<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - KSB
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------ ------------
Commission File Number: 33 - 302132
TRI - STATE 1ST BANK, INC.
(Exact name of small business issuer as specified in its charter)
Ohio 34-1824708
- ----------------------- -----------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
16924 St. Clair Avenue
P.O. Box 796
East Liverpool, Ohio 43920
- ----------------------- -----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (330) 385-9200
--------------
Securities registered under Section 12(b) of the Exchange Act: None
----
Securities registered under Section 12(g) of
the Exchange Act: Common Stock, no par value
--------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S - B contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10 -
KSB or any amendment to this Form 10 - KSB. [X]
Issuer's revenues for its most recent fiscal year. $3.4 million.
The aggregate market value of the voting stock held by non - affiliates
computed by reference to the averaged bid and ask price on March 20, 1997,
was $ 4,852,320 (147,040 shares at $33.00 per share).
As of December 31, 1996, there were issued and outstanding 205,400 shares of
the registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholders report for the year ended December 31,
1996 are incorporated by reference into Parts I and II, and portions of the
Proxy Statement for the annual shareholders meeting held March 19, 1997 are
incorporated by reference into Part III.
<PAGE>
PART I
Item 1. Business
General
- -------
Certain information required by this section is presented on page 1 of the
1996 Annual Report and is incorporated herein by reference.
Tri-State 1st Bank, Inc. (the "Company") is the parent company for 1st
National Community Bank (the "Bank"), with principal executive offices of
both the Company and the Bank located in East Liverpool, Ohio. At December
31, 1996, the Bank had 28 full - time and 2 part - time employees.
Supervision and Regulation
- --------------------------
The Company is subject to regulation under the Bank Holding Company Act of
1956, as amended and the Securities and Exchange Commission.
Deposits maintained with the Bank are insured up to regulatory limits by the
FDIC, and accordingly, are subject to deposit insurance assessments to
maintain the Bank Insurance Fund ("BIF") administered by the FDIC. The
Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA") was enacted on August 9, 1989. FIRREA significantly affected the
financial industry in several ways, including higher deposit insurance
premiums, more stringent capital requirements and new investment limitations
and restrictions. The Federal Deposit Insurance Corporation Act of 1991 ("The
FDIC Improvement Act") covered a wide expanse of Banking regulatory issues.
The FDIC Improvement Act dealt with the capitalization of the BIF, with
deposit insurance reform, including requiring the FDIC to establish a risk -
based premium assessment system, and with a number of other regulatory and
supervisory matters. On December 11, 1995, the FDIC adopted reduced
assessment rates for the semiannual assessment period beginning January 1,
1996. The resulting annual assessment rates ranged from $0.00 per $100 of
deposits for banks classified in the highest capital and supervisory
evaluation categories to $.27 per $100 of deposits for banks classified in the
lowest capital and supervisory evaluation categories, subject to a minimum
assessment. As a result of the Bank meeting certain capital requirements, the
premium assessment for 1996 was nominal, and the assessment for 1997 is also
expected to be relatively insignificant.
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the Interstate Banking Law"), various federal banking laws were amended to
provide for nationwide interstate banking, interstate bank mergers and
interstate branching. The Interstate Banking Law allowed, effective September
29, 1995, the acquisition by a bank holding company of a bank located in
another state. Interstate bank mergers and branch purchase and assumption
transactions will be allowed effective June 1, 1997; however, states may "opt
out" of the merger and purchase and assumption provisions by enacting laws
that specifically prohibit such interstate transactions. States may, in the
alternative, enact legislation to allow interstate merger and purchase and
assumption transactions prior to June 1, 1997. The Bank anticipates use of
the Interstate Banking Law to facilitate the acquisition of a branch in
another state, as referenced to in the "Market Area" discussion below.
The monetary policies of regulatory authorities, including the Federal Reserve
Board, have a significant effect on the operating results of banks and bank
holding companies. The nature of future monetary policies and the effect of
such policies on the future business and earnings of the Company cannot be
predicted.
Management is not aware of any current recommendations by regulatory
authorities which, if they were to be implemented, would have a material
effect on liquidity, capital resources or operations of the Company.
Competition
- -----------
The Bank functions in a highly competitive environment. In addition to other
commercial banks, savings and loans, and savings banks, the Bank must also
contend with other providers of financial services including finance
companies, credit unions and insurance companies. The Bank's immediate
competition emanates specifically from National City Bank, Banc One, Potters
Savings & Loan, Central Federal Savings & Loan and Perpetual Savings Bank.
Each of these competitors operate in varying capacities within the Columbiana
County area, the market region shared with the Bank. Despite having access to
less resources and smaller lending limits, the Bank remains competitive in its
service area with respect to interest rates and fees charged on loans,
interest rates paid on time and savings deposits, and service charges on
deposit accounts. The deposit base of the Bank is relatively stable;
seasonal fluctuations in the amount of deposits have not been experienced. All
of the Bank's deposits emanate from inside the United States.
1
<PAGE>
Market Area
- -----------
The Bank's primary market area is East Liverpool and Lisbon, Ohio and
surrounding communities in the tri - state area which includes eastern Ohio,
northern West Virginia and southwestern Pennsylvania and is known as the Upper
Ohio Valley. In an attempt to enhance its branch network, the Bank entered
into a Branch Purchase and Assumption Agreement with United Bankshares, Inc.,
on February 25, 1997 to acquire the assets and assume the deposits and other
liabilities of United Bankshares, Inc.'s New Cumberland, West Virginia branch.
The purchase price is $157,000 in cash plus the value of all deposit accounts
based upon the balance as of the date of closing at a premium of 5 1/2% of
account balances. Consummation and closing are anticipated by June 30, 1997
or such earlier date agreed to by the parties, so long as prior to that date
the parties have received all necessary regulatory approvals with respect to
the contemplated transaction and all waiting periods required by such
approvals have expired. This acquisition is ultimately expected to have a
positive impact on net income and future earnings per share.
Statistical Disclosures by Bank Holding Companies
- -------------------------------------------------
I. Distribution of Assets, Liabilities and Shareholders' Equity; Interest
Rates and Interest Differential
Information required by this section is presented on pages 5 through 6 of the
1996 Annual Report and is incorporated herein by reference.
II. Investment Portfolio
A. Book Value of Investment Portfolio
Information required by this section is presented on pages 17 and 18 of the
1996 Annual Report and is incorporated herein by reference.
B. Maturity and Yield Information
The following table sets forth the maturity of investments at December 31,
1996, and the weighted average yields of such investments. The yields
reflected are calculated based on the basis of the cost and effective yields
weighted for the scheduled maturity of each investment.
<TABLE>
<CAPTION>
1 Year 5 Years
Within 1 Through Through Over 10
Year Years 10 Years Years Total
--------- ---------- ---------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
U. S. Treasury securities
and other U.S. Government
agencies and corporations $ 2,148 $ 3,997 $ 800 $ $ 6,945
Obligations of states and
political subdivisions 37 1,647 2,401 291 4,376
Mortgage-backed securities 334 311 10 655
Equity securities 211 211
--------- ---------- ---------- --------- ----------
$ 2,519 $ 5,955 $ 3,211 $ 502 $ 12,187
========= ========== ========== ========= ==========
U. S. Treasury securities
and other U.S. Government
agencies and corporation 5.61% 6.45% 7.23% -%
Obligations of states and
political subdivisions 6.06 7.31 7.51 7.67
Mortgage-backed securities 6.67 8.21 6.08 -
Equity securities - - - 7.00
--------- ---------- ---------- ---------
5.75% 6.78% 7.44% 7.39%
========= ========== ========== =========
</TABLE>
Weighted average yields are computed on a tax equivalent basis using a federal
tax rate of 34% based on cost, adjusted for amortization of premium or
accretion of discount.
2
<PAGE>
C. Aggregate Book Value of Securities Exceeding 10% of Stockholders' Equity
Excluding those holdings of the investment portfolio in U.S. Treasury
securities and other agencies and corporations of the U.S. Government, there
are no investments of any one issuer which exceeds 10% of the Company's
shareholders' equity at December 31, 1996.
III. Loan Portfolio
A. Types of Loans
The following table sets forth the composition of the loan portfolio by type
of loan at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------
1996 1995
----------------------- -----------------------
Amount Percent Amount Percent
---------- ---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Type of Loan
Real Estate Loans:
Construction $ 84 0.35% $ 199 0.90%
1 - 4 Family 11,443 47.53 10,519 47.47
Commercial 3,218 13.37 3,067 13.84
Commercial Loans 5,544 23.03 4,778 21.56
Consumer Loans 3,784 15.72 3,595 16.22
---------- ---------- ---------- ----------
Total 24,073 100.00% 22,158 100.00%
========== ========== ========== ==========
Less:
Deferred loan origination fees
and costs 22 41
Allowance for possible loan losses 290 266
---------- ----------
Net loans $ 23,761 $ 21,851
========== ==========
</TABLE>
The Bank's lending policy requires the application and satisfaction of certain
underwriting standards prior to funding any loan, among which are
documentation requirements to include credit and collateral value analysis.
Credit qualification entails evaluation of business cash flows or consumer
income available to service debt payments. Secondary sources of repayment,
including collateral and guarantees may be requested as well. Lending
opportunities typically are restricted to the market areas the Bank's
branches serve.
The Bank's lending strategy has historically focused on the origination and
retention of a mixture in its portfolio of commercial loans, one - to - four
family mortgage loans and, to a lesser extent, working capital loans in the
form of credit lines and term notes, personal loans, and home equity loans.
Commercial real estate loans are granted for the acquisition or improvement of
real property. Generally, commercial real estate loans do not exceed 70% of
the appraised value of the property pledged to secure the transaction. With
repayment typically contingent upon successful operation of the subject real
estate, this is carefully scrutinized prior to approval.
Real estate construction loans are granted for the purpose of construction
improvements to real property, both commercial and residential. Real estate
loans secured by one - to - four family residential housing properties are
granted subject to statutory limits regarding the maximum percentage of
appraised value of the mortgaged property. Residential loan terms are
normally established based upon factors such as interest rates in general, the
supply of money available to the Bank and the demand for such loans.
Consumer loans represent the extension of financing to customers for personal
expenditures or household purposes. Creditworthiness is evaluated on the basis
of projected repayment capacity as well as credit history. Such loans are
granted in the form of installment or revolving transactions.
3
<PAGE>
B. Maturities and Sensitivities of Loans to Changes in Interest Rates
The following table exhibits the maturity of commercial and real estate
construction loans outstanding as of December 31, 1996, and the amounts due
after one year classified according to the sensitivity to changes in interest
rates.
Maturing
-----------------------------------
Within Through
1 Year Five Years Total
---------- ---------- ---------
(Dollars in Thousands)
Commercial and agricultural $ 2,460 $ 3,084 $ 5,544
Real estate - construction 84 84
---------- ---------- ---------
Total $ 2,544 $ 3,084 $ 5,628
========== ========== =========
Sensitivity of loans to interest rates:
Predetermined interest rates $ 3,084 $ 3,084
Floating interest rates - -
---------- ---------
Total $ 3,084 $ 3,084
========== =========
C. Risk Elements
Certain information required by this section is presented on pages 2, 7 and 19
of the 1996 Annual Report and is incorporated herein by reference.
The following table sets forth information regarding non-performing assets:
At December 31,
1996 1995
---------- ---------
(Dollars in Thousands)
Loans past due 90 days or more and
still accruing interest $ 236 $ 270
Nonaccrual loans 48
Impaired loans 111 -
---------- ---------
Total non-performing loans 347 318
Other real estate owned 54 111
---------- ---------
Total non-performing assets $ 401 $ 429
========== =========
Non-performing assets to
allowance for loan losses 138.28% 161.28%
Non-performing assets include non - performing loans and other real estate
owned. The Bank's non-performing assets, do not represent or result from
trends or uncertainties which management reasonably expects will materially
impact future operating results, liquidity or capital resources. Impaired
loans are commercial and commercial real estate loans for which it is probable
that the Bank will not be able to collect all amounts due according to the
contractual terms of the loan agreement. The Bank evaluates such loans for
impairment individually 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
Bank 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 changes in
repayment capacity, 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 future 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.
4
<PAGE>
Mortgage loans on one-to-four family properties and all consumer loans are
large groups of smaller balance homogeneous loans and are measured for
impairment collectively. Loans that experience insignificant payment delays,
which are defined as 90 days or less, generally are not classified as
impaired. Management determines the significance of payment delays on a
case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
borrower's prior payment record, and he amount of shortfall in relation to the
principal and interest owed.
Although the Bank has a diversified loan portfolio, a substantial portion of
its debtors' ability to honor their agreements is dependent upon the economic
stability of the tri - state area. At December 31, 1996, the Corporation did
not have any concentrations of loans to borrowers engaged in similar
activities exceeding 10% of total loans.
While it is impossible to predict what 1997 loan losses will be, there are no
potential problem loans outstanding at the end of any period presented for
which there was serious doubt as to the ability of the borrower to comply with
present loan repayment terms except as discussed above.
IV. Summary of Loan Loss Experience
A. Analysis of Loan Loss Experience
The following table sets forth information with respect to the Bank's
allowance for loan losses at the dates indicated:
At December 31,
-----------------------
1996 1995
---------- ----------
(Dollars in Thousands)
Balance, January 1 $ 266 $ 233
Charge - offs:
Commercial and agricultural 16 -
Real estate mortgages -
Consumer 25 51
---------- ----------
Total charge - offs 41 51
Loan recoveries:
Commercial and agricultural 1 -
Real estate mortgages -
Consumer 15 16
---------- ----------
Total loan recoveries 16 16
---------- ----------
Net charge - offs 25 35
---------- ----------
Provision charged to
operations 49 68
---------- ----------
Balance, December 31 $ 290 $ 266
========== ==========
Net charge - offs as a percent
of average loans 0.11% 0.17%
The Bank believes that the allowance for loan losses at December 31, 1996 is
adequate to cover losses inherent in the portfolio. However, there can be no
assurance that the Bank will not sustain additional losses in future periods,
which could be substantial in relation to the size of the allowance at
December 31, 1996.
5
<PAGE>
B. Allocation of the Allowance for Possible Loan Losses
The allocation of the allowance for possible loan losses is predicated upon
periodic review and evaluation of individual loans, past loss experience, risk
elements associated with particular loan categories, and the impact of the
economic environment. The allowance for loan losses is available to absorb
credit losses arising from individual or portfolio segments. When losses on
specific loans are identified, the portion deemed uncollectable is charged
off.
The Bank monitors its loan portfolio on a monthly basis, taking into
consideration the status of potential problem loans and non - performing
assets, as well as trends in delinquencies. Management's determination of the
adequacy of the allowance for loan losses is based on periodic evaluations of
the credit portfolio and other relevant factors. In addition to the estimate
of the amounts and timing of expected future cash flows on impaired loans,
other components of the allowance for loan losses include estimates for loan
losses associated within the commercial, consumer and real estate mortgage
portfolios, general amounts for historical loss experience, uncertainties in
estimating losses, and inherent risks in the various credit portfolios.
Though impossible to predict what 1997 losses will be, management estimates
that net losses should not exceed approximately $18,500 or less than .08% of
net loans outstanding at December 31, 1996.
V. Deposits
A. Average Deposits and Rates Paid by Type
The following tables summarize the daily average amount of deposits and rates
paid on such deposits for the periods indicated.
Year Ended December 31,
-----------------------
1996 1995
Amount ---------- ----------
- ----------------------- (Dollars in thousands)
Noninterest - bearing demand $ 5,127 $ 4,459
Interest - bearing demand 7,560 5,849
Savings 7,575 7,081
Money market 4,847 4,673
Time 11,648 9,964
---------- ----------
Total $ 36,757 $ 32,026
========== ==========
Rate
- -----------------------
Noninterest - bearing demand -% -%
Interest - bearing demand 2.75 2.77
Savings deposits 2.98 2.99
Money market 3.01 3.12
Time deposits 5.33 4.97
The following table sets forth the remaining maturity of time certificates of
deposit in denominations of $100,000 or more.
December 31,
1996
----------
(In thousands)
3 months or less $ 693
Over 3 months through 6 months 300
Over 6 months through 12 months 419
Over 12 months 377
----------
Total $ 1,789
==========
6
<PAGE>
VI. Return on Equity
The required information is incorporated by reference to page 2 of the 1996
Annual Report.
VII. Short-Term Borrowings
This information is not required as the average balance of short - term
borrowings during 1996 was less than 30
percent of stockholders' equity.
Item 2. Properties
The following are the principal locations of operations of the Company and
Bank:
Own or Term of
Description Rent Lease
- -------------------------- -------- ---------
Executive offices of the
Company and Bank and
main branch
16924 St. Clair Avenue
East Liverpool, OH 43920 Own N/A
Branch office
Jefferson & Lincoln Way
Lisbon, OH 44432 Own N/A
Branch office Lease
15703 St Rt 170 expiration:
Calcutta, OH 43920 Rent 12/01/05
CBCT Branch Lease
Wal Mart Store expiration:
East Liverpool, OH 43920 Rent 05/31/98
Management asserts that for insurance purposes all facilities and equipment
are subject to periodic appraisal and all properties are adequately insured.
Item 3. Legal Proceedings
There are no pending legal proceedings, other than ordinary routine litigation
incidental to banking, to which the Company or the Bank is a party or of which
any of the Company's or Bank's property is subject.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth
quarter of 1996.
7
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The required information is incorporated by reference to pages 1 through 2 of
the 1996 Annual Report.
Item 6. Management's Discussion and Analysis or Plan of Operation.
The required information is incorporated by reference to pages 2 through 8 of
the 1996 Annual Report.
Item 7. Financial Statements.
The required information is incorporated by reference to pages 9 through 28 of
the 1996 Annual Report.
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons,
Compliance With Section 16(a) of the Exchange Act.
The required information is incorporated by reference to pages 4 through 10 of
the Proxy Statement.
Item 10. Executive Compensation
The required information is incorporated by reference to pages 7 through 8 of
the Proxy Statement.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The required information is incorporated by reference to pages 8 through 10 of
the Proxy Statement.
Item 12. Certain Relationships and Related Transactions.
The required information is incorporated by reference to pages 14 through 15
of the Proxy Statement.
Item 13. Exhibits and Reports on Form 8 - K.
The following documents are filed as part of this report, except as may be
indicated:
(1) Financial Statements:
The following Consolidated Financial Statements of Tri - State 1st Bank, Inc.
together with the Report of Independent Auditors dated January 17, 1997,
except for Note 9, as to which the date is January 23, 1997 are included in
the 1996 Annual Report of the registrant which is referenced in Part II, Item
7-Financial Statements and are incorporated herein:
Page
Reference
---------
Report of Independent Auditors. 9
Consolidated Balance Sheet, December 31, 1996 and 1995. 10
Consolidated Statement of Income for the years
ended December 31, 1996 and 1995. 11
Consolidated Statement of Stockholders' Equity for the
years ended December 31, 1996 and 1995. 12
Consolidated Statement of Cash Flows for the years ended
December 31, 1996 and 1995. 13
Notes to Consolidated Financial Statements 14-28
8
<PAGE>
(2) Exhibits:
Exhibits filed herewith or incorporated by reference are set forth in the
following table prepared in accordance with item 601 of Regulation S - B.
(3.1) Articles of Incorporation of the registrant are incorporated
herein by reference to the registrant's Registration Statement on
Form S-4 filed with the Securities and Exchange Commission on
March 8, 1996.
(3.2) By-laws of the registrant are incorporated by reference to the
registrant's Registration Statement on Form S-4 filed with the
Securities and Exchange Commission on March 8, 1996.
(13) Annual Report to Security Holders for the year ended December 31,
1996, filed herewith as exhibit 13.
(21) Subsidiary of the registrant incorporated herein by reference to
the registrant's Registration Statement on Form S-4 filed with the
Securities and Exchange Commission on March 8, 1996.
(27) Financial Data Schedule for the year ended December 31, 1996, filed
herewith as exhibit 27.
9
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Tri - State 1st Bank, Inc.
Date: March 28, 1997 /s / Charles B. Lang
----------------------------
Charles B. Lang
President
(Principal Executive Officer)
Date: March 28, 1997 /s / Keith R. Clutter
----------------------------
Keith R. Clutter
Secretary
(Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the persons on behalf of the registrant and in
the capacities and on the dates indicated.
Name Title Date
- ---------------------------- ----------------- --------------
/s / Charles B. Lang President March 28, 1997
- -----------------------
Charles B. Lang
/s / Keith R. Clutter Secretary March 28, 1997
- -----------------------
Keith R. Clutter
/s / William E. Blair Director March 28, 1997
- -----------------------
William E. Blair
/s / Stephen W. Cooper Director March 28, 1997
- -----------------------
Stephen W. Cooper
/s / G. Allen Dickey Director March 28, 1997
- -----------------------
G. Allen Dickey
/s / Marvin H. Feldman Director March 28, 1997
- -----------------------
Marvin H. Feldman
/s / R. Lynn Leggett Director March 28, 1997
- -----------------------
R. Lynn Leggett
/s / John P. Scotford, Sr. Director March 28, 1997
- -----------------------
John P. Scotford, Sr.
/s / John C. Thompson Director March 28, 1997
- -----------------------
John C. Thompson
10
<PAGE>
BUSINESS
- --------
Tri-State 1st Bank, Inc. (the "Company") is the parent company for lst National
Community Bank (the "Bank"). The Company was formed as an Ohio corporation on
April 24, 1996, to own and control all of the capital stock of the Bank, a
national banking association. The Company is a bank holding company which,
under existing laws, is restricted to activities generally relating to banking.
At the present time, the Company does not actively conduct any business, and
does not intend to employ any individuals other than officers who do not receive
compensation for serving in such capacity, but utilizes the support staff and
facilities of the Bank from time to time. The Company's primary regulator is
the Board of Governors of the Federal Reserve System.
The Bank was chartered as a national banking association in June, 1987,
headquartered near East Liverpool, Ohio. Business is conducted through its
three full service offices located in Columbiana County, Ohio. The Bank
operates a full service community bank, offering a variety of financial services
to meet the needs of its market area. Services include, accepting demand and
time deposits from the general public and together with borrowings and other
funds, using the proceeds to originate secured and unsecured commercial and
consumer loans and provide construction and mortgage loans, as well as home
equity and personal lines of credit. In addition, funds are also used to
purchase investment securities. The Bank's deposits are insured up to the legal
maximum by the Federal Deposit Insurance Corporation.
Common Stock Market Price and Dividend Information
- --------------------------------------------------
Tri-State lst Bank, lnc.'s common stock is traded locally and is not listed on
any organized exchange. The following table presents the quarterly high and low
prices as reported by Advest, Inc., a market maker in the Company's common stock
and previously the Bank's common stock, for the recent two year period ending
December 31, 1996. Also included in the table are dividends per share on the
outstanding common stock.
Cash Dividends
Declared
High Low Per Share
--------- ---------- -------------
1995:
First Quarter $ 20.75 $ 20.75 $ -
Second Quarter 23.00 23.00 0.23
Third Quarter 23.00 23.00 -
Fourth Quarter 31.75 31.75 0.24
1996:
First Quarter $ 32.00 $ 30.00 $ -
Second Quarter 32.00 30.00 0.25
Third Quarter 34.00 32.00 -
Fourth Quarter 34.00 32.00 0.26
At December 31, 1996 there were issued and outstanding 205,400 shares of common
stock, which were held by approximately 357 shareholders of record.
The Company's ability to pay dividends to shareholders is dependent upon the
receipt of dividends from the Bank, because the Company currently has no source
of income other than dividends from the Bank. The Bank may not declare or pay
dividends on its common stock if such payment would cause its regulatory capital
to be reduced below minimum requirements imposed by OCC regulations. The
Company is also subject to certain regulatory restrictions imposed by the
Federal Reserve Board on the payment of dividends to its shareholders.
1
<PAGE>
Financial Highlights
- --------------------
The following tables set forth certain information concerning the consolidated
financial position and certain performance ratios of the Company and its
subsidiary, lst National Community Bank at the dates indicated:
<TABLE>
<CAPTION>
At or for the Year Ended December 31,
---------------------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(Dollars in Thousands, Except Per Share Information)
<S> <C> <C> <C> <C> <C>
Selected Financial Data
Assets $ 43,175 $ 38,636 $ 34,915 $ 29,850 $ 26,398
Investment securities 12,187 10,477 9,840 7,802 7,557
Loans 24,052 22,117 19,050 15,757 14,760
Allowance for loan losses 290 266 233 185 176
Deposits 38,690 34,358 31,111 26,545 23,210
Other Borrowings 279 375 115 - -
Stockholders' equity 4,036 3,686 3,225 3,188 3,043
Summary of Operations
Interest income $ 3,039 $ 2,704 $ 2,274 $ 1,962 $ 1,982
Interest expense 1,223 1,043 825 749 955
--------- --------- --------- --------- ---------
Net interest income 1,816 1,661 1,449 1,213 1,027
Provision for loan losses 49 68 50 112 36
--------- --------- --------- --------- ---------
Net interest income after
provision for loan losses 1,767 1,593 1,399 1,101 991
Other operating income 349 309 248 245 217
Other operating expense 1,485 1,355 1,290 1,049 981
--------- --------- --------- --------- ---------
Income before income taxes 631 547 357 297 227
Income taxes 161 145 75 75 56
--------- --------- --------- --------- ---------
Net income $ 470 $ 402 $ 282 $ 222 $ 171
========= ========= ========= ========= =========
Per Share Data (1)
Earnings $ 2.29 $ 1.96 $ 1.37 $ 1.08 $ 0.83
Cash dividends declared 0.51 0.47 0.43 0.38 0.38
Book Value 19.65 17.95 15.70 15.52 14.81
Average shares outstanding 205,400 205,400 205,400 205,400 205,400
Market Information (1)
High $ 34.00 $ 31.75 $ 19.00 $ 20.00 $ 21.00
Low 30.00 20.75 18.50 19.00 19.00
At December 31 34.00 31.75 19.00 19.50 19.00
Selected Financial Ratios
Return on average assets 1.14% 1.12% 0.87% 0.79% 0.67%
Return on average equity 12.21 11.54 8.79 7.13 7.07
Average equity to average
assets 9.33 9.63 9.94 11.36 9.43
Equity to assets at end of
period 9.35 9.54 9.24 10.68 11.53
Non-performing assets to
total assets 0.80 1.11 0.74 1.18 1.50
Non-performing loans to
total loans 1.44 1.44 0.76 1.14 2.23
</TABLE>
[FN]
(1) Adjusted for 2-for-1 stock split effective February 22, 1995.
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
- -------
The Company's results of operations are dependent on the operations of the
Bank. The Bank's results of operations are primarily dependent on its net
interest income, which is the difference between interest earned on its loan
and investment securities portfolios and other interest earning assets, and
its cost of funds consisting of interest expense paid on its deposits and
other borrowings. Net interest income is also affected by the relative
amounts of interest earning assets and liabilities. Net income of the bank is
also impacted by its provision for loan losses, as well as other operating
income and expenses. Other operating income consists primarily of service
charges on deposit accounts, while other operating expenses is comprised of
salaries and employee benefits, occupancy expenses, and other general and
administrative expenses. Earnings of the bank are impacted by general local
economic, competitive, and regulatory conditions, particularly changes in
market interest, and actions of regulatory agencies.
Management Strategy
- -------------------
The Company's philosophy is to combine quality personal service and strategic
office locations to offer a variety of loan and deposit products tailored to
fit the needs of its customers. While the Company has no specific plans to
significantly expand its branch network, management is continually identifying
and assessing opportunities for future expansion.
The Bank's lending strategy has historically focused on the origination and
retention of a mixture in its portfolio of real estate commercial mortgage
loans, one-to-four family mortgage loans and, to a lesser extent, working
capital commercial loans in the form of credit lines and term notes, personal
loans, automobile loans, and home equity loans. This focus and the
application of prudent underwriting standards is designed to reduce the risk
of loss on the Bank's loan portfolio.
To measure the relationship of interest-earning assets and interest-bearing
liabilities and their impact on net interest income, the Bank maintains an
asset/liability management program. One of the principal functions of the
program is to monitor the level to which the balance sheet is subject to
interest rate risk. The goal of the program is to manage the relationship
between interest-earning assets and interest-bearing liabilities to minimize
the fluctuations in net interest spread and achieve consistent growth in net
interest income during periods of changing interest rates. To accomplish its
strategies, adjustable-rate residential mortgage and commercial loans are
originated, as well as shorter term consumer loans. The investment securities
portfolio, which is used primarily for liquidity purposes, has historically
been comprised of short term (three to five years) U.S. Treasury and agency
obligations, and AA and AAA tax-exempt municipal and state obligations.
Although management typically holds investment securities purchased until
maturity, approximately 82% of the portfolio at December 31, 1996 was
classified as available for sale to allow management the flexibility in
managing this portfolio in a changing market rate environment.
The Bank attempts to manage the interest rates it pays on deposits, while
maintaining a stable to growing deposit base by providing convenient and
quality service and competitive interest rates to its customers.
Historically, the Bank has had minimal borrowings, which are originated
through a credit arrangement with the Federal Home Loan Bank of Cincinnati,
Ohio ("FHLB"), and has relied upon its customer deposit base as its primary
source of funds.
3
<PAGE>
Impact of Inflation and Changing Prices
- ---------------------------------------
The financial statements and related data have been prepared in accordance
with generally accepted accounting principles which require the measurement of
financial position and operating results in terms of historical dollars,
without consideration for changes in the relative purchasing power of money
over time caused by inflation.
Unlike industrial companies, nearly all of the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates
have a more significant impact on a financial institution's performance than
general levels of inflation. Interest rates do not necessarily move in the
same direction or in the same magnitude as the price of goods and services,
since such goods and services are affected by inflation. In the current
interest rate environment, liquidity and the maturity structure of the Bank's
assets and liabilities are critical to the maintenance of acceptable
performance levels.
4
<PAGE>
Average Balance Sheet
- ---------------------
The following tables set forth for the periods indicated, information
regarding the average balances of interest-earning assets and interest-bearing
liabilities, the dollar amount of interest income earned on such assets and
the resultant yields, the dollar amount of interest expense paid on such
liabilities and the resultant rates. The tables also reflect the interest
rate spread for such periods, the net yield on interest-earning assets (i.e.,
net interest income as a percentage of average interest-earning assets) and
the ratio of interest-earning assets to average interest-bearing liabilities.
Average balances are based on daily balances.
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995
--------------------------------- ----------------------------------
Average Average
Balance Interest Yield (1) Balance Interest Yield (1)
---------- --------- --------- ---------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (2),(3) $ 22,867 $ 2,257 9.87% $ 20,798 $ 2,052 9.87%
Federal funds sold 2,784 149 5.35% 1,735 105 6.05%
Investment securities 11,274 744 6.60% 9,634 630 6.53%
---------- --------- ---------- ---------
Total interest-earning assets 36,925 3,150 8.53% 32,167 2,787 8.66%
--------- ------ --------- ------
Noninterest-earning assets 4,321 4,000
---------- ----------
Total assets $ 41,246 $ 36,167
========== ==========
Interest-bearing liabilities:
Interest-bearing demand
deposits 7,560 208 2.75% 5,849 162 2.77%
Money market deposits 4,847 146 3.01% 4,673 146 3.12%
Certificates of Deposit 11,648 621 5.33% 9,964 495 4.97%
Savings deposits 7,575 226 2.98% 7,081 212 2.99%
Other borrowings 324 22 6.79% 419 28 6.68%
---------- --------- ---------- ---------
Total interest-bearing
liabilities 31,954 1,223 3.83% 27,986 1,043 3.73%
--------- ------ --------- ------
Noninterest-bearing liabilities 5,443 4,697
---------- ----------
Total liabilities 37,397 32,683
---------- ----------
Stockholders' Equity 3,849 3,484
---------- ----------
Total liabilities and
stockholders' equity $ 41,246 $ 36,167
========== ==========
Net interest income $ 1,927 $ 1,744
========= =========
Interest rate spread (4) 4.70% 4.93%
====== ======
Net yield on interest-earning
assets (5) 5.22% 5.42%
Ratio of average interest-earning
assets to average interest-bearing
liabilities 115.56% 114.94%
</TABLE>
[FN]
(1) Yields on interest-earning assets have been computed on a
taxable-equivalent basis using the federal statutory tax rate of 34%.
(2) Interest on loans includes fee income.
(3) Non-accrual loans included.
(4) Interest rate spread represents the difference between the average yield
on interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
5
<PAGE>
Rate Volume Analysis
- --------------------
The table below sets forth certain information regarding changes in interest
income and interest expense of the Company for the periods indicated. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(changes in average volume multiplied by old rate); (ii) changes in rates
(changes in rate multiplied by old average volume). Changes which are not
solely attributable to rate or volume are allocated to changes in rate due to
rate sensitivity of interest-earning assets and interest-bearing liabilities.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------
1996 vs 1995 1995 vs 1994
------------------------------- --------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
---------------------------------------------------------------------
Volume Rate Net Volume Rate Net
------- ------- ------- ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME ON:
Loans receivable $ 204 $ 1 $ 205 $ 325 $ 78 $ 403
Federal funds sold 63 (19) 44 (59) 33 (26)
Investment securities 108 7 115 44 24 68
------- ------- ------- ------- ------ -------
Total interest income $ 375 $ (11) $ 364 $ 310 $ 135 $ 445
======= ======= ======= ======== ====== =======
INTEREST EXPENSE ON:
Interest-bearing demand
deposits $ 47 $ (1) $ 46 $ 35 $ (25) $ 10
Money market deposits 5 (5) 0 (12) 23 11
Certificates of deposit 84 42 126 66 106 172
Savings deposits 15 (1) 14 15 0 15
Other borrowings (6) 0 (6) 10 0 10
------- ------- ------- ------- ------ -------
Total interest expense $ 145 $ 35 $ 180 $ 114 $ 104 $ 218
======= ======= ======= ======== ====== =======
NET INTEREST INCOME $ 230 $ (46) $ 184 $ 196 $ 31 $ 227
======= ======= ======= ======== ====== =======
</TABLE>
6
<PAGE>
Comparison of Financial Condition at December 31, 1996 and December 31, 1995
- ----------------------------------------------------------------------------
Total assets at December 31, 1996 of $43,175,000 represented an increase of
$4,539,000 or 11.80% from December 31, 1995. This increase was primarily the
result of loan portfolio growth of $1,935,000 or 42.6% of total asset growth,
and increases in investment securities of $1,710,000 or 37.7% of total asset
growth. Although federal funds sold increased by only $150,000 in balance
from December 31, 1995 to December 31, 1996, the actual average balance
outstanding during 1996 increased to $2,784,000 from average outstanding
balances in 1995 of $1,735,000.
The increase in investment securities of 16.3% at December 31, 1996 as
compared to 1995, is part of an overall management strategy to invest funds in
the securities portfolio methodically in order to employ funds not required
for loan demand in a manner which will provide safety, liquidity, and improved
earnings potential. Of the total increase in investment securities,
$1,367,000 or 79.9% is attributable to tax exempt investments.
Loans receivable at December 31, 1996 of $24,052,000 represented an increase
of 8.7% from $22,117,000 at December 31, 1995. The growth in the loan
portfolio was primarily attributable to real estate mortgages which increased
by $980,000 and commercial loans which increased by $765,000. Of the total
increase in loans from December 31, 1995 to December 31, 1996, 90.2% is
attributed to these loan classifications. Management has concentrated its
origination efforts during 1996 on obtaining a more balanced mix of loans.
The allowance for loan losses increased a net of $24,000 for the year ending
December 31, 1996. The overall ratio of the allowance to loans receivable of
1.2% remained unchanged at December 31, 1996 as compared to December 31, 1995.
The relationship between the allowance and loans receivable is a function of
credit quality and known risk factors of the loan portfolio.
At December 31, 1996, nonperforming loans, which are comprised of commercial
and consumer loans contractually past due 90 days or more as to interest or
principal payment but are not nonaccrual status because of collateral
considerations or collection status, and impaired loans, which represent
nonaccrual commercial loan types, amounted to $347,000, an increase of $28,000
from December 31, 1995 totals. Total nonperforming loans at December 31, 1996
represented only 1.44% of total loans. There are eight loans classified as
nonperforming. However, three loans for a combined total of $261,000
comprised 75.2% of this classification. All three loans are secured by
commercial real estate properties. As a part of management's ongoing
assessment of its loan portfolio, $84,000 of the allowance for loan losses at
December 31, 1996 had been allocated for these three loans.
Other assets declined by $480,000 or 52.5% from 1995 to 1996. The decline is
primarily attributed to a reduction in other real estate owned of $56,000 and
a $500,000 reduction of a receivable set up on December 31, 1995 for a U.S.
Treasury note that matured, but due to a delay in receiving funds settlement
was outstanding at year end. These decreases were partially offset by a
$70,000 increase in accrued interest receivable on investment securities.
Total deposits grew by $4,332,000 or 12.6% in 1996. Such growth was primarily
responsible for funding the total asset growth obtained in 1996. The Lisbon
branch office was a significant source of this growth. The Bank offered no
new deposit products or market incentive interest rates to attract new deposit
relationships. The growth was attributable at this office to the location,
which represented a relatively new market for the Bank in 1996.
Interest-bearing deposits represent 77.6% of total deposit growth in 1996, or
an increase of $3,361,000 in these accounts.
Stockholders' Equity increased by $350,000 or 9.5% during 1996, due to net
retained earnings from operations of $366,000, offset by the net unrealized
loss on securities which increased to $18,000 at December 31, 1996. The
increase in the net unrealized loss on securities is considered temporary in
nature and is attributable to a marginal increase in the market interest rate
environment at December 31, 1996 as compared to December 31, 1995.
7
<PAGE>
Comparison of Operating Results for the Years Ended December 31, 1996 and 1995
- ------------------------------------------------------------------------------
General. Net income for the year ended December 31, 1996 totaled $470,000 or
$2.29 per share compared to $402,000 or $1.96 per share for 1995. This
increase of 16.9% in net income is principally attributed to increases of
$155,000 in net interest income and $40,000 in other operating income, which
were partially offset by a $130,000 or 9.5% increase in other operating
expense.
Net Interest Income. Net interest income on a tax equivalent basis increased
$183,000 or 10.5% in 1996 from 1995 due to increases in interest income of
$363,000, which was partially offset by a $180,000 increase in interest
expense.
The increase in interest income was derived primarily from earnings on
investment securities, which increased $118,000 from 1995, due to an increase
in average balance to $11,274,000 at December 31, 1996 from $9,634,000 at
December 31, 1995. This represented a 17.0% increase in average balance
outstanding. From 1995 to 1996, the overall average yields on the investment
security portfolio increased slightly from 6.53% to 6.60%.
Interest income on loans for the year ended December 31, 1996, on a tax
equivalent basis, increased by $205,000 or 10.0% as compared to the year ended
December 31, 1995. The increase was attributed exclusively to the growth in
the loan volume, as the portfolio yields remained consistent with 1995
averages.
Interest expense increased $180,000 or 17.3% during 1996, as compared to 1995
due substantially to an overall increase in volume of interest-bearing
deposits. However, the majority of the increase in average interest-bearing
deposits resulted from the interest-bearing demand deposits, which increased
in average balance by $1,711,000 and the certificates of deposits which
increased by $1,684,000. The increases represented 85.6% of the
interest-bearing deposit average balance growth in 1996. Overall yields for the
year ended December 31, 1996 on the interest-bearing deposit portfolio remained
relatively consistent with the yields noted for 1995.
Provision for loan losses. The provision for loan losses for the year ended
December 31, 1996 was $49,000 as compared to $68,000 for 1995. Management
makes periodic provisions to the allowance for loan losses to maintain the
allowance at an acceptable level commensurate with management's assessment of
the credit risk inherent in the loan portfolio.
Other Operating Income. Other operating income, which is comprised principally
of fees and charges on customer deposit accounts, increased $40,000 or 12.9%
to $349,000 for 1996. Service charges on deposit customer accounts increased
$28,000 or 12.5%, due largely to the increase in the number of demand deposit
accounts during 1996. Other income increased by $10,000 because of an
increase in commissions received on life and health insurance coverage on
consumer loan accounts.
Other Operating Expense. Overall, other operating expense increased by
$130,000 or 9.6% from 1995 to 1996. Salary and employee benefits increased
$58,000 or 10.2% due to the hiring of additional personnel as well as the
impact of normal salary and cost increases related to existing employees.
Occupancy and equipment expenses increased $8,000 from 1995 to 1996 which was
due to an increase in branch office and ATM site operating lease rental
payments for 1996.
Other operating expenses increased by $63,000 or 12.7% due primarily to a
$16,000 increase in other real estate owned property maintenance costs,
$13,000 for a new Visa check card program initiated in 1996, and $37,000 due
to increased consulting, postage, and office supplies expenses.
Income Tax Expense. Income taxes increased by $16,000 or 11.0% during 1996
when compared to 1995 expense, due exclusively to the 15.4% increase in pre-tax
income.
8
<PAGE>
SNODGRASS
Certified Public Accountants
REPORT OF INDEPENDENT AUDITORS
------------------------------
Board of Directors and Stockholders
Tri-State 1st Bank, Inc.
We have audited the consolidated balance sheet of Tri-State lst Bank, Inc. and
Subsidiary as of December 31, 1996 and 1995, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Tri-State
1st Bank, Inc. and Subsidiary as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
As discussed in the notes to the consolidated financial statements, effective
January 1, 1995, the Company changed its method of accounting for impaired
loans and the related allowance for loan losses.
/s/ S. R. Snodgrass, A.C.
Wexford, PA
January 17, 1997, except for
Note 9, as to which the date
is January 23, 1997
S.R. Snodgrass, A.C.
101 Bradford Road Wexford, PA 15090-6909 Phone: 412-934-0344
Facsimile: 412-934-0345
9
<PAGE>
TRI-STATE 1ST BANK, INC.
CONSOLIDATED BALANCE SHEET
December 31,
1996 1995
------------ ------------
ASSETS
Cash and due from banks $ 3,778,082 $ 2,439,817
Interest-bearing deposits with other banks 99,018 116,975
Federal funds sold 1,700,000 1,550,000
Investment securities:
Available for sale 9,981,741 8,940,910
Held to maturity (market value of $2,220,220
and $1,575,554) 2,204,884 1,535,504
Loans 24,051,625 22,116,573
Less allowance for loan losses 290,247 266,073
------------ ------------
Net loans 23,761,378 21,850,500
Premises and equipment 1,215,915 1,288,439
Accrued interest and other assets 433,763 913,613
------------ ------------
TOTAL ASSETS $ 43,174,781 $ 38,635,758
============ ============
LIABILITIES
Deposits:
Noninterest-bearing demand $ 5,990,963 $ 5,019,752
Interest-bearing demand 8,027,946 6,708,666
Money market 4,789,319 4,364,655
Savings 7,877,057 7,076,429
Time 12,004,942 11,188,324
------------ ------------
Total deposits 38,690,227 34,357,826
Other borrowings 279,156 374,888
Accrued interest and other liabilities 169,509 216,847
------------ ------------
TOTAL LIABILITIES 39,138,892 34,949,561
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, no par value;
1,000,000 shares authorized,
205,400 shares issued and outstanding 1,283,750 1,283,750
Surplus 1,610,750 1,610,750
Retained earnings 1,159,212 793,514
Net unrealized loss on securities (17,823) (1,817)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 4,035,889 3,686,197
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 43,174,781 $ 38,635,758
============ ============
See accompanying notes to the consolidated financial statements.
10
<PAGE>
TRI-STATE 1ST BANK, INC.
CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31,
1996 1995
------------ ------------
INTEREST INCOME
Loans, including fees $ 2,246,240 $ 2,039,820
Interest-bearing deposits with other banks 3,059 3,192
Federal funds sold 148,759 104,615
Investment securities:
Taxable 466,960 438,983
Exempt from federal income tax 174,152 117,934
------------ ------------
Total interest income 3,039,170 2,704,544
------------ ------------
INTEREST EXPENSE
Deposits 1,201,379 1,015,232
Other borrowings 21,762 28,139
------------ ------------
Total interest expense 1,223,141 1,043,371
------------ ------------
NET INTEREST INCOME 1,816,029 1,661,173
Provision for loan losses 49,219 67,953
------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,766,810 1,593,220
------------ ------------
OTHER OPERATING INCOME
Service charges and fees 251,756 223,532
Investment securities losses, net (4,355) (6,619)
Other 101,718 92,211
------------ ------------
Total other operating income 349,119 309,124
------------ ------------
OTHER OPERATING EXPENSE
Salaries and employee benefits 623,368 565,705
Occupancy 172,091 161,308
Furniture and equipment 128,326 130,898
Federal deposit insurance premiums 1,000 35,750
Other 559,738 461,995
------------ ------------
Total other operating expense 1,484,523 1,355,656
------------ ------------
Income before income taxes 631,406 546,688
Income taxes 160,954 144,976
------------ ------------
NET INCOME $ 470,452 $ 401,712
============ ============
EARNINGS PER SHARE $ 2.29 $ 1.96
AVERAGE SHARES OUTSTANDING 205,400 205,400
See accompanying notes to the consolidated financial statements.
11
<PAGE>
TRI-STATE 1ST BANK, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net
Unrealized
Common Retained Loss on
Stock Surplus Earnings Securities Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ 1,283,750 $ 1,610,750 $ 488,340 $ (157,736) $ 3,225,104
Net unrealized gain on securities
transferred to available for sale
classification 29,778 29,778
Net income 401,712 401,712
Dividends declared ($.47 per share) (96,538) (96,538)
Net unrealized gain
on securities 126,141 126,141
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1995 1,283,750 1,610,750 793,514 (1,817) 3,686,197
Net income 470,452 470,452
Dividends declared ($.51 per share) (104,754) (104,754)
Net unrealized loss
on securities (16,006) (16,006)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1996 $ 1,283,750 $ 1,610,750 $ 1,159,212 $ (17,823) $ 4,035,889
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
12
<PAGE>
TRI-STATE 1ST BANK, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31,
1996 1995
------------- -------------
OPERATING ACTIVITIES
Net income $ 470,452 $ 401,712
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for loan losses 49,219 67,953
Depreciation and amortization, net 179,549 150,316
Investment securities losses, net 4,355 6,619
Deferred income taxes 12,358 1,360
Increase in accrued interest receivable (51,253) (30,009)
Increase in accrued interest payable 2,057 20,631
Other 421,911 121,726
------------- -------------
Net cash provided by operating
activities 1,088,648 740,308
------------- -------------
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from sales 774,822 707,225
Proceeds from principal repayments
and maturities 892,797 799,615
Purchases of securities (2,730,450) (2,309,432)
Investment securities held to maturity:
Proceeds from principal repayments and
maturities 240,397 451,134
Purchases of securities (939,806) (566,926)
Net loan originations (2,010,222) (3,114,364)
Acquisition of premises and equipment (52,307) (81,858)
Proceeds from sale of real estate owned 74,514 -
------------- -------------
Net cash used for investing activities (3,750,255) (4,114,606)
------------- -------------
FINANCING ACTIVITIES
Net increase in deposits 4,332,401 3,247,093
Principal payments on other borrowings (95,732) (89,543)
Cash dividends paid (104,754) (96,538)
------------- -------------
Net cash provided by financing
activities 4,131,915 3,061,012
------------- -------------
Increase (decrease) in cash and
cash equivalents 1,470,308 (313,286)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 4,106,792 4,420,078
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5,577,100 $ 4,106,792
============= =============
See accompanying notes to the consolidated financial statements.
13
<PAGE>
TRI-STATE IST BANK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -----------------------------------------------
Organization
- ------------
On April 24, 1996, the stockholders of 1st National Community Bank (the
"Bank") approved the Plan of Reorganization of the Bank into a holding company
structure. After approval by the regulatory authorities the reorganization
was completed on May 31, 1996. Each issued and outstanding share of common
stock of the Bank immediately prior to the reorganization was converted into
and exchanged for one share of Tri-State 1st Bank, Inc., (the "Company"). As
a result of this transaction, the Bank became a wholly-owned subsidiary of the
Company. For 1995, all references in the accompanying financial statements to
the number of shares and per share amounts have been restated to reflect this
reorganization. The Bank is a national banking association located in Ohio.
The Bank's principal sources of revenues emanate from its provision of
commercial, commercial mortgage, residential real estate and consumer loan
financing, as well as a variety of deposit accounts and services to its
customers through three offices which are located in the East Liverpool and
Lisbon, Ohio, areas. The Company's principal asset is represented by its
ownership of the Bank. 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.
Basis of Presentation
- ---------------------
The consolidated financial statements of the Company include its wholly-owned
subsidiary, the Bank. All intercompany transactions have been eliminated in
consolidation. The investment in subsidiary on the parent company financial
statements is carried at the company's equity position in the underlying net
assets of the bank.
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the statement of
financial condition and revenues and expenses for the period. Actual results
could differ significantly from those estimates. A material estimate that is
particularly susceptible to significant change in the near-term is the
allowance for loan losses.
A summary of significant accounting and reporting policies applied in the
presentation of the accompanying financial statements follows:
Investment Securities
- ---------------------
The Bank has classified investment securities into two categories: Held to
Maturity and Available for Sale. Debt securities acquired with the intent to
hold to maturity are stated at cost adjusted for amortization of premium and
accretion of discount, which are computed using the interest method and
recognized as adjustments of interest income. Other debt securities have been
classified as available for sale, to serve principally for liquidity purposes.
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 are computed using the
specific identification method. Interest and dividends on investment
securities are recognized as income when earned.
Common stock of the Federal Home Loan Bank and the Federal Reserve Bank
represents ownership in institutions which are wholly-owned by other financial
institutions. These equity securities are accounted for at cost.
14
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
- ---------------------------------------------------------
Loans
- -----
Loans are reported at their principal amount, net of the allowance for loan
losses. Interest on all loans is recognized as income when earned on the
accrual method. The Bank's general policy is to stop accruing interest on
loans when it is determined that reasonable doubt exists as to the
collectibility of additional interest. Interest received on nonaccrual loans
is recorded as income or applied against principal according to management's
judgment as to the collectibility of principal.
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards Statement No. 114, "Accounting by Creditors for
Impairment of a Loan," as amended by Statement No. 118. Under this Standard,
the Company estimates credit losses on impaired loans based on the present
value of expected cash flows or the fair value of underlying collateral if the
loan repayment is expected to come from the sale or operation of such
collateral. For purposes of this Standard, nonaccrual commercial and
commercial real estate loans are considered to be impaired.
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 Bank is amortizing these amounts over the contractual life of the
related loans.
Allowance for Loan Losses
- -------------------------
The Bank uses the allowance method 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 allowance is maintained at a level
believed by management to be sufficient to absorb estimated potential credit
losses. Management's determination of the adequacy of the allowance is based
on periodic evaluations of the credit portfolio and other relevant factors.
This evaluation is inherently subjective as it requires material estimates,
including the amounts and timing of expected future cash flows on impaired
loans which may be susceptible to significant change. The allowance for loan
losses on impaired loans is one component of the methodology for determining
the allowance for loan losses. The remaining components of the allowance for
loan losses provide for estimated losses on commercial loans, consumer loans
and real estate mortgages, and general amounts for historical loss experience,
uncertainties in estimating losses, and inherent risks in the various credit
portfolios.
Premises and Equipment
- ----------------------
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed on the straightline method over the estimated useful
lives of the assets. Expenditures for maintenance and repairs are charged
against income as incurred. Costs of major additions and improvements are
capitalized.
Real Estate Owned
- -----------------
Real estate owned acquired in the settlement of foreclosed loans is carried as
a component of other assets at the lower of cost or fair value minus estimated
cost to sell. Valuation allowances for estimated losses are provided when the
carrying value of the real estate acquired exceeds the fair value. Direct
costs incurred in the foreclosure process and subsequent holding costs
incurred on such properties are recorded as expenses of current operations.
15
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
- ---------------------------------------------------------
Employee Benefits
- -----------------
Pension and other employee benefits include contributions to a defined
contribution profit sharing plan covering eligible employees. Contributions
to the profit sharing plan are made at the discretion of the Board of
Directors. The Company also has an Employee Stock Ownership Plan (ESOP) for
substantially all of its employees.
Income Taxes
- ------------
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 laws or
rates are enacted, deferred tax assets and liabilities are adjusted through
the provision for income taxes.
Cash Flow Information
- ---------------------
The Company has defined cash equivalents as those amounts due from depository
institutions, interest-bearing demand deposits, and federal funds sold.
Cash paid during the year for income taxes and interest on deposits and
borrowings was as follows:
1996 1995
-------------- --------------
Interest on deposits and borrowings $ 1,221,084 $ 1,022,740
Income taxes 144,000 76,000
Earnings Per Share
- ------------------
Earnings per share are calculated on the basis of the weighted average number
of shares of stock outstanding for the periods presented.
Reclassification of Comparative Amounts
- ---------------------------------------
Certain comparative amounts for 1995 have been reclassified to conform to 1996
presentations.
2. INVESTMENT SECURITIES
- ------------------------
In December, 1995, in accordance with the Financial Accounting Standards Board
Special Report, "A Guide to Implementation of Statement No. 115 on Accounting
for Certain Investments in Debt and Equity Securities," the Bank reclassified
investment securities, predominantly obligations of states and political
subdivisions, from the held to maturity classification to the available for
sale classification with an amortized cost of $2,719,622 and an estimated
market value of $2,764,739.
16
<PAGE>
2. INVESTMENT SECURITIES (Continued)
- ------------------------------------
The amortized cost and estimated market value of investment securities
available for sale are as follows:
<TABLE>
<CAPTION>
1996
-----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ---------- ----------- -------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
other U.S. Government
agencies and corporations $ 6,800,874 $ 23,257 $ (78,121) $ 6,746,010
Obligations of states and political
subdivisions 2,746,759 32,248 (6,226) 2,772,781
Mortgage-backed securities 250,162 1,901 (63) 252,000
------------ ---------- ----------- -------------
Total debt securities 9,797,795 57,406 (84,410) 9,770,791
Equity securities 210,950 - - 210,950
------------ ---------- ----------- -------------
Total $ 10,008,745 $ 57,406 $ (84,410) $ 9,981,741
============ ========== =========== =============
</TABLE>
<TABLE>
<CAPTION>
1995
-----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ---------- ----------- -------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
other U.S. Government
agencies and corporations $ 6,497,821 $ 28,363 $ (69,007) $ 6,457,177
Obligations of states and political
subdivisions 1,971,008 40,924 (3,158) 2,008,774
Mortgage-backed securities 275,184 125 - 275,309
------------ ---------- ----------- -------------
Total debt securities 8,744,013 69,412 (72,165) 8,741,260
Equity securities 199,650 - - 199,650
------------ ---------- ----------- -------------
Total $ 8,943,663 $ 69,412 $ (72,165) $ 8,940,910
============= ========== =========== =============
17
<PAGE>
2. INVESTMENT SECURITIES (Continued)
- ------------------------------------
The amortized cost and estimated market value of investment securities
held to maturity are as follows:
</TABLE>
<TABLE>
<CAPTION>
1996
-----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ---------- ----------- -------------
<S> <C> <C> <C> <C>
U. S. Treasury securities and
other U.S. Government
agencies and corporations $ 199,270 $ - $ (457) $ 198,813
Obligations of states and
political subdivisions 1,603,477 22,665 (6,363) 1,619,779
Mortgage-backed securities 402,137 3,046 (3,555) 401,628
------------ ---------- ----------- -------------
Total $ 2,204,884 $ 25,711 $ (10,375) $ 2,220,220
============= ========== =========== =============
</TABLE>
<TABLE>
<CAPTION>
1995
-----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ---------- ----------- -------------
<S> <C> <C> <C> <C>
Obligations of states and
political subdivisions $ 1,001,409 $ 42,741 $ (3,696) $ 1,040,454
Mortgage-backed securities 534,095 5,827 (4,822) 535,100
------------ ---------- ----------- -------------
Total $ 1,535,504 $ 48,568 $ (8,518) $ 1,575,554
============= ========== =========== =============<PAGE>
</TABLE>
The amortized cost and estimated market value of debt securities by
contractual maturity at December 31, 1996, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
-------------------------- ----------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
------------ ----------- ----------- -------------
<S> <C> <C> <C> <C>
Due in one year or less $ 2,150,113 $ 2,151,640 $ 36,601 $ 36,525
Due after one year through
five years 4,851,429 4,804,886 827,488 835,276
Due after five years through
ten years 2,446,091 2,464,745 746,092 749,980
Due after ten years 100,000 97,520 192,566 196,811
------------ ----------- ----------- -------------
9,547,633 9,518,791 1,802,747 1,818,592
Mortgage-backed securities 250,162 252,000 402,137 401,628
------------ ----------- ----------- -------------
Total $ 9,797,795 $ 9,770,791 $ 2,204,884 $ 2,220,220
============ =========== ============ =============
</TABLE>
18
<PAGE>
2. INVESTMENT SECURITIES (Continued)
- ------------------------------------
Proceeds from the sales of securities available for sale and the gross
realized gains and losses for the years ended December 31, 1996 and 1995, were
as follows:
1996 1995
-------------- --------------
Proceeds from sales $ 774,822 $ 707,225
Gross realized gains 497 -
Gross realized losses 4,852 6,619
Investment securities with a carrying value of $2,801,325 and $2,521,113 at
December 31, 1996 and 1995, respectively, were pledged to secure public
deposits and other purposes as required by law.
3. LOANS
- --------
Major classifications of loans are summarized as follows:
1996 1995
-------------- --------------
Commercial and agricultural $ 5,544,146 $ 4,778,727
Real estate mortgages 14,723,307 13,742,718
Consumer 3,784,172 3,595,128
-------------- --------------
24,051,625 22,116,573
Less allowance for loan losses 290,247 266,073
-------------- --------------
Net loans $ 23,761,378 $ 21,850,500
============== ==============
The Bank grants consumer, commercial and residential loans to customers
throughout its trade area which encompasses East Liverpool and Lisbon, Ohio,
and surrounding communities. Although the Bank has a diversified loan
portfolio, a substantial portion of its debtors' ability to honor their loan
agreements is dependent upon the economic stability of the tri-state area.
Nonperforming loans are comprised of commercial and consumer loans which are
on a nonaccrual basis or loans contractually past due 90 days or more as to
interest or principal payment but are not nonaccrual status because they are
well secured or in process of collection. The following table presents
information concerning commercial and consumer related nonperforming loans.
1996 1995
-------------- --------------
Principal outstanding December 31,
Ninety days or more past due
and accruing interest $ 235,935 $ 270,023
Nonaccrual - 47,636
Impaired loans 110,537 -
-------------- --------------
Total nonperforming $ 346,472 $ 317,659
============== ==============
Contractual interest due on
nonaccrual loans $ - $ 2,846
Less interest income recognized
on nonaccrual loans - 2,158
-------------- --------------
Total $ - $ 688
============== ==============
19
<PAGE>
3. LOANS (Continued)
- --------------------
As discussed in Note 1, the Company adopted SFAS No. 114 and SFAS No. 118 in
1995. The valuation allowance recorded on impaired loans in accordance with
SFAS No. 114, is included in the total allowance for loan losses shown below
and amounted to $45,876 at December 31, 1996. The average recorded investment
in impaired loans for 1996 was $110,537. There were no impaired loans during
1995. The Company did not recognize any income on impaired loans during 1996.
As of December 31, 1996, aggregate loans of $60,000 or more extended to
officers, directors, and related affiliates or associates were $1,086,029. In
management's opinion, all of these loans were made on substantially the same
terms and conditions as loans to other individuals and businesses of
comparable creditworthiness. A summary of loan activity during the year is as
follows:
Balance Amount Balance
December 31, 1995 Additions Collected December 31, 1996
----------------- --------- --------- -----------------
$911,608 $800,593 $626,172 $1,086,029
4. ALLOWANCE FOR LOAN LOSSES
- ----------------------------
Changes in the allowance for loan losses for the years ended December 31, 1996
and 1995, are as follows:
1996 1995
-------------- --------------
Balance, January 1 $ 266,073 $ 233,281
Add:
Provision charged to operations 49,219 67,953
Recoveries 15,570 15,944
Less loans charged off 40,615 51,105
-------------- --------------
Balance, December 31 $ 290,247 $ 266,073
============== ==============
5. PREMISES AND EQUIPMENT
- --------------------------
Major classifications of premises and equipment are summarized as follows at
December 31:
1996 1995
-------------- --------------
Land and improvements $ 270,981 $ 270,982
Buildings and improvements 948,323 934,823
Leasehold improvements 28,649 24,852
Furniture, fixtures and equipment 641,146 606,132
-------------- --------------
1,889,099 1,836,789
Less accumulated depreciation 673,184 548,350
-------------- --------------
Total $ 1,215,915 $ 1,288,439
============== ==============
Depreciation and amortization charged to operations was $124,834 in 1996 and
$125,375 in 1995.
20
<PAGE>
6. DEPOSITS
- -----------
Time deposits include certificates of deposit in denominations of $100,000 or
more. Such deposits aggregated $1,789,019 and $1,567,750 at December 31, 1996
and 1995, respectively.
The maturities of time deposits at December 31, 1996 are summarized as
follows:
1997 $ 9,558,264
1998 1,296,450
1999 964,912
2000 185,316
----------------
$ 12,004,942
===============
7. OTHER BORROWINGS
- --------------------
The Bank has a line of credit with a borrowing limit of approximately
$1,199,000 with the Federal Home Loan Bank of Cincinnati (FHLB) as of December
31, 1996. This credit line is subject to annual renewal and incurs no service
charges. Borrowings on this line are collateralized by a blanket security
agreement on outstanding residential mortgage loans and the Bank's investment
in stock of the FHLB.
The Bank has two term loans outstanding with the FHLB which bear interest
rates of 6.70% and 6.75% (weighted average of 6.73%) with remaining payment
periods extending to August 1, 1999. The scheduled maturities of the term
loans at December 31, 1996, are as follows:
1996
--------------
1997 $ 102,372
1998 109,473
1999 67,311
--------------
Total $ 279,156
==============
8. INCOME TAXES
- ---------------
The provision for income taxes consist of:
1996 1995
-------------- --------------
Current $ 148,596 $ 143,616
Deferred 12,358 1,360
-------------- --------------
Total $ 160,954 $ 144,976
============== ==============
The components of the net deferred tax asset are as follows at December 31:
1996 1995
-------------- --------------
Deferred Tax Assets:
Net unrealized loss on securities $ 9,181 $ 936
Provision for loan losses 86,111 79,053
-------------- --------------
Gross deferred tax assets 95,292 79,989
Less valuation allowance - -
-------------- --------------
Deferred tax assets after
allowance 95,292 79,989
-------------- --------------
21
<PAGE>
8. INCOME TAXES (Continued)
- ----------------------------
1996 1995
-------------- --------------
Deferred Tax Liabilities:
Depreciation 18,242 17,883
Accrual to cash conversion 38,851 33,736
Other 28,099 14,157
-------------- --------------
Gross deferred tax liabilities 85,192 65,776
-------------- --------------
Net deferred tax asset $ 10,100 $ 14,213
============== ==============
No valuation allowance was established at December 31, 1996 and 1995, in view
of the Company's ability to carryback to taxes paid in previous years the
future anticipated taxable income which is evidenced by the Company's earnings
potential and the deferred tax liability amounts at each year end.
The reconciliation of the federal statutory rate and the Company's effective
income tax rate is as follows:
1996 1995
-------------------- -------------------
% of % of
Pretax Pretax
Amount Income Amount Income
--------- ------ --------- ------
Provision at statutory rate $ 214,678 34.0% $ 185,874 34.0%
Effect of tax free income (65,424) (10.4) (48,440) (8.9)
Other 11,700 1.9 7,542 1.4
--------- ------ --------- ------
Actual tax expense and
effective rate $ 160,954 25.5% $ 144,976 26.5%
========== ====== ========= ======
9. EMPLOYEE BENEFITS
- ---------------------
Profit Sharing Plan
- -------------------
The Bank makes discretionary payments to a trusteed, defined contribution
profit sharing plan covering substantially all employees and officers.
Contributions under the plan are determined annually by the Board of
Directors. The contribution for 1996 and 1995 amounted to $16,293 and
$14,522, respectively.
ESOP
- ----
The Bank also maintains an Employee Stock Ownership Plan (ESOP) covering
substantially all employees and officers. The Trustee has discretionary
authority to purchase shares of common stock of the Company in the open
market. The amount of the contribution to the ESOP is at the discretion of
the Board of Directors with benefits vesting over a seven year period.
Contributions totaling $6,000 and $5,500 were recorded during 1996 and 1995,
respectively. The Trustee held 1,246 and 968 shares of the Company's common
stock at December 31, 1996 and 1995, respectively.
22
<PAGE>
9. EMPLOYEE BENEFITS (Continued)
- ---------------------------------
Stock Option Plan
- -----------------
On January 23, 1997, the Board of Directors approved, subject to stockholder
ratification at the 1996 annual meeting, the formation of a stock option plan.
The plan will provide for granting incentive stock options and nonstatutory
stock options for executive officers and nonemployee directors of the Company.
A total of 25,000 shares of authorized but unissued common stock will be
reserved for issuance under the plan, which expires ten years from the date of
shareholder ratification. The per share exercise price of an option granted
will not be less than the fair value of a share of common stock on the date
the option is granted.
10. COMMITMENTS
- ---------------
In the normal course of business, the Bank makes various commitments which are
not reflected in the accompanying financial statements. The Bank offers such
products to enable its customers to meet their financing objectives. The
instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the balance sheet. The Bank's
exposure to credit loss is represented by the contractual amounts as disclosed
below. Losses, if any, are charged to the Allowance for Loan Losses. The
Bank minimizes its exposure to credit loss under these commitments by
subjecting them to credit approval, review procedures, and collateral
requirements as deemed necessary.
The off-balance sheet commitments were comprised of the following at December
31, 1996 and 1995:
1996 1995
---------------- ----------------
Commitments to extend credit $ 3,010,678 $ 2,300,350
Standby letters of credit 75,894 422,000
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the loan agreement.
These commitments are comprised primarily of available commercial, personal
lines of credit, and loans granted but not yet funded. The Bank does not
charge fees for these customer credit lines. Since many of the commitments
are expected to expire without being fully drawn upon, the contractual amounts
do not necessarily represent future funding requirements.
Standby letters of credit represent conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party. These
instruments are issued primarily to support bid or performance-related
contracts. The coverage period for these instruments is typically a one year
period, with an annual renewal option subject to prior approval by management.
The Bank holds collateral for these instruments, as deemed necessary.
The Bank leases a branch office site under an agreement which expires by the
year 2005. The branch agreement contains five year renewal options which are
available if elected by the Bank. At December 31, 1996, the minimum rental
commitment for this noncancelable operating lease is as follows:
1997 $ 46,800
1998 46,800
1999 46,800
2000 46,800
2001 46,800
2002 and thereafter 187,200
------------
Total $ 421,200
=============
Occupancy expense includes rental expenditures for 1996 and 1995 of $50,880
and $42,840, respectively.
23
<PAGE>
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
- ---------------------------------------
The estimated fair values at December 31 of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
1996 1995
--------------------------- ---------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks,
interest-bearing deposits in
other banks and federal funds
sold $ 5,577,100 $ 5,577,100 $ 4,106,792 $ 4,106,792
Investment securities:
Available for sale 9,981,741 9,981,741 8,940,910 8,940,910
Held to maturity 2,204,884 2,220,220 1,535,504 1,575,554
Net loans 23,761,378 23,962,000 21,850,500 22,191,000
Accrued interest receivable 306,112 306,112 254,859 254,859
------------ ------------ ------------ ------------
Total $ 41,831,215 $ 42,047,173 $ 36,688,565 $ 37,069,115
============ ============ ============ ============
Financial liabilities:
Deposits $ 38,690,227 $ 38,740,000 $ 34,357,826 $ 34,464,000
Other borrowings 279,156 281,000 374,888 381,000
Accrued interest payable 67,477 67,477 65,420 65,420
------------ ------------ ------------ ------------
Total $ 39,036,860 $ 39,088,477 $ 34,798,134 $ 34,910,420
============ ============ ============ ============
</TABLE>
Financial instruments are defined as cash, evidence of an 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 are 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 the
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.
24
<PAGE>
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
- ----------------------------------------------------
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 with Other Banks, Federal
Funds Sold, Accrued Interest Receivable, and Accrued Interest Payable
- ----------------------------------------------------------------------------
The fair value is equal to the current carrying value.
Investment Securities
- ---------------------
The fair value of securities held to maturity 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.
The fair value of securities available for sale is equal to the current
carrying value.
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 constructs
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 and Commercial Letters of 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 10.
12. REGULATORY MATTERS
- ----------------------
Cash and Due from Banks
- -----------------------
The district Federal Reserve Bank requires the Bank to maintain certain
reserve balances. As of December 31, 1996 and 1995, the Bank had required
reserves of $429,000 and $304,000, respectively, comprised of vault cash and a
depository amount held with the Federal Reserve Bank.
Dividends
- ---------
The Bank is subject to a dividend restriction which generally limits the
amount of dividends that can be paid by a national bank. Prior approval of
the Comptroller of the Currency is required if the total of all dividends
declared by a national bank in any calendar year exceeds net profits, as
defined for the year, combined with its retained net profits for the two
preceding calendar years less any required transfers to surplus. Using this
formula, the amount available for payment of dividends by the Bank to the
Company in 1997, without approval of the Comptroller, will be limited to
$627,000 plus 1997 net profits retained up to the date of the dividend
declaration.
25
<PAGE>
12. REGULATORY MATTERS (Continued)
- ----------------------------------
Capital Requirements
- --------------------
The Company and Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary actions by the regulators that, if undertaken, could have a
direct material effect on the Company's and Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, an entity must meet specific capital guidelines that
involve quantitative measures of the assets, liabilities, and certain off-
balance sheet items as calculated under regulatory accounting practices. The
entity's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by the regulation to ensure capital adequacy
require an entity to maintain minimum amounts and ratios of Total and Tier I
capital (as defined in the regulations) to risk-weighted assets (as defined),
and of Tier I capital to average assets (as defined). Management believes, as
of December 31, 1996, that the Company and Bank meet all capital adequacy
requirements to which they are subject.
As of December 31, 1996, the most recent notification from the Comptroller of
the Currency categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as "well
capitalized" the Bank must maintain minimum total risk-based, Tier I risk-
based, and Tier I leverage ratios at least 100 to 200 basis points above those
ratios set forth in the table. There have been no conditions or events since
that notification that management believes have changed the Bank's category.
The capital position of the Company does not materially differ from the
Bank's; therefore, the following table sets forth the Bank's capital position
and minimum requirements as of December 31:
1996 1995
--------------------- --------------------
Amount Ratio Amount Ratio
----------- ------- ----------- -------
Total Capital to
Risk-weighted Assets
- ----------------------
Actual $ 4,299,784 18.11% $ 3,954,087 18.18%
For Capital Adequacy 1,899,600 8.00 1,739,680 8.00
Tier I Capital to
Risk-weighted Assets
- ----------------------
Actual $ 4,009,537 16.89% $ 3,688,014 16.96%
For Capital Adequacy 949,800 4.00 869,840 4.00
Tier I Capital to Average Assets
- --------------------------------
Actual $ 4,009,537 9.78% $ 3,688,014 10.17%
For Capital Adequacy 1,640,000 4.00 1,450,000 4.00
26
<PAGE>
13. PARENT COMPANY
- ------------------
CONDENSED BALANCE SHEET
December 31,
1996
----------------
ASSETS
Investment in subsidiary bank $ 3,991,714
Other assets 44,175
----------------
Total assets $ 4,035,889
================
STOCKHOLDERS' EQUITY $ 4,035,889
================
CONDENSED STATEMENT OF INCOME
For the Period
June 1, 1996
to
December 31, 1996
----------------
INCOME
Dividends from subsidiary $ 152,932
----------------
EXPENSES 7,741
----------------
Income before income taxes 145,191
Income tax benefit (3,738)
----------------
Income before equity in undistributed
earnings of subsidiary 148,929
Equity in undistributed earnings of subsidiary 108,493
----------------
NET INCOME $ 257,422
================
27
<PAGE>
13. PARENT COMPANY (Continued)
- -------------------------------
CONDENSED STATEMENT OF CASH FLOWS
For the Period
June 1, 1996
to
December 31, 1996
----------------
OPERATING ACTIVITIES:
Net income $ 257,422
Adjustment to reconcile income
to net cash provided:
Undistributed earnings of subsidiary (108,493)
Other, net (44,175)
----------------
Net cash provided by operating activities 104,754
----------------
FINANCING ACTIVITIES
Cash dividends paid (104,754)
----------------
Net change in cash -
CASH AT BEGINNING OF PERIOD -
----------------
CASH AT END OF PERIOD $ -
================
28
<PAGE>
TRI-STATE 1ST BANK, INC.
Officers and Directors
Officers
- --------
Charles B. Lang
President of Tri-State 1st Bank, Inc.
Chairman of the Board of Directors &
Chief Executive Officer of
1st National Community Bank
Keith R. Clutter
Secretary of Tri-State 1st Bank, Inc.
President & Secretary of
1st National Community Bank
Elah M. Daniels
Vice President
Lois J. Curran
Vice President, Loans
Roger D. Sanford
Vice President & Branch Manager
Steven A. Mabbott
Assistant Vice President & Branch Manager
R. Keith Broadbent
Vice President, Loans
Directors
- ---------
Charles B. Lang
President of Tri-State 1st Bank, Inc.
Chairman of the Board of Directors &
Chief Executive Officer of
1st National Community Bank
Keith R. Clutter
Secretary of Tri-State 1st Bank, Inc.
President & Secretary of
1st National Community Bank
William E. Blair
President of Bill Blair, Inc.
Stephen W. Cooper
President of Cooper Insurance Agency
G. Allen Dickey
Chairman of D. W. Dickey & Son, Inc.
Marvin H. Feldman
Partner of The Feldman Agency
John P. Scotford
President, McBarscot Company
John C. Thompson
Chairman & Chief Executive Officer
of The Hall China Company
R. Lynn Leggett
Director Nominee, Funeral Director,
Eells-Leggett Funeral Home
Form 10-KSB and 10QSB Availability
- ----------------------------------
Copies of the Company's Annual Report on Form 10-KSB and Quarterly Report on
Form 10-QSB filed with the Securities Exchange Commission will be furnished
to any shareholder, free of charge, upon written request to Charles B. Lang
at the following address:
Tri-State 1st Bank
16924 St. Clair Avenue
East Liverpool, OH 43920
Phone: (330) 385-9200
29
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