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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q
 x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2004 OR o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to Commission file Number 0-21720 Slippery Rock Financial Corporation  Pennsylvania
    
    25-1674381(State or other jurisdiction of
    
    (I.R.S. Employer Identification Number)incorporation or organization)
 100 South Main StreetSlippery Rock, Pennsylvania
    
    16057(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (724) 794-2210 Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days. YES x NO o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES o NO x As of August 13, 2004, there were 2,737,400 shares outstanding of the issuers
class of common stock.




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Slippery Rock Financial Corporation
INDEX TO QUARTERLY REPORT ON FORM 10-Q PagePart I Financial InformationItem 1.Consolidated Financial Statements (unaudited)Consolidated Balance Sheet, June 30, 2004 and December 31, 2003
    
    
    3Consolidated Statements of Income Three months ended June 30, 2004 and 2003 and Six months ended June 30, 2004 and 2003
    
    
    4Consolidated Statements of Comprehensive Income Three months ended June 30, 2004 and 2003 and Six months ended June 30, 2004 and 2003
    
    
    5Consolidated Statement of Changes in Stockholders Equity, Six months ended June 30, 2004
    
    
    6Consolidated Statement of Cash Flows Six months ended June 30, 2004 and 2003
    
    
    7Notes to Consolidated Financial Statements
    
    
    8-10Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10-18Item 3.Quantitative and Qualitative Disclosures About Market Risk
    
    
    18-19Item 4.Controls and Procedures
    
    
    19-20Part II Other InformationItem 1.Legal Proceedings
    
    
    20Item 2.Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    20Item 3.Defaults upon Senior Securities
    
    
    20Item 4.Submission of Matters to a Vote of Security Holders
    
    
    20-21Item 5.Other Information
    
    
    21Item 6.Exhibits and Reports of Form 8-K
    
    
    21SignaturesCertificationCertificationCertificationCertificationIndependent Accountant's Report
  2




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Slippery Rock Financial Corporation 
 CONSOLIDATED BALANCE SHEET
 (Unaudited - $ in 000, except share data)
 June 30,
    
    December 31,2004
    
    2003ASSETSCash and due from banks
    
    $
    17,695
    
    
    $
    14,970Interest-bearing deposits in other banks
    
    
    139
    
    
    
    Federal funds sold
    
    
    5,000
    
    
    
    9,570Mortgage loans held for sale
    
    
    4,259
    
    
    
    1,950Investment securities:Available for sale
    
    
    86,506
    
    
    
    79,945Held to maturity (market value $200 and $426)
    
    
    200
    
    
    
    425Loans
    
    
    195,586
    
    
    
    207,234Less allowance for loan losses
    
    
    5,522
    
    
    
    3,106Net loans
    
    
    190,064
    
    
    
    204,128Premises and equipment
    
    
    9,737
    
    
    
    9,289Goodwill
    
    
    1,013
    
    
    
    1,013Bank-owned life insurance
    
    
    6,298
    
    
    
    6,147Accrued interest and other assets
    
    
    9,185
    
    
    
    7,593Total assets
    
    $
    330,096
    
    
    $
    335,030LIABILITIESDeposits:Noninterest-bearing demand
    
    $
    51,576
    
    
    $
    48,591Interest-bearing demand
    
    
    36,670
    
    
    
    38,697Savings
    
    
    55,074
    
    
    
    55,186Money market
    
    
    27,936
    
    
    
    30,227Time
    
    
    93,060
    
    
    
    94,419Total deposits
    
    
    264,316
    
    
    
    267,120Short-term borrowings
    
    
    6,005
    
    
    
    5,415Other borrowings
    
    
    30,104
    
    
    
    30,127Accrued interest and other liabilities
    
    
    864
    
    
    
    1,045Total liabilities
    
    
    301,289
    
    
    
    303,707STOCKHOLDERS EQUITYCommon stock (par value $0.25; 12,000,000 shares authorized;
2,736,111 and 2,731,132 shares issued and outstanding)
    
    
    696
    
    
    
    695Capital surplus
    
    
    10,792
    
    
    
    10,712Retained earnings
    
    
    18,850
    
    
    
    20,806Accumulated other comprehensive loss
    
    
    (760
    )
    
    
    (119
    )Treasury Stock (49,000 shares at cost)
    
    
    (771
    )
    
    
    (771
    )Total stockholders equity
    
    
    28,807
    
    
    
    31,323Total liabilities and stockholders equity
    
    $
    330,096
    
    
    $
    335,030
 See accompanying notes to the unaudited consolidated financial statements 3




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Slippery Rock Financial Corporation 
 CONSOLIDATED STATEMENTS OF INCOME
 (Unaudited - $ in 000 except per share amounts)
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003INTEREST AND DIVIDEND INCOMEInterest and fees on loans
    
    $
    3,041
    
    
    $
    3,692
    
    
    $
    6,190
    
    
    $
    7,560Federal funds sold
    
    
    44
    
    
    
    52
    
    
    
    80
    
    
    
    66Interest and dividends on investment securities:Taxable interest
    
    
    618
    
    
    
    486
    
    
    
    1,225
    
    
    
    1,085Tax-exempt interest
    
    
    130
    
    
    
    146
    
    
    
    272
    
    
    
    293Dividends
    
    
    10
    
    
    
    16
    
    
    
    23
    
    
    
    38Total interest and dividend income
    
    
    3,843
    
    
    
    4,392
    
    
    
    7,790
    
    
    
    9,042INTEREST EXPENSEDeposits
    
    
    975
    
    
    
    1,209
    
    
    
    1,970
    
    
    
    2,531Short-term borrowings
    
    
    15
    
    
    
    15
    
    
    
    30
    
    
    
    26Other borrowings
    
    
    389
    
    
    
    390
    
    
    
    779
    
    
    
    778Total interest expense
    
    
    1,379
    
    
    
    1,614
    
    
    
    2,779
    
    
    
    3,335NET INTEREST INCOME
    
    
    2,464
    
    
    
    2,778
    
    
    
    5,011
    
    
    
    5,707Provision for loan losses
    
    
    2,467
    
    
    
    150
    
    
    
    2,617
    
    
    
    300NET INTEREST INCOME (LOSS) AFTER
PROVISION FOR LOAN LOSSES
    
    
    (3
    )
    
    
    2,628
    
    
    
    2,394
    
    
    
    5,407OTHER INCOMEService charges on deposit accounts
    
    
    380
    
    
    
    378
    
    
    
    717
    
    
    
    730Trust department income
    
    
    38
    
    
    
    62
    
    
    
    74
    
    
    
    99Net investment securities gains
    
    
    
    
    
    
    203
    
    
    
    
    
    
    
    252Net gains on loan sales
    
    
    11
    
    
    
    665
    
    
    
    194
    
    
    
    1,297Interchange fee income
    
    
    73
    
    
    
    76
    
    
    
    127
    
    
    
    142Bank-owned life insurance income
    
    
    76
    
    
    
    
    
    
    
    150
    
    
    
    Other income
    
    
    127
    
    
    
    140
    
    
    
    213
    
    
    
    211Total other income
    
    
    705
    
    
    
    1,524
    
    
    
    1,475
    
    
    
    2,731OTHER EXPENSESalaries and employee benefits
    
    
    1,404
    
    
    
    1,358
    
    
    
    2,886
    
    
    
    2,729Occupancy expense
    
    
    187
    
    
    
    177
    
    
    
    388
    
    
    
    363Equipment expense
    
    
    277
    
    
    
    259
    
    
    
    537
    
    
    
    515Data processing expense
    
    
    75
    
    
    
    74
    
    
    
    149
    
    
    
    154Pennsylvania shares tax
    
    
    86
    
    
    
    82
    
    
    
    167
    
    
    
    155Dues and Subscriptions
    
    
    48
    
    
    
    53
    
    
    
    113
    
    
    
    118Professional fees
    
    
    351
    
    
    
    73
    
    
    
    419
    
    
    
    181Other expense
    
    
    572
    
    
    
    536
    
    
    
    1,130
    
    
    
    1,130Total other expense
    
    
    3,000
    
    
    
    2,612
    
    
    
    5,789
    
    
    
    5,345Income (loss) before income taxes
    
    
    (2,298
    )
    
    
    1,540
    
    
    
    (1,920
    )
    
    
    2,793Income tax expense (benefit)
    
    
    (852
    )
    
    
    473
    
    
    
    (796
    )
    
    
    850NET INCOME (LOSS)
    
    $
    (1,446
    )
    
    $
    1,067
    
    
    $
    (1,124
    )
    
    $
    1,943PER SHARE DATAAverage shares for the period, Basic
    
    
    2,733,858
    
    
    
    2,739,196
    
    
    
    2,732,755
    
    
    
    2,756,919Average shares for the period, Diluted
    
    
    2,733,858
    
    
    
    2,742,089
    
    
    
    2,732,755
    
    
    
    2,759,272Earnings (loss) per share, Basic
    
    $
    (0.53
    )
    
    $
    0.39
    
    
    $
    (0.41
    )
    
    $
    0.70Earnings (loss) per share, Diluted
    
    $
    (0.53
    )
    
    $
    0.39
    
    
    $
    (0.41
    )
    
    $
    0.70Dividends paid
    
    $
    0.15
    
    
    $
    0.15
    
    
    $
    0.30
    
    
    $
    0.30
 See accompanying notes to the unaudited consolidated financial statements 4




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Slippery Rock Financial Corporation 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 (Unaudited - $ in 000)
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net income (loss)
    
    $
    (1,446
    )
    
    $
    1,067
    
    
    $
    (1,124
    )
    
    $
    1,943Other comprehensive income:Unrealized gain (loss) on available for sale securities
    
    
    (1,319
    )
    
    
    240
    
    
    
    (971
    )
    
    
    446Reclassification adjustment for gains included in net income
    
    
    
    
    
    

    (203
    )
    
    
    
    
    
    
    (252
    )Other comprehensive income (loss) before tax
    
    
    (1,319
    )
    
    
    37
    
    
    
    (971
    )
    
    
    194Income tax expense (benefit) related to other comprehensive income
    
    
    (448
    )
    
    
    13
    
    
    
    (330
    )
    
    
    66Other comprehensive income (loss), net of tax
    
    
    (871
    )
    
    
    24
    
    
    
    (641
    )
    
    
    128Comprehensive income (loss)
    
    $
    (2,317
    )
    
    $
    1,091
    
    
    $
    (1,765
    )
    
    $
    2,071
 See accompanying notes to the unaudited consolidated financial statements 5




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Slippery Rock Financial Corporation 
 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
 (Unaudited - $ in 000 except per share amounts)
 AccumulatedOtherCommon
    
    Capital
    
    Retained
    
    Comprehensive
    
    TreasuryStock
    
    Surplus
    
    Earnings
    
    Loss
    
    Stock
    
    TotalBalance, December 31, 2003
    
    $
    695
    
    
    $
    10,712
    
    
    $
    20,806
    
    
    $
    (119
    )
    
    $
    (771
    )
    
    $
    31,323Net Loss
    
    
    
    
    
    
    
    
    
    
    (1,124
    )
    
    
    
    
    
    
    
    
    
    
    (1,124
    )Net unrealized loss on
available for sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (641
    )
    
    
    
    
    
    
    (641
    )Stock options exercised
    
    
    1
    
    
    
    80
    
    
    
    (12
    )
    
    
    
    
    
    
    
    
    
    
    69Cash dividends ($0.30 per share)
    
    
    
    
    
    
    
    
    
    
    (820
    )
    
    
    
    
    
    
    
    
    
    
    (820
    )Balance, June 30, 2004
    
    $
    696
    
    
    $
    10,792
    
    
    $
    18,850
    
    
    $
    (760
    )
    
    $
    (771
    )
    
    $
    28,807
 See accompanying notes to the unaudited consolidated financial statements 6




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Slippery Rock Financial Corporation 
 CONSOLIDATED STATEMENT OF CASH FLOWS
 (Unaudited - $ in 000)
 June 30,2004
    
    2003OPERATING ACTIVITIESNet income (loss)
    
    $
    (1,124
    )
    
    $
    1,943Adjustments to reconcile net income to
net cash provided by operating activities:Provision for loan losses
    
    
    2,617
    
    
    
    300Depreciation, amortization and accretion of investment securities
    
    
    534
    
    
    
    535Originations of mortgage loans held for sale
    
    
    (7,151
    )
    
    
    (32,040
    )Proceeds from sales of mortgage loans
    
    
    4,905
    
    
    
    33,023Net gains on loan sales
    
    
    (194
    )
    
    
    (1,297
    )Net investment security gains
    
    
    
    
    
    
    (252
    )Earnings on bank-owned life insurance
    
    
    (150
    )
    
    
    Decrease in accrued interest receivable
    
    
    75
    
    
    
    298Decrease in accrued interest payable
    
    
    (9
    )
    
    
    (103
    )Other, net
    
    
    (679
    )
    
    
    (206
    )Net cash provided by (used for) operating activities
    
    
    (1,176
    )
    
    
    2,201INVESTING ACTIVITIESInvestment securities available for sale:Proceeds from sales
    
    
    
    
    
    
    17,699Proceeds from maturities and repayments
    
    
    8,294
    
    
    
    8,670Purchases
    
    
    (15,883
    )
    
    
    (19,957
    )Investment securities held to maturity:Proceeds from maturities and repayments
    
    
    225
    
    
    
    2,221Decrease in loans, net
    
    
    5,093
    
    
    
    6,293Purchases of premises and equipment
    
    
    (915
    )
    
    
    (1,032
    )Purchase of bank-owned life insurance
    
    
    
    
    
    
    (6,000
    )Proceeds from student loan sales
    
    
    5,590
    
    
    
    6,720Proceeds from the sale of other real estate owned
    
    
    54
    
    
    
    410Net cash provided by investing activities
    
    
    2,458
    
    
    
    15,024FINANCING ACTIVITIESIncrease (decrease) in deposits, net
    
    
    (2,804
    )
    
    
    2,723Increase in short term borrowings
    
    
    590
    
    
    
    2,423Payments on other borrowings
    
    
    (23
    )
    
    
    (25
    )Proceeds from stock options exercised
    
    
    69
    
    
    
    41Purchase of treasury stock
    
    
    
    
    
    
    (771
    )Cash dividends paid
    
    
    (820
    )
    
    
    (826
    )Net cash provided by (used for) financing activities
    
    
    (2,988
    )
    
    
    3,565Increase (decrease) in cash and cash equivalents
    
    
    (1,706
    )
    
    
    20,790CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    24,540
    
    
    
    13,484CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    22,834
    
    
    $
    34,274Cash payments for interest
    
    $
    2,788
    
    
    $
    3,438Cash payments for income taxes
    
    $
    
    
    
    $
    890
 See accompanying notes to the unaudited consolidated financial 7




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Slippery Rock Financial Corporation 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 NOTE 1  BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and, therefore, do not
necessarily include all information, which would be included in audited
financial statements. The information furnished reflects all normal recurring
adjustments, which are, in the opinion of management, necessary for fair
statement of the results of the period. The results of operations for the
interim periods are not necessarily indicative of the results to be expected
for the full year. NOTE 2  EARNINGS PER SHARE There were 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. Three Months
    
    Three Months
    
    Six Months
    
    Six MonthsEnded
    
    Ended
    
    Ended
    
    EndedJune 30, 2004
    
    June 30, 2003
    
    June 30, 2004
    
    June 30, 2003Weightedaverage
common shares
outstanding used to
calculate basic
earnings per share
    
    
    2,733,858
    
    
    
    2,739,196
    
    
    
    2,732,755
    
    
    
    2,756,919Additional common
stock equivalents
(stock options)
used to calculate
diluted earnings
per share
    
    
    
    
    
    
    2,893
    
    
    
    
    
    
    
    2,353Weighted-average
common shares and
common stock
equivalents used to
calculate diluted
earnings per share
    
    
    2,733,858
    
    
    
    2,742,089
    
    
    
    2,732,755
    
    
    
    2,759,272
 Options to purchase 30,950 shares of common stock at prices from $18.50 to
$19.30 were outstanding for the periods ended June 30, 2003, but were not
included in the computation of diluted EPS because to do so would have been
anti-dilutive. No options were included in the June 30, 2004 calculation due
to the net loss, which would have had an anti-dilutive effect. NOTE 3  RECLASSIFICATION OF COMPARATIVE AMOUNTS Certain comparative amounts for the prior periods have been reclassified to
conform to current period presentations. Such reclassifications had no effect
on net income or stockholders equity. NOTE 4  RECENT ACCOUNTING PRONOUNCEMENTS In December 2003, the Financial Accounting Standards Board (FASB) revised FAS
No. 132, Employers Disclosures about Pension and Other Postretirement Benefit.
This statement retains the disclosures required by FAS No. 132, which
standardized the disclosure requirements for pensions and other postretirement
benefits to the extent practicable and requires additional information on
changes in the benefit obligations and fair value of plan assets. Additional
disclosures include information describing the types of plan assets, investment
strategy, measurement date(s), plan obligations, cash flows, and components of
net periodic benefit cost recognized during interim periods. This statement
retains reduced disclosure requirements for nonpublic entities from FAS No.
132, and it includes reduced disclosure for certain of the new requirements.
This statement is effective for financial statements with fiscal years ending
after December 15, 2003. The interim disclosures required by this statement
are effective for interim periods beginning after December 15, 2003. The
adoption of this statement did not have a material effect on the Companys
disclosure requirements. The Company has adopted the revised disclosure
provisions. 8




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In December 2003, the FASB issued a revision to Interpretation 46,
Consolidation of Variable Interest Entities, which established standards for
identifying a variable interest entity (VIE) and for determining under what
circumstances a VIE should be consolidated with its primary beneficiary.
Application of this Interpretation is required in financial statements of
public entities that have interests in special-purpose entities for periods
ending after December 15, 2003. Application by public entities, other than
small business issuers, for all other types of VIEs is required in financial
statements for periods ending after March 15, 2004. Small business issuers
must apply this Interpretation to all other types of VIEs at the end of the
first reporting period ending after December 15, 2004. The adoption of this
interpretation has not and is not expected to have a material effect on the
Companys financial position or results of operations. NOTE 5  PRO FORMA STOCK COMPENSATION EXPENSE Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, encourages all entities to adopt a fair value based
method of accounting for employee stock compensation plans, whereby
compensation cost is measured at the grant date based on the fair value of the
award and is recognized over the service period, which is usually the vesting
period. However, it also allows an entity to continue to measure compensation
cost for those plans using the intrinsic value based method of accounting

prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, whereby compensation cost is the excess, if any, of
the quoted market price of the stock at the grant date over the amount an
employee must pay to acquire the stock. Stock options issued under the
Companys option plans have no intrinsic value at grant date. Accordingly,
under APB Opinion No. 25, no compensation cost is recognized. The Company has elected to continue with the accounting prescribed in APB
Opinion No. 25 and, as a result, must make pro forma disclosures of net income
and earnings per share and other disclosures as if the fair value based method
of accounting had been applied. The estimated fair value of the options is
amortized to expense over the vesting period of the option. The following table
presents the effect on reported net income and net income per share of
accounting for employee stock options under the fair value method ($ in
thousands except per share amounts): Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003Net income (loss), as reported:
    
    $
    (1,446
    )
    
    $
    1,067
    
    
    $
    (1,124
    )
    
    $
    1,943Less proforma expense related
to stock options
    
    
    19
    
    
    
    10
    
    
    
    38
    
    
    
    31Proforma net income (loss)
    
    $
    (1,465
    )
    
    $
    1,057
    
    
    $
    (1,162
    )
    
    $
    1,912Basic net income (loss) per common share:As reported
    
    $
    (0.53
    )
    
    $
    0.39
    
    
    $
    (0.41
    )
    
    $
    0.70Pro forma
    
    
    (0.53
    )
    
    
    0.39
    
    
    
    (0.41
    )
    
    
    0.69Diluted net income (loss) per common share:As reported
    
    $
    (0.53
    )
    
    $
    0.39
    
    
    $
    (0.41
    )
    
    $
    0.70Pro forma
    
    
    (0.53
    )
    
    
    0.39
    
    
    
    (0.41
    )
    
    
    0.69
 NOTE 6  NET PERIODIC BENEFIT COST  DEFINED BENEFIT PLANS For a detailed disclosure on the Companys pension and employee benefits plans,
please refer to Note 13 of the Companys Consolidated Financial Statements
included in the 2003 Annual Report on Form 10-K. 9




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##### Table of Contents



The following sets forth the components of net periodic benefit cost of the
domestic non-contributory defined benefit plans ($ in thousands): Three months ended June 30,
    
    Six months ended June 30,2004
    
    2003
    
    2004
    
    2003Service cost
    
    $
    63
    
    
    $
    57
    
    
    $
    125
    
    
    $
    115Interest cost
    
    
    49
    
    
    
    45
    
    
    
    98
    
    
    
    89Expected return on plan assets
    
    
    (37
    )
    
    
    (31
    )
    
    
    (73
    )
    
    
    (62
    )Amortization of transition obligation
    
    
    (1
    )
    
    
    (1
    )
    
    
    (2
    )
    
    
    (2
    )Amortization of prior service cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of loss
    
    
    18
    
    
    
    18
    
    
    
    36
    
    
    
    36Net periodic cost
    
    $
    92
    
    
    $
    88
    
    
    $
    184
    
    
    $
    176
 Employer Contributions The Company previously disclosed in its consolidated financial statements
included in the 2003 Annual Report on Form 10-K that it anticipated to
contribute $264,000 to its defined benefit plan in 2004. 
 Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS Forward Looking Statements This report includes forward-looking statements within the meaning of Sections
27A of the Securities Act of 1933, as amended, and Rule 175 promulgated
thereunder, and 21E of the Securities Exchange Act of 1934, as amended, and
Rule 3b-6 promulgated thereunder, that involve inherent risks and
uncertainties. This report contains certain forward-looking statements with
respect to the financial condition, results of operations, plans, objectives,
future performance and business of Slippery Rock Financial Corporation (the
Company) including statements preceded by, followed by or that include the
words or phrases such as believes, expects, anticipates, plans,
trend, objective, continue, remain, pattern or similar expressions or
future or conditional verbs such as will, would, should, could,
might, can, may or similar expressions. There are a number of important
factors that could cause future results to differ materially from historical
performance and these forward-looking statements. Factors that might cause
such a difference include, but are not limited to: (1) competitive pressures
among depository institutions increase significantly; (2) changes in the
interest rate environment reduce interest margins; (3) prepayment speeds, loan
sale volumes, charge-offs and loan loss provisions; (4) general economic
conditions, either national or in the Commonwealth of Pennsylvania, are less
favorable than expected; (5) political developments, wars or other hostilities
may disrupt or increase volatility in securities markets or other economic
conditions; (6) legislative or regulatory changes or actions adversely affect
the businesses in which the Company is engaged; (7) changes and trends in the
securities markets; (8) a delayed or incomplete resolution of regulatory
issues; (9) the impact of reputational risk created by these developments on
such matters as business generation and retention, funding and liquidity; (10)
the costs associated with the proposed merger with F.N.B. Corporation
(F.N.B.); (11) successful integration of the Companys operations into F.N.B.
in the event the merger is consummated; (12) the outcome of regulatory and
legal proceedings. The Company undertakes no obligation to release revisions
to these forward-looking statements or reflect events or circumstances after
the date of this report. Comparison of the Three Months Ended June 30, 2004 and 2003 Total Interest Income- Total interest income was $3,843,000 for the
three-month period ended June 30, 2004 compared to $4,392,000 for the same
three-month period in 2003, a decrease of $549,000 or 12.5%. The overall
decrease in total interest income is attributed principally to a decrease in
interest and fees on loans of $651,000 or 17.6%. This was partially offset by
an increase in taxable interest income from investments of $132,000. Income
from interest and fees on loans decreased due to decreases in both volume and
yields within the loan portfolio. 10




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##### Table of Contents



Average gross loans, including loans available for sale, at June 30, 2004 were
$202.7 million, a decrease of $25.0 million or 11.0% from $227.8 million at
June 30, 2003. Virtually all major segments within the loan portfolio
reflected net declines in average balances compared to June 30, 2003. The most
significant declines occurred within the home equity and consumer loan
segments. Average home equity loans decreased $9.2 million or 21.0% while
average consumer loans decreased $6.4 million or 44.1%. Partially offsetting
these declines was an increase in average commercial real estate loans of $7.0
million or 9.9%. The decline within the average loan portfolio was brought
about by general market activity resulting primarily from the low interest rate
environment which caused high levels of prepayment within all loan types. Over
the past year, the Company has experienced a record number of refinancings.
Many customers chose to refinance or consolidate their home equity loans into
fixed rate 1-4 family loans with a first lien position, which the Company, in
accordance with its interest rate risk policy, generally sells to Freddie Mac.
This is the primary cause for the decline in the home equity loans. Interest and fees on loans also decreased due to a decline in the net yield on
interest earning assets. This decline was a result of the Federal Reserve
Boards actions of decreasing interest rates throughout 2001, 2002 and 2003
which triggered downward repricings of variable rate loans and an increased
level of refinancings. The tax equivalent yield on interest earning assets
fell from 5.90% for the six months June 30, 2003 to 5.35% for the six months
ended June 30, 2004. Yields on interest-earning assets have been computed on a
taxable-equivalent basis using the federal income tax statutory rate of 34%.
The net yield on interest earning assets also decreased due to a shift in the
earning asset composition. Average investments and overnight funds, which
generally have a lower yield than loans, as a percent of average earning assets
at June 30, 2004 were 32.5% compared to 27.2% at June 30, 2003. In June and August of 2004,
the Federal Reserve Boards Open Market Committee twice
raised its target for the federal funds rate by one-quarter of a percentage
point, to its current level of 1.50 percent. The prime rate will rise to 4.50 percent. These are
the first Federal Reserve Board rate increases since May 2000, which come after
13 consecutive rate cuts that reduced the federal funds rate from 6.5 percent
at the end of 2000 to 1 percent in June 2003. If rates continue to rise as
expected and to the extent interest-bearing liabilities reprice faster than
interest-earning assets, the increased rates could have an adverse impact on
the Companys net interest income. See Item 3. Quantitative and Qualitative
Disclosures About Market Risks. Taxable investment interest income increased due to an increase in volume
within the investment portfolio. Average total investments were $97.9 million
at June 30, 2004, an increase of $12.7 million from $85.2 million at June 30,
2003. Average U.S. government agency securities represented the largest
increase within the taxable investment securities of $10.6 million. As the
interest rate on overnight funds decreased throughout 2002 and 2003, management
felt it prudent to invest in higher yielding, short-term duration, U.S.
government agency securities and mortgage-backed securities. Due to the low
rate environment and the high level of mortgage refinancings, average
mortgage-backed securities declined by $1.4 million from June 30, 2003. Total Interest Expense- Total interest expense was $1,379,000 for the
three-month period ended June 30, 2004 representing a decrease of $235,000 from
the $1,614,000 reported for the same three-month period in 2003. The change
was comprised primarily of a decrease in interest expense on deposits of
$234,000, resulting from both a decline in the Banks cost of funds and a
decrease in average interest-bearing deposits. The Banks cost of deposits
decreased from 2.27% at June 30, 2003 to 1.81% at June 30, 2004. Average
interest-bearing deposits decreased $5.5 million from 2003. Due to the low
interest rate environment, the Bank continued to see a shift in consumer
preference within interest bearing deposits from time deposits with fixed
maturities to more liquid products such as money market accounts and
interest-bearing demand deposits. Average time deposits decreased $12.6
million from June 30, 2003, while the average interest-bearing demand deposits
increased $5.4 million or 16.1% and average money market accounts increased
$4.7 million. Net Interest Income- Net interest income was $2,464,000 for the three months
ended June 30, 2004 compared to $2,778,000 for the same three-month period in
2003, a decrease of $314,000. 11




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##### Table of Contents



Provision for Loan Losses- The provision for loan losses for the three months
ended June 30, 2004 was $2.5 million compared to $150,000 for the same period
in 2003. As a result of its recurring quarterly analysis of loan loss reserve
adequacy, management determined that an increase in the provision was required.
For details of the analysis and methodology, see Risk Elements. Total Other Income- Total other income for the three-month period ended June
30, 2004 was $705,000 compared to $1,524,000 for the three-month period ended
June 30, 2003, a decrease of $819,000. This decrease was primarily the result
of decreases in net gains on loan sales of $654,000 and net gains on the sale
of investment securities of $203,000. These decreases were partially offset by
an increase in bank-owned life insurance (BOLI) income of $76,000. For the three month period ended June 30, 2004, gains of $11,000 were recorded
on the sale of $869,000 of fixed rate, 1-4 family residential mortgages to
Freddie Mac. For the three-month period ended June 30, 2003, $16.4 million of
fixed rated, 1-4 family residential mortgages were sold resulting in a net gain
of $665,000. The Company also sold investment securities in the second quarter
of 2003 totaling $12.2 million which resulted in gains of $203,000. During the
second quarter of 2003, the Company also purchased BOLI totaling $6.0 million
which caused the increase in bank-owned life insurance income. Total Other Expense- Total other expense of $3,000,000 for the three months
ended June 30, 2004 compared to $2,612,000 for the same three-month period in
2003. This represented an increase of $388,000 or 14.9%. The increase was
primarily derived from an increase in professional fees of $278,000, followed
by increases in salaries and employee benefits expense of $46,000. The
increase in professional fees was due to merger related expenses and is
expected to continue to increase for the next two quarters or until the
consummation of the proposed merger with F.N.B. Corporation. The increases in
salaries and employee benefits resulted principally from additional personnel
as well as an increase in the cost of employee benefits. Additional personnel
were needed due to the centralization of loan functions and the expansion of
the credit administration department. Additional senior management positions
were also created to supervise these areas. Net Loss- The net loss for the three-month period ended June 30, 2004 was
$1,446,000, a decrease of $2,513,000 from net income of $1,067,000 reported at
June 30, 2003. Earnings (loss) per share for the three-month period ended June
30, 2004 were $(0.53), a decrease of $0.92 from $0.39 per share earned during
the same three-month period in 2003. Comparison of the Six Months Ended June 30, 2004 and 2003 Total Interest Income- Total interest income was $7,790,000 for the six month
period ended June 30, 2004 compared to $9,042,000 for the same six month period
in 2003, a decrease of $1,252,000 or 13.8%. The overall decrease in total
interest income is attributed principally to a decrease in interest and fees on
loans of $1,370,000 or 18.1%. Income from interest and fees on loans decreased
due to a decrease in yields and volume within the loan portfolio as discussed
for the three month periods above. Total Interest Expense- Total interest expense was $2,779,000 for the six
month period ended June 30, 2004 represented a decrease of $556,000 from the
$3,335,000 reported for the same six month period in 2003. The decrease in
interest expense is due to a decrease in interest expense on deposits resulting
from a general decline in the Banks cost of funds as discussed for the three
month periods above. Net Interest Income- Net interest income was $5,011,000 for the six months
ended June 30, 2004 compared to $5,707,000 for the same six month period in
2003, a decrease of $696,000. Provision for Loan Losses- The provision for loan losses for the six months
ended June 30, 2004 was $2,617,000 compared to $300,000 for the same period in

2003. As a result of its recurring quarterly analysis of loan loss reserve
adequacy, management determined that an increase to the provision was required.
For details of the analysis and methodology, see Risk Elements. 12




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##### Table of Contents



Total Other Income- Total other income for the six month period ended June 30,
2004 was $1,475,000 compared to $2,731,000 for the six month period ended June
30, 2003, a decrease of $1,256,000. The decrease is primarily due to a
decrease in net gains on loan sales of $1,103,000 and a decrease in net gains
on the sale of investment securities of $252,000. These decreases were
partially offset by an increase in BOLI income of $150,000. Gains of $111,000 were recorded on the sale of $4.8 million of fixed rate, 1-4
family residential mortgages to Freddie Mac for the six month period ended June
30, 2004. The Company also sold student loans totaling $5.5 million with gains
of $83,000 in 2004. For the six month period ended June 30, 2003, $32.1
million of fixed rated, 1-4 family residential mortgages were sold resulting in
a gain of $1.2 million. In addition to the sale of mortgages, the Company also
sold $6.6 million in student loans during the first quarter of 2003 which
resulted in a gain of $99,000. Total Other Expense- Total other expense of $5,789,000 for the six months
ended June 30, 2004 compared to $5,345,000 for the same six month period in
2003. This represented an increase of $444,000 or 8.3%. The increase is
primarily derived from an increase in professional fees of $238,000 and
salaries and employee benefits expense of $157,000. The increase in
professional fees was due to the merger related expenses and is expected to
continue to increase for the next two quarters or until the consummation of the
proposed merger with F.N.B. Corporation. The increase in salaries and employee
benefits is discussed above. Net Loss- Net loss for the six month period ended June 30, 2004 was
$1,124,000, a decrease of $3,067,000 from net income of $1,943,000 reported at
June 30, 2003. Earnings (loss) per share for the six month period ended June
30, 2004 were $(0.41), a decrease of $1.11 from $0.70 per share earned during
the same six month period in 2003. Financial Condition Total assets decreased $4.9 million or 1.5% from December 31, 2003 to $330.1
million at June 30, 2004. The decrease in total assets was primarily due to a
decrease in net loans of $14.1 million which was partially offset by an
increase in available for sale investment securities of $6.6 million. Total
gross loans (including loans available for sale) decreased $9.3 million from
December 31, 2003 due to general economic conditions and the sale of $5.5
million in student loans discussed above. The increase in available for sale
investment securities is due to the purchase of $15.9 million in securities
during the first two quarters of 2004. Se also Comparison of the Three Months
Ended June 30, 2004 and 2003  Total Interest Income At June 30, 2004, the Company serviced approximately $97.1 million in sold
fixed rate mortgages. As discussed above, sales of fixed rate mortgages for the
six-month period ended June 30, 2004 totaled $4.8 million with net gains of
$111,000. Management anticipates future sales of fixed rate mortgages; however,
the extent to which the Company participates in the secondary market will be
dependent upon demand for fixed rate mortgages in the market place, liquidity
needs of the Company and interest rate risk exposure. Management will continue
to obtain the necessary documentation to allow loans to be sold in the
secondary market, so that if liquidity or market conditions dictate, management
will be able to respond to these conditions. Premises and equipment also increased $448,000 from December 31, 2003 to $9.7
million. This increase is a result of additional fixed assets in relation to
the expansion of the Companys operations center. Total deposits of $264.3 million at June 30, 2004 represented a decrease of
$2.8 million or 1.0% from $267.1 million at December 31, 2003. Money market
accounts had the largest decrease of $2.3 million followed by interest-bearing
demand and time deposits of $2.0 million and $1.4 million, respectively. These
decreases were partially offset by an increase in noninterest-bearing demand
deposits of $3.0 million. See also Comparison of the Three Months Ended June
30, 2004 and 2003  Total Interest Expense 13




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##### Table of Contents



Short-term borrowings increased $590,000 from December 31, 2003 to $6.0
million. This increase is due to an increase in short-term repurchase
agreements. 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 June 30, 2004: Actual
    
    Minimum
    
    WellAmount
    
    Ratio
    
    Ratio
    
    CapitalizedTier 1 risk - based capital
    
    $
    28,551
    
    
    
    13.70
    %
    
    
    4.00
    %
    
    
    6.00
    %Total risk - based capital
    
    
    31,191
    
    
    
    14.97
    
    
    
    8.00
    
    
    
    10.00Leverage capital
    
    
    28,551
    
    
    
    8.54
    
    
    
    4.00
    
    
    
    5.00
 As the above table illustrates, the Company exceeds both the minimum and
well-capitalized regulatory capital requirements at June 30, 2004. The Banks
regulatory capital amounts, as of the report date, did not differ significantly
from that of the Company. LIQUIDITY The principal functions of the Companys asset/liability management program are
to provide adequate liquidity and to monitor interest rate sensitivity.
Liquidity represents the ability to meet the cash flow requirements of both
depositors and customers requesting bank credit. Asset liquidity is provided
by repayments and the management of maturity distributions for loans and
securities. An important aspect of asset liquidity lies in maintaining
adequate levels of adjustable rate, short term, or relatively risk free
interest earning assets. Management evaluates the Companys liquidity position
over 30 day, 60 day, and 90+ day time horizons. The analysis not only
identifies liquidity within the balance sheet, but off balance sheet as well.
It identifies anticipated sources and uses of funds as well as potential
sources and uses. Anticipated needs include liquidity for credit demand,
commitments to purchase assets, and anticipated deposit decreases. Anticipated
sources include cash (net of reserve requirements), maturing investment
securities, daily federal funds sold, anticipated deposit increases, and the
repayment of loans and mortgage backed securities. Potential uses include
unfunded loan commitments available on lines of credit. Potential sources
include borrowing capacity available to the Company through the Federal Home
Loan Bank (FHLB). At June 30, 2004, for the 30-day horizon, the Company had a
net anticipated funding position of 5.9% of total assets. This ratio was 1.3%
at December 31, 2003. Management views this ratio to be at an adequate level. Management also monitors its liquidity by the Companys loans to deposits
ratio. The gross loans (including loans held for sale) to deposits ratio was
75.6% at June 30, 2004 as compared to 78.3% at December 31, 2003 and 80.3% at
June 30, 2003. The Companys liquidity plan allows for the use of long-term advances or
short-term lines of credit with the FHLB as a source of funds. Borrowing from
the FHLB not only provides a source of liquidity for the Company, but also
serves as a tool to reduce interest rate risk. The Company may structure
borrowings from FHLB to match those of customer credit requests, and therefore,
lock in interest rate spreads over the lives of the loans. At June 30, 2004,
the Company continued to have three such matched funding loans outstanding
totaling $104,000. The Company continues to also have short-term borrowing availability through
FHLB 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 of qualifying
residential mortgages. At June 14




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##### Table of Contents



30, 2004 and 2003, the Company had no
RepoPlus advances outstanding. The Companys remaining borrowing capacity
with FHLB was $111.5 million at June 30, 2004. The Company has outstanding a Convertible Select
advance with the FHLB for general liquidity purposes in the amount of $30.0
million at a rate of 5.11%. The 10year/1year advance matures in 2011
with the opportunity to reprice quarterly, if the strike rate is
attained. The strike rate of 7.50% is
tied to the 3-month London Inter-bank Offering Rate (LIBOR); accordingly, the
advance will maintain at its fixed rate unless 3-month LIBOR rises to 7.50%.
At June 30, 2004 the 3-month LIBOR was 1.60%. Interest is paid quarterly to
the FHLB at a rate of 5.11%. The advance is
subject to prepayment penalties. In addition to borrowing from the FHLB as a source for liquidity, as mentioned
earlier, 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 provide an opportunity for the
Company 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. Loan sales on the secondary market also provide management an
additional tool to use in managing interest rate risk exposure within the
balance sheet. The Company continues to service all loans sold to Freddie Mac. The Statement of Cash Flows, for the six-month period ended June 30, 2004,
indicated a decrease in cash and cash equivalents of $1.7 million. Cash was
provided from proceeds from sales of mortgage loans and student loans of $4.9
million and $5.6 million, respectively, and proceeds from sales, maturities,
and repayments of available for sale securities of $8.3 million. Cash was used
during the period primarily for the origination of loans held for sale of $7.2
million and the purchase of available for sale investments of $15.9 million.
Cash dividends paid during the six-month period ended June 30, 2004 totaled
$820,000. Cash and cash equivalents totaled $22.8 million at June 30, 2004, a
decrease of $1.7 million from $24.5 million at December 31, 2003. Management is not aware of any conditions, including any regulatory
recommendations or requirements, which would adversely affect its liquidity or
ability to meet its funding needs in the normal course of business. 15




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##### Table of Contents



RISK ELEMENTS Schedule of Non-performing Assets The following schedule presents the non-performing assets for the last five
quarters: Jun
    
    Mar
    
    Dec
    
    Sep
    
    Jun2004
    
    2004
    
    2003
    
    2003
    
    2003(dollars in thousands)Non-performing and restructured loansAccruing loans past due 90 days or more
    
    $
    258
    
    
    $
    86
    
    
    $
    57
    
    
    $
    52
    
    
    $
    110Non-accrual loans
    
    
    7,219
    
    
    
    3,309
    
    
    
    3,170
    
    
    
    3,977
    
    
    
    3,114Restructured loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total non-performing
and restructured loans
    
    
    7,477
    
    
    
    3,395
    
    
    
    3,227
    
    
    
    4,029
    
    
    
    3,224Other non-performing assetsOther real estate owned
    
    
    1,138
    
    
    
    822
    
    
    
    318
    
    
    
    240
    
    
    
    145Repossessed assets
    
    
    43
    
    
    
    42
    
    
    
    68
    
    
    
    54
    
    
    
    87Total other non-performing assets
    
    
    1,181
    
    
    
    864
    
    
    
    386
    
    
    
    294
    
    
    
    232$
    8,658
    
    
    $
    4,259
    
    
    $
    3,613
    
    
    $
    4,323
    
    
    $
    3,456Total non-performing assetsNon-performing and restructured loans
as a percentage of total loans(1)
    
    
    3.82
    %
    
    
    1.70
    %
    
    
    1.56
    %
    
    
    1.82
    %
    
    
    1.47
    %Non-performing assets and
restructured loans as a
percentage of total loans
and other non-performing
Assets and restructured loans(1)
    
    
    4.40
    %
    
    
    2.12
    %
    
    
    1.74
    %
    
    
    1.95
    %
    
    
    1.58
    %
   (1)
    
    Excludes loans held for sale. Allowance for Loan Losses The allowance for loan losses
at June 30, 2004 totaled $5,522,000 or 2.76% of
total gross loans (including loans held for sale) as compared to $3,106,000 or
1.48% at December 31, 2003. Provisions for loan losses were $2,617,000 and
$300,000 for the six-month periods ended June 30, 2004 and 2003. Based on the
Banks methodology for evaluating the level of the loan loss allowance,
management determined it was appropriate to increase the provision for loan
losses in the second quarter of 2004. 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. Commercial and commercial
real estate loans are risk-rated by loan officers, loan committee and the board
of directors and are independently verified by credit administration and loan
review. Consumer and residential real estate loans are generally reviewed in
the aggregate due to their relative smaller dollar size and homogeneous nature.
Specific provision and allowance allocations are made for risk-rated loans that
have been analyzed. These allocations are based upon specific borrower data,
such as non-performance, delinquency, financial performance, capacity to repay,
and collateral valuation. Non-account specific allocations are made for all
remaining loans within the portfolio based on recent charge-off history, other
known trends and expected losses. In addition, allocations are made for 16




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##### Table of Contents



qualitative factors such as changes in the local, regional and national
economies, industry trends, loan growth, and loan administration. A quarterly report and recommendation is presented
to and approved by the Board of Directors. Based on this analysis, managements review of updated financial information
provided by borrowers indicated deterioration in the financial condition of
certain borrowers due to the current economic environment. Management
determined to lower the risk ratings on approximately
$8.3 million of loans
comprised primarily of commercial loans secured by real estate for the period
ended June 30, 2004. The risk-rating changes in the second quarter resulted in
increased provision expense of $2,317,000 and an increase in non-performing
loans for the second quarter of 2004 presented in the table above. Although, management believes the allowance is adequate to cover probable
losses inherent within the loan portfolio, future adjustments may be necessary
if economic conditions differ substantially from the economic assumptions used
in making its determinations. In addition, no assurances can be made concerning
the future financial condition of borrowers, the deterioration of which would
require additional provisions in subsequent periods. Non-accrual/Impaired Loans A loan is classified as nonaccrual if, in the opinion of management, reasonable
doubt as to the collectibility of the account arises. In addition, 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.
At the time the account is placed on nonaccrual status, all previously accrued
interest is charged against current earnings. At the time the accrual of
interest is discontinued, future income is recognized only when cash is
received, depending on managements assessment of the collectibility of
principal. At June 30, 2004, the Company had nonaccrual loans of $7,219,000. A loan is considered impaired when, based upon current information and events,
it is probable that the Company will be unable to collect all principal and
interest amounts due according to the contractual terms of the loan agreement.
Included in the nonaccrual loans at June 30, 2004 were impaired loans totaling
$6.5 million. The average balance of impaired loans during the six months ended
June 30, 2004 was $2.9 million. Impaired loans had a related allowance
allocation of $1,506,000 and no income was recognized in 2004 for any loans
while they were classified as impaired. The increase in classified loans, non-accrual loans and impaired loans and
ultimately, loan loss reserve levels, resulted principally from current
economic conditions and managements review of updated financial information
provided by borrowers during the second quarter of 2004. Of the fourteen credit relationships downgraded during the quarter, three
commercial loan relationships represented approximately $3.5 million of the
total increase in impaired loans and $1.4 million of the increase in loan loss
reserves at June 30, 2004. Each of these loans are in our market area. Each
of the credits were classified as impaired and placed in non-accrual status due
to the deteriorating financial condition of the borrowers, however, all three
relationships continue to perform according to their original contractual
agreements.  
    
    The largest of these borrowers has several credits totaling $1.5
million which are secured by various commercial and residential real
estate properties, equipment and receivables and are related to the
operation of an excavation and construction business. These credits
were classified as impaired and placed in non-accrual status in the
second quarter of 2004 due to the deteriorating financial condition of
the borrower and due to a lack of updated equipment valuations for which
the Company has a secured interest. The borrower continues to pay as
agreed.
    
    The second borrower relationship with credits totaling $1.4 million
was also classified as impaired and placed in non-accrual status in the
second quarter of 2004 due to the deteriorating financial condition of 17




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the borrower. These credits pertain to a leasing company and are
collateralized by commercial real estate as well as personal guarantees of the borrower and related entities. The
borrower continues to pay as agreed.
    
    The third credit relationship totaling $583,000 involves a borrower
in the restaurant business. This credit relationship was classified as
impaired and placed in non-accrual status in the second quarter of 2004
due to the borrowers deteriorating financial condition. The
relationship is collateralized by the restaurant and the owners primary
residence and continues to pay as agreed. The remaining eleven relationships that were downgraded during the second
quarter of 2004 had average outstanding loan balances of approximately $600,000
and represented approximately $800,000 of increase in provision expense during
the quarter. Based on the current reserve levels and the collateral securing the credits,
management does not consider any of the remaining non-performing loans to pose
any further significant risk to the capital position or future earnings of the
Company. Based on the current reserve levels and the collateral securing the credits,
management believes none of the non-performing assets, including other real
estate owned, at June 30, 2004, pose any significant risk to the operations,
liquidity or capital position of the Company. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk. Market risk for the Company is comprised primarily from interest rate risk
exposure and liquidity risk. Since virtually all of the interest-earning
assets and paying liabilities are at the Bank, virtually all of the interest
rate risk and liquidity risk lies at the Bank level. The Bank is not subject
to currency exchange risk or commodity price risk, and has no trading
portfolio, and therefore, is not subject to any trading risk. In addition, the
Bank does not participate in hedging transactions such as interest rate swaps
and caps. Changes in interest rates will impact both income and expense
recorded and also the market value of long-term interest-earning assets.
Interest rate risk and liquidity risk management is performed at the Bank
level. Although the Bank has a diversified loan portfolio, loans outstanding
to individuals and businesses are dependent upon the local economic conditions
in the immediate trade area. One of the principal functions of the Companys asset/liability management
program is to monitor the level to which the balance sheet is subject to
interest rate risk. The goal of the asset/liability program is to manage the
relationship between interest rate sensitive assets and liabilities, thereby
minimizing the fluctuations in the net interest margin, which achieves
consistent growth of net interest income during periods of changing interest
rates. Interest rate sensitivity is the result of differences in the amounts and
repricing dates of a banks rate sensitive assets and rate sensitive
liabilities. These differences, or interest rate repricing gap, provide an
indication of the extent that the Companys net interest income is 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 June 30, 2004, the Company had a cumulative negative gap of $72.1 million 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. However, not all assets and liabilities with similar
maturities and repricing opportunities will reprice at the same time or to the
same degree. The pricing on all deposit products, for example, is determined
by management, and therefore can be controlled as to the extent and timing of
repricing. As a result, the Companys gap position does not necessarily
predict the impact on interest income given a 18




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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 rate increases or
decreases of +300 basis points (or 3.00%) or -100 basis points (or 1.00%) in
100 basis point (or 1.00%) increments. The analysis reprices the balance sheet
and forecasts future cash flows over a one-year horizon at the new interest
rate levels. The cash flows are then totaled to calculate net interest income.
Assumptions are made for loan and investment pre-payment speeds and are
incorporated into the simulation as well. Loan and investment pre-payment
speeds will increase as interest rates decrease and slow as interest rates
rise. The current analysis indicates that, given a 100 basis point overnight
decrease in interest rates, the Company would experience a potential $136,000
or 1.3% decline in net interest income. If rates were to increase 300 basis
points, the analysis indicates that the Companys net interest income would
decrease $259,000 or 2.5%. 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 affect the
net interest income. As mentioned earlier, in gap analysis, as well as in
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 effect forecasted results. Much of the Company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 Company retains
much of the control over repricing by determining itself the extent and timing
of repricing of deposit products. In addition, the Company 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 Company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 Company with the use of borrowings from the FHLB and the
selling of fixed rate mortgages as a source of liquidity to the Company. 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 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. 
 Item 4. Controls and Procedures As of the quarter ended June 30, 2004, the Company carried out an evaluation,
under the supervision and with the participation of the Companys management,
including the Companys President and Chief Executive Officer along with the
Companys Chief Financial Officer, of the effectiveness of the design and
operation of the Companys disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based upon that 19




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evaluation, the Companys President
and Chief Executive Officer along with the Companys Chief Financial
Officer concluded that the Companys disclosure controls and procedures are
effective in timely alerting them to material information relating to the
Company (including its consolidated subsidiaries) required to be included in
the Companys periodic SEC filings. There have been no significant changes in
the Companys internal controls or in other factors which could significantly
affect internal controls subsequent to the date the Company carried out its
evaluation. A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any system of controls also is based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions; over time, controls may become
inadequate because of changes in conditions, or the degree of compliance with
the policies or procedures may deteriorate. Because of the inherent limitations
in a cost-effective control system, misstatements due to error or fraud may
occur and not be detected, and, thus, the Companys management cannot provide
absolute assurance that the Companys disclosure controls will prevent all
errors and all fraud. 
 PART II  OTHER INFORMATION 
 Item 1. Legal Proceedings In January 2004, two lawsuits were filed by a borrower and guarantor arising
out of financings by the Bank consummated in March 1998. These suits were
filed in the Court of Common Pleas of Lawrence County, Pennsylvania. Todd W.
Booher v. First National Bank of Slippery Rock (Case No. 10124 of 2004, C.A.)
and Estate of Pansie Booher v. First National Bank of Slippery Rock (Case No.
10125 of 2004, C.A.). Among other things, the suits allege that as a result of
the Banks commercially unreasonable sale of certain collateral, the plaintiff
suffered losses of approximately $1.3 million. The Corporation has filed
preliminary objections to the complaints. The Corporation believes it has
meritorious defenses and intends to vigorously defend. However, no assurances
can be given as to the ultimate outcome of these proceedings. 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities (none) 
 Item 3. Defaults Upon Senior Securities (none) 
 Item 4. Submission of Matters to a Vote of Security Holders The annual meeting of shareholders of Slippery Rock Financial Corporation took
place on April 20, 2004. The
following two (2) matters were voted upon: (1) Election of the three (3) persons listed in CLASS III of the Proxy
Statement dated March 26, 2004 whose
terms expire in 2007. CLASS II Directors:Mr. Robert E. GreggMr. S.P. SnyderMr. Thomas D. McClymonds
 20




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(2) Such other business as may properly come before the meeting or any
adjournment thereof. Continuing CLASS I directors whose terms expire in 2005 are: Mr. John W. ConwayMr. William D. KingeryMr. Scott A. McDowellMr. Charles C. Stoops, Jr.
 Continuing CLASS II directors whose terms expire in 2006 are: Mr. Robert M. GreenbergerMs. Brenda K. McBrideMr. William C. SonntagMr. Norman P. Sundell
 The following table presents the results of the vote tabulation Issue
    
    Description
    
    Votes For
    
    Votes Against1
    
    Election of CLASS III DirectorsMr. Robert E. Gregg
    
    
    1,508,990
    
    
    
    136,098Mr. S.P. Snyder
    
    
    1,533,114
    
    
    
    111,974Mr. Thomas D McClymonds
    
    
    1,618,770
    
    
    
    26,3182
    
    No other issues were brought before the meeting.
 
 Item 5. Other Information (none) 
 Item 6. Exhibits and Reports on Form 8  K (a)     Exhibits required by Item 601 of Regulation S  K: Exhibit Number31.1
    
    Rule 13a-14(a)/15d-14(a) Certification  Chief Executive Officer31.2
    
    Rule 13a-14(a)/15d-14(a) Certification  Chief Financial Officer32.1
    
    Section 1350 Certification  Chief Executive Officer32.2
    
    Section 1350 Certification  Chief Financial Officer99.0
    
    Report of Independent Registered
Public Accounting Firm
 (b) Reports on Form 8-K  Filed August 4, 2004 announcing second quarter earnings Filed May 28, 2004, attaching copy of merger agreement between the Company
and
F.N.B. Corporation 21




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SIGNATURES Pursuant to the requirements of the Securities 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
              (Registrant) Date: August 16, 2004
    By:

/s/William
C. SonntagWilliam C. Sonntag President & CEO Date: August 16, 2004
    By:
    /s/ Mark A. VolponiMark A. Volponi CFO