MSR"). The MSRs will be amortized to expense in future periods over the estimated life of the servicing portfolio. The Bank serviced $43.0 million and $34.0 million in sold loans to Freddie Mac at December 31,1999 and 1998 respectively. The retaining of the servicing also provides a source of fee income to the Bank, which totaled $102,000 and $82,000 in 1999 and 1998 respectively. The Bank has a single commitment to fund $5.0 million in 2000. 27 The following table is a schedule of the maturity distributions and weighted average yield of investment securities as of December 31, 1999: 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) U. S. Government agency securities $ 1,828 $ 3,987 $ 495 $ 978 $ - $ 7,288 Obligations of states and political subdivisions - 1,555 8,654 5,304 - 15,513 Other debt securities - 927 100 - - 1,027 Mortgage-backed securities (2) - 32 1,187 1,385 - 2,604 -------- -------- -------- -------- -------- -------- Total Debt Securities 1,828 6,501 10,436 7,667 - 26,432 Common Stocks - - - - 1,028 1,028 -------- -------- -------- -------- -------- -------- Total $ 1,828 $ 6,501 $ 10,436 $ 7,667 $ 1,028 $ 27,460 ======== ======== ======== ======== ======== ======== Weighted average yield (1) 5.52 % 5.98 % 6.70 % 6.43 % - % 6.05% ======== ======== ======== ======== ======== ======== 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) Obligations of states and political subdivisions $ - $ 1,163 $ 1,558 $ - $ - $ 2,721 Other - 100 100 - - 200 Mortgage-backed securities (2) - - - 52 - 52 -------- -------- -------- -------- -------- -------- Total $ - $ 1,263 $ 1,658 $ 52 $ - $ 2,973 ======== ======== ======== ======== ======== ======== Weighted average yield (1) - % 8.01 % 7.55 % 7.02 % - % 7.74% ======== ======== ======== ======== ======== ========
(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 1.32% of total assets at December 31, 1999, a decrease from 8.07% in 1998. The decrease is due to the decreases in interest-bearing balances at other banks, and daily federal funds sold discussed earlier. 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 affected by future changes in interest rates. During a period of rising interest rates, a positive gap, a position of more rate sensitive assets than rate sensitive liabilities, is desired. During a falling interest rate environment, a negative gap is desired, that is, a position in which rate sensitive liabilities exceed rate sensitive assets. The following table shows the Company's gap position for December 31, 1999, 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. 28
91 days 0-90 to 1 to 5 Over Days 1 Year Years 5 Years Total ---------- ---------- ----------- ---------- ---------- (Dollars in Thousands) ASSETS Interest-bearing deposits $ - $ - $ - $ - $ - Investments (2) (3) 1,812 3,175 8,980 15,606 29,573 Federal funds sold 1,200 - - - 1,200 Loans (1) 56,752 33,070 26,106 67,214 183,142 ---------- ---------- ----------- ---------- ----------- Total 59,764 36,245 35,086 82,820 213,915 ---------- ---------- ----------- ---------- ----------- LIABILITIES Interest-bearing demand 24,547 - - - 24,547 Savings 22,187 - - - 22,187 Money market 27,349 - - - 27,349 Certificates > $100,000 7,507 9,310 6,119 663 23,599 Other time deposits 14,997 30,060 19,526 2,389 66,972 Borrowed funds 9,003 93 208 - 9,304 ---------- ---------- ----------- ---------- ----------- Total 105,590 39,463 25,853 3,052 173,958 ---------- ---------- ----------- ---------- ----------- Interest sensitivity gap $ (45,826) $ (3,218) $ 9,233 $ 79,768 $ 39,957 ========== ========== =========== ========== =========== Cumulative interest sensitivity gap (45,826) (49,044) (39,811) 39,957 - ========== ========== =========== ========== =========== Rate sensitive assets/rate sensitive liabilities 0.57 0.92 1.36 - 1.23 Cumulative gap/Total assets (0.20) (0.21) (0.17) 0.17 -
(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, 1999, the Company had a cumulative negative gap of $49,044,000 at the one year horizon. This value compares to a negative gap of $27,732,000 at December 31, 1998. The gap analysis indicates that if interest rates were to rise 100 basis points (1.0%), the Company's net interest income would decline $490,000 at the one year horizon because the Company's rate sensitive liabilities would reprice faster than rate sensitive assets. Conversely, if rate were to fall 100 basis points, the Company would earn $490,000 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. Management also manages interest rate risk with the use of simulation modeling which measures the sensitivity of future net interest income as a result of changes in interest rates. The analysis is based on repricing opportunities for variable rate assets and liabilities and upon contractual maturities of fixed rate instruments. The simulation also calculates net interest income based upon estimates of the largest foreseeable rate increase or decrease (+ or 200 basis points or 2.00%). The current analysis indicates that, given a 200 basis point overnight movement in interest rates, the Bank would experience a potential $ 868,000 or 8% change in net interest income. It is important to note, however, that this exercise would be of a worst-case scenario. It would be more likely to have incremental changes in interest rates, rather than a single significant increase or decrease. When management believes interest rate movements will occur, it can restructure the balance sheet and thereby the ration of rate sensitive assets to rate sensitive liabilities which in turn will effect the net interest income. As mentioned earlier, in gap analysis, as well as simulation analysis, not all assets and liabilities with similar maturities and repricing opportunities will reprice at the same time or to the same degree and therefore, could affect forecasted results. 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 $1,355,000 or 5.6% in 1999. 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 1999, 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, 1999: Actual ------------------ Minimum Well Amount Ratio Ratio Capitalized -------- ------ ------ ----------- Tier 1 risk - based capital $ 24,484 14.7 % 4.00 % 6.00 % Total risk - based capital 26,165 15.7 8.00 10.00 Leverage capital 24,484 10.6 4.00 5.00 29 As the above table illustrates, the Company exceeds both the minimum and "well capitalized" regulatory capital requirements at December 31, 1999. 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. 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 three most recent years ended:
Amortized Cost -------------------------------------------------------------------- December 31, -------------------------------------------------------------------- (Dollars in Thousands) 1999 1998 1997 Available Held to Available Held to Available Held to for Sale Maturity for Sale Maturity for Sale Maturity ---------- -------- --------- -------- --------- -------- U.S. Treasury securities $ - $ - $ 2,415 $ - $ 4,925 $ 500 U. S. Government agency securities 7,288 - 6,033 - 728 500 Obligation of states and political subdivisions 15,513 2,721 7,518 3,365 5,039 5,640 Other debt securities 1,027 200 100 200 - 200 Mortgage backed securities 2,604 52 1,008 79 1,395 110 -------- -------- -------- -------- -------- -------- 26,432 2,973 17,074 3,644 12,087 6,950 Restricted common stock 1,028 - 992 - 891 - -------- -------- -------- -------- -------- -------- Total $ 27,460 $ 2,973 $ 18,066 $ 3,644 $ 12,978 $ 6,950 ======== ======== ======== ======== ======== ========
There are no securities in excess of 10% of stockholders' equity at December 31, 1999, 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:
December 31, ------------------------------------------------------------------ 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- (Dollars in Thousands) Commercial, financial and agricultural $ 17,727 $ 15,761 $ 18,223 $ 18,084 $ 13,283 Real estate construction 4,663 2,693 2,587 1,466 2,967 Real estate mortgage 136,853 112,173 106,308 94,213 81,717 Loans to individuals 23,899 30,227 30,385 27,539 24,852 ---------- ---------- ---------- ---------- ---------- 183,142 160,854 157,503 141,302 122,819 Less unearned income - - 2 17 72 ---------- ---------- ---------- ---------- ---------- Total loans $ 183,142 $ 160,854 $ 157,501 $ 141,285 $ 122,747 ========== ========== ========== ========== ==========
30 The following table presents the maturity distribution sensitivity of real estate construction and commercial loans:
December 31, 1999 ------------------------------------------------------ Due After Due in 1 1 Year Year or Through Due After Less 5 Years 5 Years Total --------- --------- --------- --------- (Dollars in Thousands) Commercial, financial and agricultural $ 6,324 $ 7,128 $ 4,275 $ 17,727 Real estate construction 4,663 - - 4,663 --------- --------- --------- --------- $ 10,987 $ 7,128 $ 4,275 $ 22,390 ========= ========= ========= ========= Predetermined interest rates $ 2,608 $ 5,337 $ 1,774 $ 9,719 Floating interest rates 8,379 1,791 2,501 12,671 --------- --------- --------- --------- $ 10,987 $ 7,128 $ 4,275 $ 22,390 ========= ========= ========= =========
Generally, loans with maturities of one 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, 1999:
Year Ended December 31, --------------------------------------------------------------- 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- Loans outstanding at end of period $ 183,142 $ 160,854 $ 157,501 $ 141,285 $ 122,747 ========== ========== ========== ========== ========== Average loans outstanding (1) $ 171,974 $ 160,218 $ 149,370 $ 132,278 $ 118,201 ========== ========== ========== ========== ========== Allowance for loan losses: Balance, beginning of period $ 1,410 $ 1,299 $ 1,177 $ 1,098 $ 1,037 Loans charged off: Commercial, financial and agricultural 7 14 35 8 - Real estate mortgages 326 8 - 5 50 Consumer 190 221 153 139 190 ---------- ---------- ---------- ---------- ---------- Total loans charged off 523 243 188 152 240 ---------- ---------- ---------- ---------- ---------- Recoveries: Commercial, financial and agricultural 3 9 5 5 4 Real estate mortgages 11 - - 4 1 Consumer 60 35 30 22 21 ---------- ---------- ---------- ---------- ---------- Total recoveries 74 44 35 31 26 ---------- ---------- ---------- ---------- ---------- Net loans charged off 449 199 153 121 214 ---------- ---------- ---------- ---------- ---------- Provision charged to expense 720 310 275 200 275 ---------- ---------- ---------- ---------- ---------- Balance, end of period $ 1,681 $ 1,410 $ 1,299 $ 1,177 $ 1,098 ========== ========== ========== ========== ========== Ratio of net charge offs during the period to average loans outstanding during the period 0.26% 0.12% 0.10% 0.09% 0.18%
(1) Daily average balances. 31 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, 1999 is also presented:
December 31, 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (Dollars in thousands) Non-performing and restructured loans Loans past due 90 days or more $ 93 $ 50 $ 18 $ 177 $ 87 Non-accrual loans 2,526 1,871 1,335 798 783 Restructured loans - - - 597 306 -------- -------- -------- -------- -------- Total non-performing and restructured loans 2,619 1,921 1,353 1,572 1,176 -------- -------- -------- -------- -------- Other non-performing assets Other real estate owned 280 138 1 221 149 Repossessed assets 33 38 24 24 24 -------- -------- -------- -------- -------- Total other non-performing assets 313 176 25 245 173 -------- -------- -------- -------- -------- Total non-performing assets $ 2,932 $ 2,097 $ 1,378 $ 1,817 $ 1,349 ======== ======== ======== ======== ======== Non-performing and restructured loans as a percentage of total loans 1.4% 1.2% 0.9% 1.1% 1.0% Non-performing assets as a percentage of total assets 1.3% 1.0% 0.7% 0.9% 0.8% Non-performing and restructured loans as a percentage of loan loss allowance 155.8% 136.2% 104.2% 133.6% 107.1% Allowance for loan losses/loans 0.92% 0.88% 0.82% 0.83% 0.89% Nonaccrual and restructured loan interest data: Interest computed at original terms:($ in 000) $ 34 ===== Interest recognized in income ($ in 000) $ 6 =====
Other real estate owned increased to $280,000 during 1999, which is the result of foreclosure activity on a single commercial property. 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, 1999, the Company had nonaccrual loans of $2,526,000, of which, $2,150,000 were classified as impaired. The average balance in 1999 of impaired loans was $948,000. Impaired loans had a related allowance allocation of $322,000 and income recognized in 1999 for impaired loans totaled $6,000. While impaired loans at December 31, 1999 were comprised of several loan accounts, three borrowers accounted for $1.9 million of the total, of which one borrower totaled $1.3 million. Two of the borrowers have begun voluntary liquidation of assets and are making payments as part of work out arrangements with the Bank. The remaining borrower pertains to a participated loan for a dairy operation. The Bank was cross-collateralized on cattle, feed and real estate, including facilities. Prior to year-end, based on internal analysis, the Bank determined that a loss pertaining to the cattle portion of the credit was eminent. Accordingly, management recorded a charge off in the amount of $300,000 during the fourth quarter of 1999, which represented the Bank's portion of the total loss. In addition, the remaining dairy herd has been sold with all proceeds delivered to the Bank. Management anticipates receiving deed in lieu of foreclosure on the remaining real estate. Management is in negotiations with an interested third party for a lease with an option to purchase. Management does not consider any of the remaining non-performing loans to pose any significant risk to the capital position or future earnings of the Company. 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, futures income is recognized only when cash is received. Non-performing loans as a percentage of total loans at December 31, 1999 was 1.4% compared to 1.2% at December 31, 1998, the increase is due principally to an increase in nonaccrual loans, which increased $655,000 during the period. Management does not believe the increase in nonaccrual loans or any of the accounts classified as non-performing will have a significant effect on operations or liquidity during 2000. Exclusive of the dairy farm credit mentioned above, nonaccrual loans, total non-performing and restructured loans and total non-performing assets at December 31, 1999 would have been $1.2 million, $1.3 million and $1.6 million respectively. Non-performing and restructured loans as a percentage of total loans would be 0.7% and non-performing assets as a percentage of total assets would be 0.7%. 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. 32 The risk of loan losses is one of the inherent risks associated with lending. Management recognizes and experience indicates, that at any point in time, possible losses may exist in the loan portfolio. Therefore, based upon management's best estimate, each year provisions are charged against earnings to maintain the allowance for loan losses a level sufficient to recognize this potential risk. For 1999, management provided $720,000 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 element in the portfolio, management believes the allowance for loan losses at December 31, 1999 is adequate. Management believes the allowance can be allocated to commercial, real estate and consumer categories as follows:
1999 1998 1997 1996 1995 ----------------- ------------------ ------------------- ------------------- ------------------- % of % of % of % of % of Loans in Loans in Loans in Loans in Loans in Category Category Category Category Category to Total to Total to Total to Total to Total Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- (Dollars in Thousands) Commercial, financial and agricultural $ 256 9.7 % $ 249 9.8 % $ 269 11.6 % $ 139 12.8 % $ 169 10.8 % Real estate construction - 2.5 - 1.7 - 1.6 - 1.0 - 2.4 Real estate mortgage 528 74.7 279 69.7 247 67.5 315 66.7 196 66.6 Consumer 449 13.1 298 18.8 271 19.3 299 19.5 312 20.2 Unallocated 448 - 584 - 512 - 424 - 421 - ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- $ 1,681 100.0 % $ 1,410 100.0 % $ 1,299 100.0 % $ 1,177 100.0 % $ 1,098 100.0 % ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
DEPOSITS The following table presents average deposits by type and the average interest rates paid as of 1999, 1998 and 1997:
December 31, ---------------------------------------------------------------------------- 1999 1998 1997 ---------------------- ---------------------- ---------------------- (Dollars in thousands) Average Average Average Average Rate Average Rate Average Rate Balance Paid Balance Paid Balance Paid ---------- ------ --------- ------ ----------- ------ Non interest-bearing demand $ 32,699 - % $ 29,910 - % $ 26,195 - % Interest-bearing demand 25,691 1.69 24,052 2.17 22,780 2.16 Money market 25,994 3.50 22,694 3.82 23,842 3.83 Savings 22,324 2.14 20,736 2.45 18,709 2.47 Time 91,512 5.32 88,928 5.68 81,840 5.59 ---------- --------- ----------- Total $ 198,220 4.04 % $ 186,320 4.44 % $ 173,366 4.38 % ========== ====== ========= ====== =========== ======
The following table presents the maturity schedule of time deposits of $100,000 and over: Three months or less $ 7,507 Over three through six months 3,655 Over six months through twelve months 5,655 Over twelve months 6,782 ------------ Total $ 23,599 ============ 33 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, markdown 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, 1998. Prices are based on information made available to the Company. Cash dividends were declared on a quarterly basis. Pricing and dividends have been adjusted for the effect of a two for one split in December 1998.
1999 1998 ------------------------------------- --------------------------------------------- Stock Price Stock Price ----------------------- Dividend ----------------------------- Dividend High Low Declared High Low Declared ----------------------- ---------- ----------------------------- ------------ First Quarter $ 28.00 24.50 $ 0.09 $ 25.00 $ 21.88 $ 0.075 Second Quarter 25.75 22.00 0.09 25.50 23.25 0.080 Third Quarter 27.00 23.00 0.09 27.18 23.25 0.085 Fourth Quarter 25.50 23.00 0.16 26.00 21.75 0.150
The Company paid cash dividends of $0.43 and $0.39 per shares in 1999 and 1998 respectively, after adjustment for the stock split in 1998. 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, 1999, the Company had approximately, 653 shareholders of record. 34 EX-21 3 LIST OF SUBSIDIARIES List of Subsidiaries The First National Bank of Slippery Rock 35 EX-27 4 FINANCIAL DATA SCHEDULE
9 1,000 12-MOS DEC-31-1998 DEC-31-1999 10,068 38 1,200 0 26,600 2,973 2,986 183,142 1,681 233,019 197,124 9,000 982 304 0 0 692 24,917 233,019 14,695 1,472 452 16,619 6,694 6,797 9,822 722 0 6,485 4,353 4,353 0 0 3,097 1.12 1.12 8.14 2,526 93 0 0 1,410 523 74 1,681 1,224 0 457
EX-99.1 5 PROXY NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT SLIPPERY ROCK FINANCIAL CORPORATION 100 SOUTH MAIN STREET SLIPPERY ROCK, PENNSYLVANIA 16057-1245 To be held April 18, 2000 Mailed to Shareholders March 31, 2000 SLIPPERY ROCK FINANCIAL CORPORATION 100 SOUTH MAIN STREET SLIPPERY ROCK, PENNSYLVANIA 16057-1245 (724) 794-2210 NOTICE OF ANNUAL MEETING OF SHAREHOLDERS To the Shareholders: NOTICE IS HEREBY GIVEN that pursuant to the call of its Board of Directors, the Annual Meeting of Shareholders of Slippery Rock Financial Corporation will be held at the Slippery Rock Township Building, 155 Branchton Road, Slippery Rock, Pennsylvania 16057, on Tuesday, April 18, 2000, at 7:00 p.m., prevailing time, for the purpose of considering and voting on the following matters: 1. Election of four directors for a term of three years. 2. Such other business as may properly come before the meeting or any adjournment thereof. Only those shareholders of record at the close of business on March 10, 2000 shall be entitled to receive notice of and to vote at the meeting. A Proxy Statement, a form of proxy and self-addressed envelope are enclosed. Complete, date and sign the proxy. Return it promptly in the envelope which requires no postage if mailed in the United States. If you attend the meeting, you may withdraw your proxy and vote in person. This Notice, the accompanying Proxy Statement and form of proxy are sent to you by order of the Board of Directors. Eleanor L. Cress Secretary Slippery Rock, Pennsylvania March 31, 2000 2 PROXY STATEMENT INTRODUCTION The Proxy Statement and enclosed proxy are being mailed to the shareholders of Slippery Rock Financial Corporation (the "Corporation"), on or about March 31, 2000, in connection with the solicitation of proxies by the Board of Directors of the Corporation. The proxies will be voted at the Annual Meeting of the Shareholders to be held on April 18, 2000, at 7:00 p.m., prevailing time, at the Slippery Rock Township Building, 155 Branchton Road, Slippery Rock, Pennsylvania 16057. Proxies may be revoked at will at any time before they have been exercised by filing with the Secretary of the Corporation an instrument of revocation, by submitting a duly executed proxy bearing a later date or by appearing at the Annual Meeting and giving notice of intention to vote in person. Proxies solicited hereby may be exercised only at the Annual Meeting and any adjournment or postponement thereof and will not be used for any other meeting. The costs of the solicitation of proxies will be borne by the Corporation. In addition to the use of the mails, directors and officers of the Corporation may solicit proxies, without additional compensation, by telephone or telegraph. Arrangements may be made by the Corporation with banks, brokerage houses and other custodians, nominees and fiduciaries to forward solicitation material to the beneficial owners of shares held by them of record, and the Corporation may reimburse them for reasonable expense they incur in so doing. The Corporation's Annual Report for the year ended December 31, 1999, is enclosed with this Proxy Statement. It should not be regarded as proxy solicitation material. VOTING SECURITIES As of the close of business on March 10, 2000 (the "Record Date"), there were outstanding 2,769,048 shares of Common Stock of the Corporation ("Common Stock"), the only class of capital stock of the Corporation outstanding and entitled to vote. Only shareholders of record as of the close of business on the Record Date are entitled to receive notice of and to vote at the Annual Meeting. Each shareholder is entitled to one vote for each such share held. BENEFICIAL OWNERSHIP BY CERTAIN PERSONS AND MANAGEMENT There is set forth below information with respect to the beneficial ownership, as of the Record Date, of certain persons, including directors and nominees for director, of shares of the Common Stock. 1 Name of Beneficial Amount and Nature Percent of Class - ------------------ ----------------- ---------------- Owner of Ownership - ----- ------------ (1)(2) John W. Conway Slippery Rock, Pennsylvania 95,080 3.4% Grady W. Cooper St. Cloud, Florida 378,584 13.7% Robert M. Greenberger Butler, Pennsylvania 5,664 * Robert E. Gregg Grove City, Pennsylvania 10,911 (3)(4) * William D. Kingery New Wilmington, Pennsylvania 5,208 (3) * Paul M. Montgomery Slippery Rock, Pennsylvania 53,776 (3) 1.9% S. P. Snyder Slippery Rock, Pennsylvania 40,902 (3) 1.5% William C. Sonntag Slippery Rock, Pennsylvania 17,653 (5) * Charles C. Stoops, Jr. Pittsburgh, Pennsylvania 87,416 3.2% Norman P. Sundell Slippery Rock, Pennsylvania 9,112 (3) * Kenneth D. Wimer Grove City, Pennsylvania 33,784 (3) 1.2% Officers, Directors and Nominees for Directors 774,679 28.0% as a Group (6) - ------------- *Less than l% (l) The securities "beneficially owned" by an individual are determined in accordance with the definition of "beneficial ownership" set forth in the General Rules and Regulations of the Securities and Exchange Commission ("SEC") and may include securities owned by or for the individual's spouse and minor children and any other relative who has the same home, as well as securities to which the individual has or shares voting or investment power or has the right to acquire beneficial ownership within sixty (60) days after the Record Date. Beneficial ownership may be disclaimed as to certain of the securities. 2 (2) Information furnished by the Directors and Officers and the Corporation. (3) Includes shares of Common Stock which may be acquired within 60 days by exercise of stock options granted pursuant to the Non-Employee Directors Stock Option Plan approved in 1997. Shares of Common Stock which are subject to stock options are deemed to be outstanding for computing the percentage of Common Stock owned by such person, but are not deemed to be outstanding for the purpose of computing the percentage of any other person. The number of such shares included above are as follows: Mr. Snyder, 600 shares; Mr. Wimer, 1,200 shares; Mr. Sundell, 600 shares; Mr. Gregg, 1,200 shares; Mr. Kingery, 1,200 shares; Mr. Montgomery, 600 shares. (4) Includes voting power of attorney over 3,689 shares owned by members of Mr. Gregg's family. (5) Includes 1,333 shares of Common Stock which may be acquired within sixty (60) days by exercise of stock options granted to Mr. Sonntag pursuant to the Employee Incentive Stock Option Plan approved in 1997. (6) The group consists of 14 persons, as of the Record Date, being two officers of the Corporation, one executive officer of The First National Bank of Slippery Rock (the "Bank"), directors and nominees for director. PRINCIPAL HOLDERS OF STOCK Except as set forth in the following table, no person is known to the Corporation's management to own of record or beneficially 5% or more of the outstanding Common Stock as of the Record Date: 3 Common Stock Name and Address -------------------------- of Beneficial Owner Amount Percentage - ------------------- --------- ------------ Grady W. Cooper St. Cloud, Florida 34769 378,584 13.7% ELECTION OF DIRECTORS The Corporation's Articles of Incorporation provide that there shall be three classes of directors as nearly equal in number as possible, each class being elected for a three-year term and only one class being elected each year beginning in 1993. The total number of directors shall be that number from time to time determined by a resolution adopted by a majority vote of the directors then in office or by resolution of the shareholders at a meeting thereof. There shall be not less than five directors. The number of directors for 2000 has been set at 11. The Board of Directors has nominated Messrs. Robert M. Greenberger, Paul M. Montgomery, William C. Sonntag and Norman P. Sundell for election as Class II directors for three-year terms to expire at the 2003 Annual Meeting of Shareholders, or until their successors are duly elected and qualified. All Class II directors were elected by the shareholders at the 1997 Annual Meeting. The remaining seven directors will continue to serve in accordance with their prior election with the terms of the Class III and Class I directors expiring in 2001 and 2002, respectively. Each shareholder has one vote for each share registered in his or her name, and there are no cumulative voting rights. Unless authority is withheld as to a particular nominee or as to all nominees, all proxies will be voted for the nominees listed below. Directors shall be elected by a plurality of votes cast at the meeting by holders of stock present and entitled to vote thereat. Votes marked "WITHHOLD AUTHORITY" in the election of directors are counted toward a quorum but have no effect on the outcome of the election. It is intended that shares represented by proxies will be voted for the nominees listed below, each of whom is now a director of the Corporation and each of whom has expressed his willingness to serve, or for any substitute nominee or nominees designated by the Board of Directors in the event any nominee or nominees become unavailable for election. The four persons receiving the highest number of votes for Class II directors will be elected. The Board of Directors has no reason to believe that any of the nominees will not serve if elected. In the following tables are set forth as to each of the nominees for election as Class II directors and as to each of the continuing Class III and Class I directors his age, principal 4 occupation and business experience, the period during which he has served as a director of the Corporation, the Bank or an affiliate and other business relationships as of the Record Date. There are no family relationships between any of the persons listed below except Mr. Cooper and the Messrs. Wimer are first cousins. NOMINEES FOR ELECTION AS CLASS II DIRECTORS Terms Expire in 2003 Directorship in other Name and Principal Director Reporting Occupation (1) Age Since (2)(3) Companies - ------------- ----- ------------ ----------- Robert M. Greenberger 63 1995 None Owner and President, Harry Products, Inc., parent firm of Warehouse Sales and Trader Horn, Retail Sales Paul M. Montgomery 75 1971 None Retired, former President of the Bank William C. Sonntag 51 1989 None President and Chief Executive Officer of the Corporation and Bank Norman P. Sundell 56 1987 None Vice Chairman,Partner, Sundell Auto Specialties THE BOARD OF DIRECTORS RECOMMENDS THE ABOVE NOMINEES BE ELECTED. 5 CLASS I DIRECTORS TERMS EXPIRE IN 2002 Directorship in other Name and Principal Director Reporting Occupation (1) Age Since (2)(3) Companies - -------------- ----- ------------ ------------- John W. Conway 75 1961 None Vice Chairman, Retired, former Executive Vice President of the Bank William D. Kingery 46 1995 None Vice President and Treasurer, Springfield Restaurant Group Charles C. Stoops, Jr. 66 1984 None Retired, former General Tax Counsel, Rockwell International Corp. CLASS III DIRECTORS TERMS EXPIRE IN 2001 Directorship in other Name and Principal Director Reporting Occupation (1) Age Since (2)(3) Companies - -------------- ----- ------------ ------------- Grady W. Cooper 77 1966 None Chairman of the Board, retired, former President of Cooper Brothers, Inc. Building Supplies Robert E. Gregg 58 1987 None Partner, Spring Meadows Farms S. P. Snyder, 67 1966 None Retired, former Owner and Partner, Snyder Bus Company Kenneth D. Wimer 73 197 None Retired, former Manager, Cooper Brothers, Inc. Building Supplies 6 (l) All directors and nominees have held the positions indicated or another senior executive position with the same entity or one of its affiliates or predecessors for the past five years. (2) Reflects the earlier of the first year as a director of the Corporation or the Bank. (3) All incumbent directors were elected by the shareholders. BOARD MEETINGS AND COMMITTEES The Board of Directors of the Corporation has various committees including a Personnel and Salary Committee and an Audit Committee. During the year 1999 the Board of Directors of the Corporation held 5 meetings and the Board of Directors of the Bank held 12 meetings. The Audit Committee held 11 meetings. The Audit Committees of the Corporation and the Bank comprise the same persons, and all meetings were jointly held. Each director attended at least 75% of the combined total of meetings of the Board of Directors and each committee of which he was a member except Mr. Montgomery who attended 65% of such meetings. The Audit Committee is responsible for recommending to the Board of Directors the appointment of independent public accountants to audit the books and accounts of the Corporation and its subsidiaries; reviewing the reports of the Audit Department and the reports of examination conducted by bank and bank holding company regulators and of independent public accountants; reviewing the adequacy of internal audit and control procedures; and reporting to the Board of Directors. The Audit Committee is presently comprised of Messrs. Gregg, Montgomery, Snyder and Wimer who also constitute the Audit Committee of the Bank. The Loan Review Committee consists of Messrs. Gregg, Montgomery, Snyder and Sundell. The Committee met 4 times in 1999. The Corporation presently does not have a separate Nominating Committee. The Personnel and Salary Committee of the Bank, consisting of Messrs. Cooper, Greenberger, Kingery, Snyder, Stoops and Sundell met 3 times in 1999. Mr. Sonntag is ex-officio member of all committees. EXECUTIVE COMPENSATION COMPENSATION OF DIRECTORS Directors were paid $950.00 for each Board meeting for January through June and $1,000.00 for each Board meeting for July through December 1999. A total of $118,700 was paid as Directors fees in 1999. 7 The Corporation has a Non-Employee Director Stock Option Plan which was approved by the Board of Directors and adopted by the Shareholders at the 1997 meeting. Options to purchase up to 72,000 shares of Common Stock may be granted to directors of the Corporation or any subsidiary who are not employees of the Corporation or a subsidiary. Under the terms of the Plan, a compensatory stock option to purchase 600 shares of Common Stock is automatically granted to each non-employee director as of September 30 of each year, beginning September 30, 1997 and ending on September 30, 2006. The option price is the fair market value per share of common stock on the date of the grant. All options are vested on the date of the grant, but none shall be exercisable after the expiration of 10 years from the date of the grant. Information with respect to the number of options held by directors is set forth under "Beneficial Ownership by Certain Persons and Management". EXECUTIVE COMPENSATION The following persons are considered to be Executive Officers of the Corporation by virtue of their position with the Corporation or the Bank. Name Age Position Business Experience(1) ---- --- -------- ------------------- William C. Sonntag 51 President and Chief Executive Officer of the Corporation and the Bank Mark A. Volponi 38 Treasurer of the Corporation and Controller of the Bank Eleanor L. Cress 60 Secretary of the Corporation and Vice President and Secretary of the Bank Dale R. Wimer 54 Executive Vice President of the Bank (l) Each of the above persons, has held an executive position with the Corporation or the Bank for the past five years. The following table sets forth the cash compensation paid or to be paid by the Bank during 1999 to Mr. Sonntag, the Chief Executive Officer. No other officer's compensation exceeded $100,000. The Corporation pays no salaries or benefits. 8 SUMMARY COMPENSATION TABLE Annual Compensation (l)(2) Name and Principal Number of All Other Annual Position Year Salary Bonus Stock Options(4) Compensation(4) - --------- ---- ------ ----- ---------------- --------------- William C. 1999 $101,500 $31,198 4,000 Sonntag, 1998 $ 95,508 $30,309 4,000(5) - President and 1997 $ 90,504 $29,166 4,000(5) - Chief Executive Officer (3) (l) Information with respect to group life, health, hospitalization and medical reimbursement plans is not included as they do not discriminate in favor of officers or Directors and are available generally to all salaried employees. (2) Information with respect to the Bank's Employees Retirement Plan is not included as it is a fixed benefit plan available to all salaried employees on the same terms and conditions. (3) Does not include amounts attributable to miscellaneous benefits. In the opinion of management of the Corporation, the cost of providing such benefits during 1999 did not exceed the lesser of $50,000 or 10% of Mr. Sonntag's total salary and bonus. (4) The Corporation has no restricted stock or other long-term incentive plans. The Board of Directors approved an Employees Incentive Stock Option Plan which was approved and adopted by Shareholders at the 1997 meeting. Information with respect to grants made pursuant to this plan is set forth below. (5) Restated to reflect a two for one stock split in December, 1998. COMPENSATION COMMITTEE REPORTS ON EXECUTIVE COMPENSATION The Personnel and Salary Committee of the Bank, acting as a compensation committee, has the responsibility to recommend to the Bank's Board of Directors the compensation of the Chief Executive Officer and other persons who are deemed to be principal officers of the Bank. The Corporation pays no salaries. The Committee also evaluates performance of management and considers management's success, planning and related matters. The Committee reviews with the Bank's Board of Directors all aspects of the compensation of the highest paid officers, including stock option grants. A salary plan is reviewed for consistency with industry peer group surveys. The peer group consists of banks within the area of similar assets, size and additional banks elsewhere within the same asset range. Judgments are made with respect to the value contributed to the corporation and the Bank by the various officer's positions, including the Chief Executive Officer. 9 Individual salary levels and option awards are based on relative importance of the job, individual performance of each officer in those positions and the contribution that person has made to the Corporation during the year. As a result of these reviews, salary increases and option grants are determined by the Board of Directors. Management of the Bank determines salary and increases for all other officers and employees based upon performance. Submitted by Messrs. Cooper, Greenberger, Kingery, Snyder, Stoops and Sundell. COMPENSATION ACCORDING TO PLANS RETIREMENT PLAN All eligible employees of the Bank are covered by a Defined Benefit Pension Plan (the "Plan"). The Plan is a non-contributory, defined benefit pension plan which provides a normal retirement benefit based upon each participant's years of service with the Bank and the participant's average monthly compensation, which is defined as the compensation converted to a monthly amount and averaged over five (5) consecutive calendar years which produces the highest monthly average within the last ten (10) completed years of service. Benefits are equal to 35% of average monthly compensation plus 22% of average monthly compensation in excess of one-twelfth (1/12) of covered compensation. "Covered Compensation" is defined as a 35 year average of the Social Security Taxable Wage Basis in effect for each calendar year ending with the last day of each calendar year in which a participant reaches normal retirement age. Employees are fully vested after five or more years of service. Actuarial equivalent benefits will be paid upon early retirement, death or disability. An employee will receive his or her vested portion if employment is terminated for any other reason. Employees are eligible at age 21 years and completion of one (1) year of service. Directors are not entitled to benefits under the Retirement Plan unless they are also active employees of the Bank. The following table sets forth the estimated annual benefits payable to an employee retiring in 1999 under the Plan reflecting applicable limitations under Federal tax laws. 10 AVERAGE ANNUAL COMPENSATION YEARS OF SERVICE AT RETIREMENT 10 20 30 40 $ 60,000 $ 8,400 $16,800 $21,000 $21,000 $ 80,000 $12,696 $25,392 $31,740 $31,740 $105,000 $18,396 $36,792 $45,990 $45,990 $130,000 $24,096 $48,192 $60,240 $60,240 $155,000 $29,796 $59,592 $74,490 $74,490 $180,000 $30,936 $61,872 $77,340 $77,340 As of December 31, 1999, Mr. Sonntag had been credited with 24 years of service for purposes of the retirement plan. The approximate accrued benefit at age 65 (or retirement if later) based on years of credited service is $35,024 for Mr. Sonntag. Covered compensation is based on salary shown in the Summary Compensation Table. 401(K) SAVINGS PLAN Employees who have reached age 21 and completed one (1) year of service (1,000 hours) are eligible to participate in the Bank's 401(k) Savings Plan. This is a participant salary reduction plan wherein a participant may elect to have a percentage of his or her salary (up to maximum legal limits) reduced. Such amounts are immediately fully vested. The Bank makes an annual matching contribution equal to a percentage of salary reduction. Currently, the maximum matching contribution is 2% of salary. Employer contributions are fully vested after five years eligible service. 11 Investment gains and losses are allocated on the last day of the Plan year (December 31) as follows: Market Value of Employee's Account Employee's Share = x Net gain or loss to be allocated ------------------- Market Value of all Participant's Accounts A participant is entitled to receive 100% of his or her account balance at normal retirement (later of age 65 or 10th anniversary of participation). Payments are also made on early retirement, late retirement, death or disability. Only the vested portion is paid on termination for any other cause. STOCKHOLDERS RETURN PERFORMANCE Set forth below is a graph comparing the yearly percentage change in the cumulative total shareholder return on the Corporation's Common Stock against the cumulative total return of S&P 500 Total Return Stock Index and Peer Group Index for the five years beginning January 1, 1995 and ending December 31, 1999. Each assumes an investment of $100 on December 31, 1994 and retention of dividends when paid. (Graph belongs in this area) Valued at December 31 1994 1995 1996 1997 1998 1999 ------ ------ ------ ------ ------ ------ Corporation (1)) $100 $148.45 $229.22 $253.04 $289.47 $288.57 S&P 500 (2) $100 $137.45 $168.92 $225.21 $289.43 $350.26 Peer Group (2) $100 $119.92 $143.00 $204.73 $222.57 $209.45 (1) Data based upon appraised values for 1997, 1998 and 1999 and market sales for prior years. (2) Data obtained from Tucker Anthony Cleary Gull 12 OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth certain information concerning the grant of stock options to Mr. Sonntag during fiscal 1999. Percent of Total Options Exercise Options Granted to Price Expiration Name Granted(#) Employees ($/Share)(1) Date - ---- ---------- ------------- ------------ ---------- William C. Sonntag 4,000 22.1% $19.30 9/30/09 (1) Based upon a market value of $19.30 per share on September 30, 1999 pursuant to an independent appraisal as of that date. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR END OPTION VALUES -------------------------------------- The following table sets forth certain information concerning exercise of stock options granted pursuant to the Employees Incentive Stock Option Plan by Mr. Sonntag during the year ended December 31, 1999 and options held at December 31, 1999.
Shares Acquired Number of Unexercised Value of Unexercised on Value Options at 12/31/99 Options at12/31/99 Name Exercise Realized Exercisable Unexercisable Exercisable(1) Unexercisable(1) - ---- -------- -------- ----------- ------------- ------------- ---------------- William C. Sonntag 0 0 1,333 10,667 $ 5,332.00 $7,468.00
(1) Based upon a market value of $18.50 per share on December 31, 1999 pursuant to an independent appraisal as of the date. COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934 Section 16(a) of the Exchange Act requires the Corporation's officers, directors and persons owning more than 10% of the Corporation's Common Stock to file reports of ownership and changes in ownership with the Securities and Exchange Commission ("SEC"). Officers, directors and such shareholders are required by regulation to furnish the Corporation with copies of all Section 16(a) forms they file. Except as set forth above in "Principal Holders of Stock", the Corporation knows of no person who owned 10% or more of its Common Stock. Based upon review of copies of the forms furnished to the Corporation, the Corporation believes that during 1999 all Section 16(a) filing requirements were complied with in a timely manner except Mr. Cooper was late in filing a Form 4. This report has been filed. 13 TRANSACTIONS WITH MANAGEMENT Certain directors, nominees and executive officers and/or their associates were customers of and had transactions with the Corporation or the Bank during 1999. Transactions which involved loans or commitments by the Bank were made in the ordinary course of business and on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and did not involve more than normal risk of collectability or present other unfavorable features. AUDITORS S. R. Snodgrass, A.C. has audited the Corporation's financial statements for the fiscal year ended December 31, 1999, and the report on such financial statements appears in the Annual Report to Shareholders. S. R. Snodgrass, A.C. has been selected by the Board of Directors to perform an examination of the consolidated financial statements of the Corporation for the year ending December 31, 2000. FINANCIAL INFORMATION A copy of the Corporation's Annual Report to Shareholders for the year ended December 31, 1999 accompanies this Proxy Statement. Such Annual Report is not a part of the proxy solicitation materials. REQUESTS FOR PRINTED FINANCIAL MATERIAL FOR THE CORPORATION OR ANY OF ITS SUBSIDIARIES - ANNUAL OR QUARTERLY REPORTS, FORMS 10-K AND 10-Q AND CALL REPORTS AND A LIST OF EXHIBITS - SHOULD BE DIRECTED TO MARK A. VOLPONI, TREASURER, 100 SOUTH MAIN STREET, SLIPPERY ROCK, PA 16057-1245, TELEPHONE (724) 794-2210. UPON WRITTEN REQUEST AND PAYMENT OF A COPYING FEE OF TEN CENTS A PAGE, THE CORPORATION WILL ALSO FURNISH A COPY OF ALL EXHIBITS TO THE FORM 10-K. SHAREHOLDERS PROPOSALS FOR NEXT ANNUAL MEETING Any eligible shareholder desiring to present a proposal pursuant to Rule 14a-8 promulgated by the SEC to be considered at the 2001 Annual Meeting of Shareholders should submit the proposal in writing to: William C. Sonntag, President, Slippery Rock Financial Corporation, 100 South Main Street, Slippery Rock, PA 16057-1245 no later than November 26,2000. A shareholder wishing to submit a proposal other than pursuant to Rule 14a-8 must notify the Corporation no later than February 15, 2001. In the absence of timely notice, management will exercise its discretionary power in voting on any such matter. 14 OTHER MATTERS The Board of Directors knows of no other matters to be presented at the meeting. If, however, any other business should properly come before the meeting, or any adjournment thereof, it is intended that the proxy will be voted with respect thereto in accordance with the best judgment of the persons named in the proxy. By Order of the Board of Directors, ------------------------------ Eleanor L. Cress Secretary 15 PROXY FOR ANNUAL MEETING OF SHAREHOLDERS OF SLIPPERY ROCK FINANCIAL CORPORATION The undersigned shareholder(s) of SLIPPERY ROCK FINANCIAL CORPORATION, Slippery Rock, Pennsylvania (the "Corporation") do(es) hereby appoint Paul E. Mershimer and Terry D. Dambaugh, or either one of them my (our) true attorney(s) with full power of substitution, for me (us) and in my (our) name(s), to vote all the common stock of the Corporation standing in my (our) name(s) on its books on March 10, 2000 at the Annual Meeting of Shareholders of the Corporation to be held at the Slippery Rock Township Building, 155 Branchton Road, Slippery Rock, Pennsylvania 16057, on April 18, 2000, at 7:00 p.m. or any adjournment or postponement thereof as follows: This will ratify and confirm all that said attorney(s) may do or cause to be done by virtue hereof. Said attorney(s) is (are) hereby authorized to exercise all the power that I (we) would possess if present personally at said meeting or any adjournment(s) thereof. I (we) hereby revoke all proxies by me (us) heretofore given for any meeting of Shareholders of the Corporation. Receipt is acknowledged of the Notice and Proxy Statement for said meeting, each dated March 31,2000. MAP 16 THIS PROXY IS CONTINUED ON THE REVERSE SIDE. PLEASE SIGN ON THE REVERSE SIDE AND RETURN PROMPTLY. Mark an "X" in the box below to indicate your vote. 1. Election of Class II Directors for a three year term [ ] FOR all nominees listed [ ] WITHHOLD AUTHORITY below (Except as marked to vote for all to the contrary below) nominees listed below SPECIAL INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE(S), DRAW A LINE THROUGH THE NOMINEE'S NAME(S) BELOW. Class II Director for Term Expiring in 2003 ------------------------------------------- Robert M. Greenberger William C. Sonntag Paul M. Montgomery Norman P. Sundell 2. In accordance with the recommendations of management, to vote upon such other matters as may properly come before the meeting or any adjournment or postponement thereof. IN ABSENCE OF A CONTRARY DIRECTION, THE SHARES REPRESENTED SHALL BE VOTED IN FAVOR OF ITEM 1 AND IN ACCORDANCE WITH THE RECOMMENDATION OF MANAGEMENT WITH RESPECT TO ITEM 2. THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS AND MAY BE REVOKED PRIOR TO EXERCISE. If planning on attending the meeting in person, please indicate in the box below. [ ] WILL ATTEND Number of Shares held of record as of March 10, 2000: ------------------ --------------------------------- Signature of Shareholder -------------------------------- Signature of Shareholder 17 Dated: Please date and sign exactly as your -------------------------- name(s) appear(s) hereon. When signing as attorney, executor, administrator, trustee, or guardian, etc., you should indicate your full title. If stock is in joint name(s), each joint owner should sign. 18 EX-99.2 6 REPORT OF INDEPENDENT AUDITORS REPORT OF INDEPENDENT AUDITORS 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, 1999 and 1998, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the three years in the period ended December 31, 1999. 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, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. /s/ S.R. Snodgrass, A.C. Wexford, PA February 4, 2000 S.R. Snodgrass, A.C. 1000 Stonewood Drive Suite 200 Wexford, PA 15090-8399 Phone: 724-934-0344 Facsimile: 724-934-0345 19 -----END PRIVACY-ENHANCED MESSAGE-----