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As filed with the Securities and Exchange Commission on October 19, 1999
Registration No. 333-
---------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________________
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
__________________________________
TRI-STATE 1ST BANK, INC.
(Name of small business issuer in its charter)
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<CAPTION>
OHIO 6021 34-1824708
---- ---- ----------
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(State or jurisdiction (Primary Standard Industrial (IRS Employer
of incorporation or organization) Classification Code Number) Identification No.)
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16924 St. Clair Avenue
P.O. Box 796
East Liverpool, OH 43920
(330) 385-9200
(Address and telephone number of principal executive offices and principal place
of business)
Charles B. Lang
President
Tri-State 1st Bank, Inc.
16924 St. Clair Avenue
East Liverpool, OH 43920
(330) 385-9200
(Name, address, and telephone number of agent for service)
Copies to:
Richard D. Rose, Esq.
Doepken Keevican & Weiss Professional Corporation
58th Floor, USX Tower
600 Grant Street
Pittsburgh, PA 15219
(412) 355-2600
Approximate date of proposed sale to the public: AS SOON AS PRACTICABLE AFTER
THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
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If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
CALCULATION OF REGISTRATION FEE
-------------------------------
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Proposed
Title of each class Proposed maximum
of securities to be Dollar amount to maximum offering aggregate offering Amount of
registered be registered price per share price registration fee
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<S> <C> <C> <C> <C>
Common Stock, $4,001,400 $27.00 $4,001,400 $1,112
no par value
- -------------------------------------------------------------------------------------------------------
</TABLE>
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said section 8(a),
may determine.
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Prospectus
TRI-STATE 1ST BANK, INC.
148,200 COMMON SHARES
$27.00 Per Share
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<CAPTION>
Tri-State 1st Bank, Inc. The Offering:
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. We are a bank holding company which . We are offering a portion of the shares first
owns one bank, 1st National Community to our existing stockholders.
Bank, with six banking offices in the tri-
state area which includes eastern Ohio, . The remaining shares plus any shares not
southwestern Pennsylvania and northern purchased by our existing stockholders will
West Virginia. We are in the process of be offered to the general public, including
opening an additional banking office. our customers and business associates.
. Tri-State 1st Bank, Inc. . We plan to use the proceeds from this
16924 St. Clair Avenue offering to increase our capitalization and
P.O. Box 796 position ourselves to expand possibly
East Liverpool, OH 43920. through acquisitions.
Trading . We are selling the common stock on a best
efforts basis, and this is not an underwritten
. Our shares are not listed on any exchange offering. The minimum investment by
or the NASDAQ stock market, but are individuals who are not current
traded on a limited basis in the over-the- shareholders is 50 shares.
counter market with the symbol TSEO.
. Closing _________________, _____
Per Share Total
--------- -----
Public offering price: $27.00 $4,001,400
Net Proceeds to Tri-State: $27.00/1/ $3,946,400/1/
</TABLE>
__________________
/1/ This assumes expenses of the offering of approximately $55,000 and no
commissions are paid to any placement agent. We may, however, pay a commission
of up to 6% to qualified agents that place the shares. Any such commissions
paid will reduce the proceeds to Tri-State.
This investment involves risk. Investors should be able to afford the loss of
their investment. See "Risk Factors" beginning on page 4.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is
a criminal offense.
The shares offered hereby are not bank deposits and are not insured by the
federal deposit insurance corporation or any other agency or company. The
federal deposit insurance corporation has not passed, and does not pass, upon
the merits of these or any other securities nor do they pass upon the accuracy
or completeness of any prospectus or other selling literature.
The date of this Prospectus is , 1999
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This offering will be provided, and may be construed as an offer of a security
only to potential investors who have completed and returned to the company a
subscription agreement which contains certifications that the potential investor
is a resident of a state in which the offering is exempt from qualification or
in which the shares have been qualified for the sale under applicable securities
or blue sky laws. The securities offered by this prospectus will be offered and
sold only to residents of a state in which the shares have been qualified for
sale under applicable securities or blue sky laws or states in which an
exemption from qualification is available. This prospectus does not constitute
an offer or solicitation in any state or jurisdiction in which such an offer or
solicitation is not authorized.
For Pennsylvania Residents: You have accepted an offer to purchase these
securities made pursuant to a prospectus which contains a notice explaining your
right to withdraw your acceptance pursuant to Section 207(m) of the Pennsylvania
Securities Act of 1972 (70 P.S. (S) 1-207(m). You may elect, within two
business days after the first time you have received the notice and a prospectus
to withdraw from your purchase agreement and receive a full refund of all monies
paid by you. Your withdrawal will be without any further liability to any
person. To accomplish this withdrawal, you need only send a letter or telegram
to the issuer (or underwriter if one is listed on the front page of the
prospectus) indicating your intention to withdraw. Such letter or telegram
should be sent and postmarked prior to the end of the aforementioned second
business day. If you are sending a letter, it is prudent to send it by certified
mail, return receipt requested, to ensure that it is received and also to
evidence the time when it was mailed. Should you make the request orally, you
should ask for written confirmation that your request has been received.
Notice to Ohio Investors: a Registration Statement concerning the shares has
been filed with the Ohio Division of Securities pursuant to Section
1707.06(a)(1) of the Ohio Revised Code. These shares have not been approved or
disapproved as an investment for any Ohio resident by the Ohio Division of
Securities, nor has the Division passed upon the accuracy of this prospectus.
You should rely only on the information contained in this document or
incorporated by reference. We have not authorized anyone to provide you
information that is different. This prospectus shall not constitute an offer to
sell or a solicitation of an offer to buy any securities in any jurisdiction in
which it would be unlawful to make such offer or solicitation.
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TABLE OF CONTENTS
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Prospectus Summary......................................................................... 1
Risk Factors............................................................................... 4
Forward-Looking Statements................................................................. 7
The Company................................................................................ 8
Use of Proceeds............................................................................ 8
Market for Common Equity and Dividends..................................................... 8
Capitalization............................................................................. 10
Determination of Offering Price............................................................ 10
Dilution................................................................................... 10
Plan of Distribution....................................................................... 11
Legal Proceedings.......................................................................... 13
Description of Common Shares............................................................... 13
Information about Tri-State 1st Bank, Inc.................................................. 17
Management................................................................................. 18
Executive Compensation and Other Information............................................... 20
Principal Stockholders..................................................................... 22
Certain Transactions....................................................................... 23
Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................... 24
Selected Financial Data.................................................................... 44
Supervision and Regulation................................................................. 45
Indemnification............................................................................ 51
Legal Opinions............................................................................. 52
Experts.................................................................................... 52
Index to Consolidated Financial Statements................................................. 53
</TABLE>
WHERE YOU CAN FIND MORE INFORMATION
We are subject to certain of the informational requirements of the
Securities Exchange Act of 1934 so we file reports with the SEC. You can read,
inspect and copy these documents at the public reference facilities maintained
by the Commission at the following locations:
. Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549;
. 7 World Trade Center, New York, New York 10048; and
. Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60606.
Please call the Commission at 1-800-SEC-0330 for further information about
its public reference rooms, including copy charges. The Commission maintains an
Internet site that contains material filed electronically by us with the
Commission which you can access at http://www.sec.gov.
We have filed with the Commission a registration statement under the
Securities Act of 1933 for the Securities offered by this prospectus. The
prospectus includes all material information relating to the offering, but omits
some of the information contained in the registration statement. Additional
information concerning documents mentioned in this prospectus can also be found
in the exhibits to the registration statement. The registration statement and
the exhibits may be inspected without charge at the Commission's Washington,
D.C. reference facility and copies may be obtained from the Commission at
prescribed rates.
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PROSPECTUS SUMMARY
The following summarizes information in other sections of our prospectus.
This summary is not complete and does not contain all of the information that
you should consider before investing in our common stock. You should read the
entire prospectus carefully. Generally, references to "we," "us" and "our" mean
Tri-State 1st Bank, Inc. and our subsidiaries. We refer to Tri-State 1st Bank,
Inc. as "Tri-State" and our principal operating subsidiary as the "Bank," where
necessary to indicate those entities on an individual basis.
The Company
Tri-State 1st Bank, Inc., an Ohio corporation, is a registered bank holding
company headquartered in East Liverpool, Ohio. Our principal business is
presently to operate 1st National Community Bank (the "Bank"), which is a wholly
owned subsidiary and our principal asset. The Bank conducts a general
commercial banking business through its 6 full-service banking offices in the
tri-state area consisting of eastern Ohio, southwestern Pennsylvania and
northern West Virginia, an area also known as the Upper Ohio Valley. On April
14, 1999, we established a second subsidiary, Gateminder Corporation, to provide
non-bank activities for automated teller machines ("ATMs"). Gateminder sells
ATM machines to businesses that operate ATMs and provides a means for processing
the transactions and distributing the fee back to the ATM operator. Among our
strategic goals are the expansion of our operations, particularly by lending
into new markets in adjoining areas. Our mailing address is 16924 St. Clair
Avenue, P.O. Box 796, East Liverpool, Ohio 43920 and our telephone number is
(330) 385-9200.
As of September 30, 1999, we had consolidated total assets of approximately
$63.0 million, deposits of approximately $55.4 million and shareholders' equity
of approximately $5.1 million. We have paid cash dividends on our common shares
for 9 consecutive years.
We offer a broad range of lending and deposit services to individual,
governmental and commercial customers. The Bank's loan portfolio is diversified
among commercial, real estate, and installment lending.
The Offering
Securities Offered..................... 148,200 common shares, no par value
(the "Shares") at a subscription price
of $27 per Share.
Shares Outstanding/Authorized. ........ We had 567,784 Shares issued and
outstanding as of September 23, 1999,
the record date of offering. If the
offering is fully subscribed, we will
have 715,984 Shares issued and
outstanding. We have 1,000,000 Shares
authorized.
Preemptive Rights - Rights Offering.... Each current shareholder has the right
to purchase their pro rata portion of
113,556 Shares in the offering
("Right"). Shareholders will be
entitled to purchase one Share at
$27.00 per Share for every five Shares
of our stock held by them as of
September 23, 1999.
1
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Fractional Shares will not be issued.
Rights will be rounded downward to
the nearest whole Share. Rights are
nontransferable. This preemptive
right to purchase shares offered in
this Offering is referred to
throughout this Prospectus as the
"Rights Offering."
Public Offering.......................... We will offer an additional 34,644
Shares plus any of the 113,556 Shares
not purchased in the Rights Offering
to the public. The minimum
subscription which will be accepted
in the Public Offering is 50 Shares.
The Shares offered to the public are
referred to throughout this
Prospectus as the "Public Offering."
The Public Offering is only being
offered to residents of the states in
which the offering has been duly
qualified. We intend to offer Shares
in the states of Ohio, Pennsylvania,
West Virginia and Florida once the
Shares have been qualified in those
states. We may expand this list of
states subject to regulatory
approval.
Expiration Date of the Rights Offering... The Rights Offering will expire on
[30 days after effective date].
Thereafter, current shareholders will
have no further preemptive rights to
purchase Shares in this offering, but
may subscribe in the Public Offering.
Expiration Date of the Public Offering... The Public Offering will expire at
the earlier of: (i) a date determined
at the direction of our Board of
Directors; or (ii) [60 days after
effective date] unless we decide to
extend the offering for an additional
ninety (90) days.
Manner of Subscribing.................... CURRENT SHAREHOLDERS
Current shareholders interested in
purchasing additional Shares pursuant
to the Rights Offering should execute
and return to us the enclosed rights
subscription agreement together with
a check in the full amount of the
Shares to be purchased in the Rights
Offering. All checks should be made
payable to Tri-State 1st Bank, Inc.
Shareholders who desire to purchase
Shares in excess of their allowable
pro rata amount in the Rights
Offering should use the instructions
for noncurrent shareholders as to the
amounts to be purchased in excess of
the Rights Offering.
2
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PERSON NOT CURRENTLY A SHAREHOLDER
If you are interested in purchasing
Shares, you should complete and
execute the Subscription Agreement
delivered with this Prospectus and
return it to us. The Subscription
Agreement obligates you to deliver a
check in the full amount of the
purchase price upon call by us at any
time prior to and including the
Closing. All checks should be made
payable to Tri-State 1st Bank, Inc.
Use of Proceeds.......................... Our estimated net proceeds of
approximately $3,946,400 will be used
for general corporate purposes,
including additional capitalization
of the Bank and for potential
acquisitions.
Closing.................................. The offering will be closed at the
direction of our Board of Directors
at any time after the Expiration Date
of the Rights Offering and on or
prior to [60 days after effective
date], unless extended by us for an
additional ninety (90) days.
3
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RISK FACTORS
An investment in the Shares involves risks, many of which are beyond our control
and represent contingencies that cannot be reliably estimated. Investment in
the Shares is therefore suitable only if you have no need for liquidity in your
investment. You should carefully consider the following factors and other
information in this prospectus before deciding to invest in Shares of our common
stock.
Our Shares Are Not Readily Marketable.
As of the date hereof, our Shares of common stock trade infrequently and there
can be no assurance that a broader public market will develop. This will
restrict your ability to shift your investment in the Shares to an alternative
investment in the future. Given the lack of a ready market for the Shares, you
may need to find your own buyers if you want to sell your Shares.
We Face Intense Competition in Our Market Area Which May Reduce Our Customer
Base.
Bank holding companies and their subsidiary banks are subject to vigorous and
intense competition from various financial institutions and other "nonbank" or
non-regulated companies or firms that engage in similar activities. We compete
for deposits with other commercial banks, savings banks, savings and loan
associations, insurance companies and credit unions, as well as issuers of
commercial paper and other securities, including shares in mutual funds. In
making loans, we compete with other commercial banks, savings banks, savings and
loan associations, consumer finance companies, credit unions, insurance
companies, leasing companies and other nonbank lenders.
We compete not only with financial institutions in the Upper Ohio Valley but
also with a number of large out-of-state and foreign banks, bank holding
companies and other financial and nonbank institutions. Some of these
institutions are engaged in national and international operations and have more
assets and personnel than us. In addition, some of our competitors are not
subject to the extensive bank regulatory structure and restrictive policies
which apply to us.
The principal factors in successfully competing for deposits are convenient
office locations, flexible hours, competitive interest rates and availability
and convenience of services, while those relating to loans are competitive
interest rates, the range of lending services offered and lending fees. We
believe that the local character of our business and our community bank
management philosophy enables us to compete successfully in our respective
market area. We anticipate, however, that competition will continue to increase
in the years ahead.
Our Financial Condition is Dependent Upon the Bank's Operations.
Our financial health is directly related to the financial health of the Bank.
The financial health of the Bank may be adversely affected by detrimental
changes in federal or state laws, the national monetary and fiscal policies and
international, national and/or local economic conditions. Such laws, policies
or conditions could have material and adverse effects upon the Bank's operations
revenues and profitability.
4
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Changes In Interest Rates May Hurt Our Profits.
The results of operations for financial institutions may be materially and
adversely affected by changes in prevailing economic conditions, including
declines in real estate market values, rapid changes in interest rates and the
monetary and fiscal policies of the federal government. Our profitability is in
part a function of the spread between the interest rates earned on investments
and loans and the interest rates paid on deposits and other interest-bearing
liabilities. In the early 1990s, many banking organizations experienced
historically high interest rate spreads. More recently, interest rate spreads
have generally narrowed due to changing market conditions and competitive
pricing pressure, and there can be no assurance that such factors will not
continue to narrow interest rate spreads or that the higher interest rate
spreads will return. Like most banking institutions, our net interest spread
and margin will be affected by general economic conditions and other factors
that influence market interest rates and our ability to respond to changes to
such rates. At any given time, our assets and liabilities will be such that
they are affected differently by a given change in interest rates. As a result,
an increase or decrease in rates could have a material adverse effect on our net
income, capital and liquidity. Although management takes measures to mitigate
interest rate risk, there can be no assurance that such measures will be
effective in minimizing the exposure to interest rate risk.
We Are Dependent on Our Management.
We are dependent primarily upon the services of Charles B. Lang and
Keith R. Clutter. If the services of these or other key officers of the Bank
were to become unavailable to us for any reason, or if we were unable to hire
highly qualified and experienced personnel either to replace them or any other
experienced employee, or to adequately staff the anticipated growth of the Bank,
our operating results could be aversely affected. In addition, we do not have
employment agreements with any of our executive officers.
We Must Avoid Technological Obsolescence or We May Lose Customers.
The banking industry is undergoing rapid technological changes with frequent
introductions of new technology-driven products and services. In addition to
better serving customers, the effective use of technology increases efficiency
and enables financial institutions to reduce costs. Our future success will
depend in part on our ability to address the needs of our customers by using
technology to provide products and services that will satisfy customer demands
for convenience as well as to create additional efficiencies in our operations.
Many of our competitors have substantially greater resources to invest in
technological improvements. Such technology may permit competitors to perform
certain functions at a lower cost than us. There can be no assurance that we
will be able to effectively implement new technology-driven products and
services or be successful in marketing such products and services to our
customers.
We Have Broad Discretion As to the Use of Proceeds From This Offering. Our
Failure to Effectively Apply Such Proceeds Could Affect Our Profits.
We have not allocated the proceeds of this offering to any specific purpose, and
we will have significant flexibility in determining the amounts of net proceeds
we will apply to different uses and the timing of such applications. Our
failure to apply these funds effectively could hurt our revenues and profits.
5
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Additional Sales of Common Stock in the Future Would Dilute Our Stockholders'
Ownership Interests.
Our Shares of common stock eligible for future sale could have a dilutive effect
on the market for our common stock and could adversely affect the market price.
Our Articles of Incorporation authorize the issuance of up to 1,000,000 Shares
of common stock, of which 567,784 shares were outstanding at September 23, 1999.
Assuming all 148,200 shares offered in this Offering are sold, 284,016 shares
will be available for future issuance which includes the shares reserved for
issuance under our Stock Option Plan. The issuance of additional shares of
common stock in the future could adversely affect the market price of the
Shares.
Our Articles and Code of Regulations Contain Anti-takeover Provisions Which Are
Intended to Encourage Potential Suitors to Negotiate with Our Board So As to
Maximize Value But Which Could Discourage Acquisitions, Dilute Shareholders'
Ownership Interests and Adversely Affect the Price of Our Stock.
Our Articles of Incorporation and Code of Regulations contains provisions which
may have the effect of discouraging or impeding a tender offer, proxy contest or
similar transactions involving control of Tri-State, including transactions in
which our stockholders might otherwise receive a premium for their shares above
then-current market prices or other transactions they may deem to be in their
best interest.
Specifically:
1. Our Articles of Incorporation and Code of Regulations classify our
Board of Directors into three classes, each with their term expiring at
different years. This means that only one-third of our directors will normally
be up for reelection at any one time, thus requiring a person attempting to gain
control of the board to wait for at least two elections before a change can be
made to at least a majority of the directors.
2. Our Articles of Incorporation require the approval of at least two-
thirds of our voting stockholders to approve any of the following transactions,
unless the transaction receives the prior approval of a majority of our board of
directors (not including any directors related to the acquiring person in the
transaction) and any stockholder action, if any, otherwise required by law:
. any merger or consolidation with any person who is the
beneficial owner of more than 5% of any class of our voting
securities (a "Related Person"), an affiliate of Tri-State or an
affiliate of a Related Person;
. any sale, lease, exchange, mortgage, pledge, transfer or
disposition of assets having a fair market value of $500,000 or
more to a Related Person or an affiliate of a Related Person;
. the issuance or transfer of securities of Tri-State or any of
its subsidiaries to any Related Person or any affiliate of a
Related Person in exchange for property or cash with a value of
$500,000 or more;
. the purchase from any Related Person or any affiliate of a
Related Person of any voting stock of Tri-State having an
aggregate value of $100,000 or more;
6
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. the adoption of a plan or proposal for the liquidation or
dissolution of Tri-State by or on behalf of any Related Person or
any affiliate of a Related Person; or
. any reclassification, reverse stock split, recapitalization or
any merger or consolidation which has the effect of increasing
the proportionate voting power of the outstanding shares owned by
any Related Person or any affiliate of a Related Person.
3. Our Code of Regulations does not permit shareholders to call special
meetings of the shareholders.
4. Our Code of Regulations provides that a director may only be removed
without assigning cause by the affirmative vote of not less than 75% of our
voting shareholders.
The Year 2000 Issue Could Hurt Our Operations and Our Profits and Could Lower
the Value of Your Stock.
Like most financial institutions, we rely upon computers for conducting our
business and for information systems processing. There is concern among
industry experts that on January 1, 2000, computers may be unable to read or
interpret the new year properly and there may be widespread computer
malfunctions. The issue may also negatively affect the business of our
customers and vendors. Failure of any of our computers systems, those of the
parties we do business with or the public infrastructure, including the electric
and telephone companies, to process transactions after January 1, 2000, may
disrupt our ability to do routine business and to service our customers. This
could hurt our operations and profits. For more information regarding the year
2000 issue, see "Supervision and Regulation -- Year 2000."
FORWARD-LOOKING STATEMENTS
We have made statements under the captions "Prospectus Summary," "Risk
Factors," " Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business" and elsewhere in this
prospectus that are forward-looking statements. You can identify these
statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate," and "continue" or similar words. Forward-
looking statements may also use different phrases. Forward-looking statements
address, among other things, (1) our expectations; (2) projections of our future
results of operations or of our financial condition; or (3) other "forward
looking" information.
We believe it is important to communicate our expectations to our
investors. However, events may occur that we are not able to predict accurately
or which we do not fully control that could cause actual results to differ
materially from those expressed or implied by our forward-looking statements,
including:
. our inability to manage our growth;
. changes in general economic and business conditions and in the banking
industry in particular;
. actions by our competitors;
. changes in banking regulations;
7
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. changes in our business strategies; and
. other factors discussed under "Risk Factors."
THE COMPANY
We commenced operations in April, 1996 with the reorganization of the Bank as a
subsidiary of a bank holding company. The Bank was organized in 1987 and is a
full-service bank offering a wide range of commercial and personal banking
services to customers in the Upper Ohio Valley. On April 14, 1999 we established
a second subsidiary, Gateminder Corporation, to provide non-bank activities for
automated teller machines. As a locally owned and managed banking company, the
Bank seeks to respond to its customers' banking needs by providing timely, local
banking decisions. Among our strategic goals are the expansion of our
operations, particularly by lending into new markets in adjoining areas, and
through acquisition of other community bank branches.
The Bank has 6 modern, full-service offices, 4 of which are located in
Columbiana County, Ohio, 1 of which is in Hancock County, West Virginia and 1 in
Beaver County, Pennsylvania which is scheduled to open in a temporary building
in November, 1999. Our headquarters and the main office are located at 16924 St.
Clair Avenue, P.O. Box 796, East Liverpool, Ohio 43920, and our telephone number
is (330) 385-9200
USE OF PROCEEDS
The net proceeds from the sale of the Shares offered hereby are estimated to be
$3,946,400 after payment of approximately $55,000 for offering, consulting,
legal and accounting fees, printing costs and filing fees in connection with the
offering. The net proceeds will be used to support our anticipated growth,
particularly for possible future acquisitions. We have no present understanding
or agreement with respect to any particular acquisition.
MARKET FOR COMMON EQUITY AND DIVIDENDS
Our common stock has historically traded infrequently and is not traded on any
established securities market. Parties interested in buying or selling our stock
are generally referred to Advest, Inc., 340 South Hollywood Plaza, Steubenville,
Ohio 43952, telephone: (800) 761-8008.
8
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For 1999 year-to-date, 1998 and 1997, bid and ask quotations were obtained from
Advest which makes a limited market in our stock. The quotations are inter-
dealer prices, without retail markup, markdown or commission and may not
represent actual transactions.
<TABLE>
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1997(1)(2)(3) Low Bid High Bid Low Ask High Ask
------- -------- ------- --------
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1st Qtr. $10.80 $10.80 $11.48 $11.48
2nd Qtr. 10.80 10.80 11.48 11.48
3rd Qtr. 13.50 13.50 14.85 14.85
4th Qtr. 13.50 13.50 14.85 14.85
1998(1)(2)
1st Qtr. 16.20 16.20 17.55 17.55
2nd Qtr. 16.88 16.88 18.06 19.41
3rd Qtr. 21.75 21.75 23.81 23.81
4th Qtr. 23.25 23.25 24.75 24.75
1999(1)
1st Qtr. 23.25 23.25 24.75 24.75
2nd Qtr. 23.25 23.25 24.75 24.75
3rd Qtr. 24.75 25.00 26.25 27.00
</TABLE>
(1) All figures prior to August 25, 1999 were adjusted for our 5-for-4
stock split which took effect on that date.
(2) All figures prior to June 26, 1998 were adjusted to reflect our 10%
stock dividend which took effect on that date.
(3) All figures prior to July 9, 1997 were adjusted to reflect our 2-for-1
stock split which took effect on that date.
Management does not have knowledge of the prices paid in all transactions and
has not verified the accuracy of those prices that have been reported. Because
of the lack of an established market for our stock, these prices may not reflect
the prices at which the stock would trade in an active market.
Other than with respect to the Rights Offering, holders of our Shares have no
rights, options or warrants to purchase our common stock or securities
convertible into our common stock. Certain of our officers and directors have
been granted stock options to purchase our Shares. See "Executive Compensation
and Other Information - Stock Option Plans." As of September 23, 1999, our
directors and executive officers beneficially owned 201,883 shares of common
stock which could be sold by them in the manner provided for the sale of
securities by affiliates under Rule 144 of the Securities Exchange Act of 1933.
No agreement exists for us to register our common stock held by any shareholder.
9
<PAGE>
We have 1,000,000 authorized and 567,784 outstanding shares of common stock held
by approximately 357 shareholders as of September 23, 1999. We paid a $0.12 per
share dividend on June 29, 1999. We also paid cash dividends of $0.23 and $0.21
per share in 1998 and 1997, respectively. Our ability to pay future dividends is
dependent on the ability of the Bank to pay dividends to Tri-State. The Bank's
ability to pay dividends is subject to certain regulatory limits and oversight.
See "Supervision and Regulation."
CAPITALIZATION
The following table sets forth our consolidated capitalization at September 30,
1999, and as adjusted for the issuance and sale of the Shares offered hereby and
the application of the net proceeds thereof (see "Use of Proceeds"). The table
below assumes the full subscription of the offering. There is no minimum
aggregate offering amount.
<TABLE>
<CAPTION>
September 30, 1999
----------------------
Actual Pro Forma (1)
------- -------------
(in thousands)
<S> <C> <C>
Shareholders' Equity:
Common shares, no par value, 1,000,000 shares
authorized; 567,784 and 715,984 issued and
outstanding, respectively $3,945 $7,891
Retained earnings 1,349 1,349
Cumulative other comprehensive loss (240) (240)
------ ------
Total shareholders' equity $5,054 $9,000
====== ======
</TABLE>
(1) Net of estimated expenses of approximately $55,000 for offering,
consulting, legal and accounting fees, printing costs and filing fees with
federal and state securities authorities.
DETERMINATION OF OFFERING PRICE
Our Board of Directors considered several factors in setting the per share
offering price of the Shares. Our Shares are traded on a limited basis in the
over-the-counter market. In determining the per share offering price, our Board
of Directors took into account the prices at which recent trades have taken
place in our Shares. Additionally, the Board considered our historical financial
performance, including our dividend payment history as well as our perception
that there is an existing demand to purchase Shares by existing and prospective
shareholders. For additional information regarding the prices at which Shares
have traded and information regarding historical dividends, see "Market for
Common Equity and Dividends."
DILUTION
Shareholders who do not participate on a pro rata basis in the Rights Offering
will experience dilution in their ownership percentage. Additionally, assuming
the full subscription of the offering had occurred on September 30, 1999, a
purchaser of Shares in the offering would have paid a premium of $14.43 per
Share or an approximately 115% premium over the pro forma book value of such
share of $12.57.
10
<PAGE>
PLAN OF DISTRIBUTION
We are offering to our shareholders of record (the "Shareholders"), as of the
close of business on September 23, 1999 (the "Record Date"), the preemptive
right to subscribe for 113,556 Shares at a price of $27.00 per Share (the
"Subscription Price"), pursuant to the Rights Offering and, to the extent
available, to subscribe for additional Shares in the Public Offering.
Shareholders will have the Right to purchase one Share, for each five Shares
owned on the record date pursuant to the Rights Offering. Fractional shares will
not be issued. Rights will be rounded downward to the next whole Share.
Prospective investors will not have a right to a return of funds paid to us.
An additional 34,644 Shares and any Shares not purchased pursuant to the Rights
Offering are to be offered to the public, subject to a minimum subscription of
50 Shares. Shares offered in the Public Offering outside of the states of Ohio,
Pennsylvania, West Virginia and Florida will only be offered to our existing
shareholders. Advest, Inc. makes a limited market in our stock. We will offer
the Shares on a best efforts basis, and there is no underwriter involved in the
Offering. The Shares will be offered and sold directly by us through our
directors, officers, and employees, who will not receive any additional
compensation for their sales efforts. We expect to promote the offering through
word of mouth to our customers and others with whom we do business. We may,
however, at our option, engage placement agents who will be registered broker-
dealers and members of the NASD. If we use such placement agents, we will pay a
commission for such services not in excess of 6%. Sales to West Virginia
residents will only be made through qualified broker-dealers.
Rights. Each Shareholder is entitled to subscribe for his pro rata portion of
- ------
the 113,556 Shares offered by us in the Rights Offering. These preemptive rights
to subscribe are evidenced by nontransferable Rights. Each Right evidences the
total number of Shares to which the Shareholder is entitled to subscribe in the
Rights Offering. A shareholder who does not participate in the Rights Offering
will experience ownership dilution (see "Dilution"). Officers and Directors, in
their capacity as shareholders, will have the same right to purchase Shares in
the Rights Offering as all other Shareholders. While there can be no assurance
of such, it is expected that our executive officers and Directors will exercise
their Rights to purchase additional Shares.
Expiration Date. The Rights Offering expires on [30 days from effective date]
- ---------------
(the "Expiration Date of the Rights Offering"). The Public Offering will expire
(the "Public Offering Expiration Date") at the earlier of: (i) the direction of
our Board of Directors; or (ii) [60 days from effective date], unless extended
by us, which extended date shall not be later than [90 days from Public Offering
Expiration Date]. Subscribers for Shares would be informed in writing of any
such extension.
Method of Exercising Rights and Payment. Rights to subscribe may be exercised by
- ---------------------------------------
completing and signing the Rights Subscription Agreement and mailing or
delivering it, together with payment in full for all Shares subscribed for under
the Rights Offering in the manner indicated below, so as to be received by us on
or before the Expiration Date of the Rights Offering. Full payment for Shares
subscribed for in this Rights Offering is to be made when a subscriber returns
his Rights Subscription Agreement to us in order to enable us to promptly
process subscriptions for Shares purchased in the Rights Offering. In the event
that payment is less than that required to purchase the number of Shares
subscribed for under the Rights Offering, we will issue only the number of
Shares for which payment is received. There is no minimum subscription required
to exercise a Right nor is there any aggregate minimum offering amount. We will
accept Rights Subscriptions as they are submitted.
11
<PAGE>
By Hand Delivery or Mail
------------------------
Tri-State 1st Bank, Inc.
16924 St. Clair Avenue
P.O. Box 796
East Liverpool, OH 43920
Attention: Charles B. Lang
Telephone inquiries should be directed to Charles B. Lang or Keith R.
Clutter at (330) 385-9200.
Public Offering. We will offer the 34,644 additional Shares and those Shares
- ---------------
not purchased in the Rights Offering to the general public at a price of $27 per
share (the "Public Offering"). We reserve the right to accept or reject, in
whole or in part, for any reason, any subscription for Shares tendered in the
Public Offering. A minimum subscription of 50 shares is required in the Public
Offering.
We will close the Public Offering at the direction of our Board of Directors
(the "Closing") which may be at: (i) that time at which the offering is fully
subscribed for; or (ii) not later than the fifth business day following the
Public Offering Expiration Date.
Method of Subscribing for Shares in Public Offering and Payment. To subscribe
- ---------------------------------------------------------------
for Shares in the Public Offering, complete the Subscription Agreement, sign and
return it in the manner indicated below so as to be received by us on or before
the Expiration Date of the Public Offering. Payment for Shares subscribed for in
the Public Offering will be due upon call. Because we may not accept all or part
of your subscription, you should not submit payment for such Shares until
notified by us as to the number of Shares for which we have accepted your
Subscription Agreement.
The Subscription Agreement may be executed and mailed or delivered to us as
follows:
By Hand Delivery or Mail
------------------------
Tri-State 1st Bank, Inc.
16924 St. Clair Avenue
P.O. Box 796
East Liverpool, OH 43920
Attention: Charles B. Lang
Telephone inquiries should be directed to Charles B. Lang or Keith R.
Clutter at (330) 385-9200.
Acceptance of Subscriptions. We will determine on a case by case basis which
- ---------------------------
subscriptions we will accept or reject among the subscribers for Shares. In
making our determination, we will take into account such factors as the amount
of the subscription, other business relationships between us and the subscriber,
and whether such subscriber is an existing shareholder. It is our intention to
encourage broad participation among persons who live or work in the primary
market areas serviced by us. We reserve the right to accept or reject all or a
portion of any subscription for Shares.
Delivery of Share Certificates. As soon as practicable following receipt of a
- ------------------------------
Rights Subscription Agreement and full payment for Shares subscribed for in the
Rights Offering is received, certificates for Shares will be
12
<PAGE>
mailed or delivered. After the Closing of the Public Offering, and after full
payment is received from subscribers for Shares in the Public Offering,
certificates for Shares will be mailed or delivered as soon as practicable.
Federal Income Taxes. We have received an opinion of Doepken Keevican & Weiss,
- --------------------
Professional Corporation, to the effect that, for federal income tax purposes:
(1) neither the receipt nor the exercise of the Rights will result in
taxable income to the shareholders;
(2) no deductible loss will be realized if Rights are allowed to expire
without exercise;
(3) the tax basis of Shares acquired upon the exercise of Rights or in
the Public Offering will be the Subscription Price; and
(4) there is no allocation of an existing shareholders' tax basis in
current Shares held to such Shareholders Rights, whether or not such
Rights are exercised, because (based upon the limited time period in which
shareholders have the option to exercise their Rights and the fact that
the purchase price per share paid upon the exercise of a Right is
substantially equal to the per share price of the Shares sold in the
Public Offering) we have determined that such value is zero.
No independent determination of the value of the Rights distributed has been
made.
LEGAL PROCEEDINGS
We are not currently subject to any pending or, to our knowledge, threatened
lawsuits.
DESCRIPTION OF COMMON SHARES
General
We are authorized to issue 1,000,000 Common Shares, no par value. As of
September 23, 1999, there were 567,784 Shares issued and outstanding.
Holders of Shares are entitled to dividends when and if declared by our Board of
Directors out of funds legally available therefore. Voting rights are vested in
holders of the Shares, each Share being entitled to one vote.
Classification of Board of Directors
Our Board of Directors has been classified by dividing the Directors into three
classes. One class of Directors is elected each year for a term of three years,
so that the term of office of one class of Directors expires each year.
Cumulative Voting
Our shareholders have cumulative voting rights pursuant to Ohio law. A
shareholder voting cumulatively may cast the number of shares he owns times the
number of Directors to be elected in favor of one nominee or allocate such votes
among the nominees as he determines.
13
<PAGE>
We may, as permitted by Section 1701.69 of the Ohio Revised Code, propose to
shareholders that our Articles of Incorporation be amended to delete the right
to vote cumulatively in the election of Directors. If we propose such an
amendment to shareholders, all shareholders would be entitled to notice of the
proposed amendment as provided by law and such an amendment would be subject to
other requirements as to the number of shares which could be voted against the
proposed amendment. The adoption of such amendment would require the affirmative
vote of the holders of a majority of the stock entitled to vote in the election
of Directors.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is the Bank, Tri-State's
wholly owned subsidiary.
Liquidation Rights
In the event of liquidation, holders of our common stock are entitled to certain
rights as to assets distributable to shareholders on a pro rata basis, after
satisfaction of our debts.
No Preemptive Rights
Holders of our common stock have no preemptive right to subscribe for or to
purchase any additional securities which may be issued by us. Preemptive rights
permit a shareholder to subscribe to a sufficient number of shares so as to
maintain their relative pro rata ownership upon the issuance of additional
shares by a corporation, except in certain circumstances.
Dissenters' Rights
Our shareholders have dissenters' rights in connection with certain mergers and
consolidations pursuant to Ohio law.
Right of Redemption
We are specifically empowered by our Articles of Incorporation to buy our shares
of outstanding common stock from our shareholders.
Dividend Rights
Dividends may be paid on our common stock as declared by our Board of Directors
out of funds legally available therefor. Dividends may not exceed the surplus of
Tri-State, as defined by the Ohio Business Corporation Act, and may not be
declared if we are insolvent or would thereby be made insolvent. (See
"Supervision, Regulation and Legislation--The Company.")
Assessability
When issued, our common stock is fully paid and nonassessable.
14
<PAGE>
Antitakeover Provisions
Some Important Charter Provisions
Our Articles of Incorporation and Code of Regulations provide for a classified
board of directors as described above. In addition, our Code of Regulations
provide that special meetings of stockholders may not be called by the
shareholders. Our Regulations also provide that the number of directors may be
changed by the affirmative vote of at least 2/3 of the directors but shall not
be fewer than five nor greater than twenty-five.
Our Regulations further provide that vacancies on the board may be filled by the
remaining directors. In addition, our Regulations provide that directors may
only be removed without cause with the affirmative vote of 75% of our
shareholders.
In addition, our Articles of Incorporation provide certain procedures which must
be followed before we may enter into "Significant Transactions." The Articles
define the term "Significant Transactions" as including:
. Any merger or consolidation of Tri-State or any of its subsidiaries with
any "Related Person" or an "Affiliate";
. Any sale, lease, exchange or other transfer from Tri-State or any of its
subsidiaries to a "Related Person" or "Affiliate" of assets with an
aggregate fair market value of $500,000 or more;
. Any issuance or transfer of securities of Tri-State or any of its
subsidiaries to a "Related Person" or "Affiliate" with a fair market value
of $500,000 or more;
. The acquisition by Tri-State or any of its subsidiaries of (1) Tri-State's
securities or (2) other securities, of a "Related Person" or "Affiliate"
with a fair market value of $100,000 or more;
. The adoption of a plan of liquidation or dissolution of Tri-State proposed
by a "Related Person" or "Affiliate"; or
. Any reclassification or recapitalization of securities of Tri-State which
increases the voting power of a "Related Person."
A "Related Person," as defined in the Articles, includes any person or entity
who owns or has beneficial ownership of more than 5 percent (5%) of any class of
Tri-State securities. Any "Significant Transaction" described above which is not
approved by a majority of our Directors, who are unaffiliated with the "Related
Person" and were members of the Board prior to the time that the "Related
Person" became a "Related Person" ("Continuing Directors"), must be approved by
the affirmative vote of the holders of 66 2/3 percent of the outstanding Shares.
Any amendments to the Articles which alter the shareholder approval requirements
for the above defined "Significant Transaction" must also be approved by the
Continuing Directors or by the affirmative vote of the holders of at least
66 2/3 percent of the outstanding Shares.
These provisions may have the effect of deterring hostile takeovers or delaying
changes in our management. The availability of the authorized and unissued
Shares of Tri-State to be issued into friendly hands with the purpose of
diluting a potential acquiror's ownership of Tri-State may also be determined to
have an antitakeover effect. Our Articles of Incorporation and Code of
Regulations currently contain no other provisions that were intended to be or
could fairly be considered as antitakeover in nature or effect. Our Board of
Directors has no present intention to amend the Articles of Incorporation to add
any antitakeover provisions,
15
<PAGE>
nor are the above described provisions the result of our knowledge of any effort
to obtain control of Tri-State by any means.
Some Important Ohio Statutory Provisions
We are subject to certain provisions of Ohio law that may discourage or render
more difficult an unsolicited takeover:
The Merger Moratorium Act prohibits certain mergers, sales of assets, issuances
or purchases of securities, liquidation or dissolution, or reclassifications of
the then-outstanding shares of an Ohio corporation involving, or for the benefit
of, certain beneficial holders of stock representing 10% or more of the voting
power of the corporation (a "10% shareholder"), unless:
. the transaction is approved by the directors prior to the time that the 10%
shareholder became a 10% shareholder (the "Shareholder Acquisition Date");
. the acquisition of 10% of the voting power is approved by the directors
prior to the Shareholder Acquisition Date; or
. the transaction involves a 10% shareholder that has been such for at least
three years and the transaction is either approved by holders of two-thirds
of the voting power of the corporation and the holders of a majority of the
voting power not owned by 10% shareholders, or certain minimum price and
form of consideration requirements are met.
The Control Share Act provides that the acquisition of shares entitling the
holder to exercise voting power in certain ranges (one-fifth or more, one-third
or more, or a majority) can be made only with the prior authorization of:
. the holders of at least a majority of the total voting power; and
. the holders of at least a majority of the total voting power held by
shareholders other than the proposed acquirer, officers of the corporation
elected or appointed by the directors, and directors of the corporation who
are also employees and excluding certain shares that are transferred after
the announcement of the proposed acquisition and prior to the vote with
respect to the proposed acquisition. The Control Share Act does not specify
a remedy for violation of the Act. However, in at least one situation, a
court has set aside an acquisition made in violation of the Control Share
Act.
The Profit Disgorgement Act provides Ohio corporations, or in certain
circumstances the shareholders of an Ohio corporation, a cause of action to
recover profits realized under certain circumstances by persons who dispose of
securities of a corporation within 18 months of proposing to acquire such
corporation.
Reports
Our common stock is not currently registered under Section 12(g) of the
Securities and Exchange Act of 1934. However, we file periodic reports with the
SEC as required by Section 15(d) of the Exchange Act. After the
16
<PAGE>
Offering, we will continue to file periodic reports with the SEC and, depending
upon how many stockholders of record we will have after the offering, we may be
required to register our common stock under Section 12(g) of the Exchange Act.
INFORMATION ABOUT TRI-STATE 1ST BANK, INC.
Introduction
We commenced operations in April 1996 with the reorganization of the Bank as a
subsidiary of a bank holding company. The Bank commenced operations in 1987 as a
national banking association. On April 14, 1999 we established a second
subsidiary, Gateminder Corporation, to provide non-bank activities for automated
teller machines. The Bank is a full-service bank offering a wide range of
commercial and personal banking services primarily to customers in the Upper
Ohio Valley, which consists of eastern Ohio, southwestern Pennsylvania and
northern West Virginia, through its 6 offices. The Bank's services include
commercial, mortgage and installment loans (particularly auto loans), checking
accounts, savings accounts, certificates of deposit, safe deposit boxes,
traveler's checks, money orders, wire transfers, VISA, IRAs, Keoghs, and money
market investments.
Service Area
We provide banking services throughout the Upper Ohio Valley, which has long
been an important industrial community. We are not dependent upon any single
industry or business for its banking opportunities. We do not have any foreign
operations.
Competition
Banking in the Upper Ohio Valley is highly competitive. We compete with various
commercial banks, some of which are branches or affiliates of banks or bank
holding companies with significantly greater resources than us. We also compete
with a large number of other financial institutions, such as savings and loan
associations, savings banks, insurance companies, consumer finance companies,
credit unions and commercial finance and leasing companies, for deposits, loans
and service business. Money market mutual funds, brokerage houses and similar
organizations provide many of the financial services offered by us.
We compete on the basis of the rates of interest charged for loans, the rates of
interest paid for funds, the availability and convenience of services, the fees
charged for services and the local orientation and timeliness of lending
decisions.
Employees
As of September 30, 1999, we had approximately 44 full-time employees and 8
part-time employees. We consider our relationship with our employees to be good.
None of the employees are covered by a collective bargaining agreement.
Properties
Our main office, located at 16924 St. Clair Avenue, East Liverpool, Ohio 43920
is owned by the Bank. In addition, we presently operate branch banking
facilities at five locations. Two branches are owned and two are leased, with
expiration dates in 2002 and 2005. The Bank has purchased property in Midland,
17
<PAGE>
Pennsylvania for a new branch opening in November 1999. We intend to open a
seventh office in downtown East Liverpool, Ohio in the second quarter of 2000
for which we are currently negotiating the terms of a lease.
MANAGEMENT
The following table sets forth, as of September 30, 1999, for each director and
executive officer, name, age, principal occupations during the past five years,
the year they first became a director and year of expiration of the current term
as director.
<TABLE>
<CAPTION>
Term
Name Occupation Expires
---- ---------- -------
<S> <C> <C> <C>
Charles B. Lang 59 President and Director of Tri-State; 2002
Chairman, Director and CEO of the
Bank
Keith R. Clutter 55 Director and Secretary of Tri-State 2001
Director and President of the Bank
Kevin Anglemyer 34 Vice President and Chief Financial N/A
Officer of Tri-State and the Bank
Roger D. Sanford 51 Vice President of the Bank N/A
R. Keith Broadbent 55 Vice President of the Bank N/A
Steven A. Mabbot 42 Vice President of the Bank N/A
Lester W. Smith 70 Vice President of the Bank N/A
Vickie L. Owens 37 Assistant Vice President of the Bank N/A
William E. Blair 64 Director of Tri-State and the Bank 2000
Stephen W. Cooper 56 Director of Tri-State and the Bank 2000
G. Allen Dickey 69 Director of Tri-State and the Bank 2001
Marvin H. Feldman 53 Director of Tri-State and the Bank 2000
R. Lynn Leggett 53 Director of Tri-State and the Bank 2002
John P. Scotford 70 Director of Tri-State and the Bank 2001
John C. Thompson 73 Director of Tri-State and the Bank 2002
</TABLE>
Charles B. Lang has served as Chairman of the Board of the Bank since 1993. He
has served as President of Tri-State's Board since inception and a Director of
the Bank since 1987.
Keith R. Clutter has served as President of the Bank from 1993 to present. Mr.
Clutter has been a director of the Bank since 1987. He has served as director
and Secretary of Tri-State since inception.
18
<PAGE>
Kevin Anglemyer has been Chief Financial Officer of Tri-State and the Bank since
September 1999 and August 1998, respectively. Prior to joining the Bank, he
served as Controller for Century National Bank, Rochester, PA. Mr. Anglemyer is
a licensed certified public accountant in the Commonwealth of Pennsylvania.
Roger D. Sanford has served as a Vice President of the Bank since 1992 and has
been employed at the Bank since 1991.
R. Keith Broadbent has been a Vice President of the Bank since 1996 and a loan
officer of the Bank since 1995. He previously served as Banking Officer for
First National Bank of Chester, West Virginia.
Steven A. Mabbott was an Assistant Vice President of the Bank from 1994 to 1998,
at which time he became Vice President. He previously served as Mortgage Loan
Office at National City Bank / Potters Bank from 1988 to 1993.
Lester W. Smith has served as Vice President of the Bank since September 1999.
He is also employed by Lester W. Smith Mortgage Inc., Brighton Township, PA and
serves as its President.
Vickie L. Owens has served as Assistant Vice President and Supervisor of Data
Processing since 1998.
William E. Blair has served as a director of the Bank from 1991 to present, and
a director of Tri-State since inception. He has served as President of Bill
Blair, Inc., an oil and gas exploration company, since 1978.
Stephen W. Cooper has served as a director of the Bank since 1989, and has been
a director of Tri-State since inception. He has served as President of Cooper
Insurance Agency since 1970.
G. Allen Dickey has served as a director of the Bank since 1987, and has been a
director of Tri-State since inception. He has been the Chairman of D.W. Dickey &
Son, Inc. since 1995 and served as its President since 1962.
Marvin H. Feldman has been a director of the Bank since 1987, and has been a
director of Tri-State since inception. He has also been a Partner in The Feldman
Agency since 1967.
R. Lynn Leggett has been a director of Tri-State and the Bank since 1996. He has
also been President and Funeral Director at Eells-Leggett Funeral Home since
1975.
John P. Scotford has been a director of the Bank since 1987, and has been a
director of Tri-State since inception. He is also the President of McBarscot
Company, a real estate investment firm and also operates an automobile retail
sales company.
John C. Thompson has served as a director of the Bank since 1987, and a director
of Tri-State since inception. He is also the Chairman of The Hall China Company,
a pottery manufacturing company, and has served in this capacity since 1991.
19
<PAGE>
EXECUTIVE COMPENSATION AND OTHER INFORMATION
Summary of Cash and Certain Other Compensation
We are required to provide certain summary information concerning compensation
paid or accrued by us, to or on behalf of our Chief Executive Officer and the
four highest paid executive officers whose base salary and bonus exceeded
$100,000, for the fiscal years ended December 31, 1998, 1997, and 1996. As
applied to us, our Chief Executive Officer's compensation is required to be
disclosed as follows:
Summary Compensation Table
Annual Compensation
Name and Principal Position Year Salary($) Bonus($)
---- ------- --------
Charles B. Lang, President, 1998 $64,972 $3,428
Tri State 1st Bank and 1997 62,800 1,256
Chairman & CEO, the Bank 1996 59,750 3,235
We do not have an employment contract with Mr. Lang.
Directors' Compensation
In 1998, no compensation was paid to any directors of Tri-State for their
services to the holding company. No compensation was paid to Directors Lang and
Clutter as directors of the Bank, as they are compensated in their capacity as
officers of the Bank. Compensation paid to each of the seven outside directors
of the Bank was as follows: an annual retainer of $2,200; $230 for each of the
12 Board meetings attended; and $230 for each Executive Committee attended
(three outside directors are assigned to each of the monthly Executive Committee
meetings). $175 was paid to the four members of the Audit Committee for each of
the two meetings attended, and also to the six non-officer director members of
the Future Directions and New Office Expansion Committee for the four meetings
held, provided that they had attended.
Option Grants in 1998
<TABLE>
<CAPTION>
Potential Realizable
Percent of Value at Assumed Rates
Number of Total of Stock Price
Securities Options Appreciation for Option
Underlying Granted to Term
Options Employees Exercise or -----------------------------
Granted in Base Price Expiration
(#) 1998 ($/Sh) Date 5% 10%
-------------- ------------- --------------- -------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Charles B.
Lang 4,000/(a)/ 36% $22.40 8/26/2003 $23,800 $29,200
</TABLE>
(a) Adjusted for 5-for-4 stock split.
20
<PAGE>
The following table sets forth information with respect to the number and value
of outstanding options held by executive officers named in the Summary
Compensation Table at the end of 1998.
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Year End at Year End ($)(a)
----------------------- ----------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Charles B. Lang 9,500(b) 0 $82,915 0
</TABLE>
(a) Based on an assumed public offering price of $27 per share, minus the
exercise price, multiplied by the number of shares underlying the option.
(b) Adjusted for 5-for-4 stock split.
Stock Option Plans
We have a stock option plan, under which we have reserved for issuance 68,750
Shares of common stock. We have issued options to purchase 52,383 Shares of our
common stock under the plan. The plan provides for grants of incentive stock
options and nonqualified stock options to our key employees and directors. The
option committee of the board of directors administers and interprets the plan.
The exercise price of common stock underlying an option may be greater, less
than or equal to fair market value. However, the exercise price of an incentive
stock option must be equal to or greater than the fair market value of a share
of common stock on the date such incentive stock option is granted, and the
exercise price of an incentive stock option granted to an employee who owns more
than 10% of the common stock may not be less than 110% of the fair market value
of the underlying shares of common stock on the date of grant. The aggregate
fair market value of common stock subject to all incentive stock options granted
to an employee which are exercisable for the first time by the employee in any
calendar year cannot exceed $100,000.
The maximum term of an incentive stock option is 10 years from the date of grant
except that the term of an incentive stock option granted to an employee who
owns more than 10% of the common stock may not exceed five years from the date
of grant. The option committee may accelerate the exercisability of any or
all outstanding options in the event of a dissolution, liquidation or change in
control.
21
<PAGE>
PRINCIPAL STOCKHOLDERS
Shares Account
Beneficially Percent
Name of Beneficial Owner Owned as of as of
9-23-99 (1) 9-23-99
- -------------------------------- -------------- ---------
Executive Officers and Directors
Charles B. Lang (2) 55,203 8.90%
Keith R. Clutter (3) 6,700 1.08
Kevin Anglemyer (4) 1,475 *
Roger D. Sanford (5) 3,819 *
R. Keith Broadbent (6) 1,350 *
Lester W. Smith (7) 500 *
Steven A. Mabbot (8) 2,100 *
William E. Blair (9) 8,975 1.45
Stephen W. Cooper (10) 4,025 *
G. Allen Dickey (11) 20,319 3.28
Marvin H. Feldman (12) 31,354 5.06
R. Lynn Leggett (13) 6,725 1.08
John P. Scotford (14) 47,819 7.71
John C. Thompson (15) 11,519 1.86
Principal Officers and Directors as a
Group (14 Persons) 201,883 32.55
* Indicates that the percentage of shares beneficially owned does not exceed
1% of the class.
(1) For the purposes of this table, shares are considered "beneficially" owned
if the person directly or indirectly has the sole or shared power to vote
or direct the voting of the securities or the sole or shared power to
dispose of or direct the disposition of the securities. A person is also
considered to beneficially own shares that such person has the right to
acquire within 60 days. In computing the percentage of ownership for each
nominee, director and principal officer and the group, the shares covered
by exercisable stock options held by such nominee, director, principal
officer and group are deemed outstanding. In calculating the percentage of
class owned, the total number of shares issued and outstanding have been
increased to reflect the number of shares that would be outstanding,
including those exercising stock options.
(2) Includes 12,550 shares owned of record, 30,403 shares held in Trust, an IRA
custodial account and as Co-Trustee of the Francis H. Lang Trust, and
12,250 stock options.
(3) Includes 550 shares owned of record and 6,150 stock options.
(4) All 1,475 shares are by stock option.
(5) All 3,819 shares are by stock option.
(6) Includes 275 shares owned jointly with another person and 1,075 stock
options.
22
<PAGE>
(7) All 500 shares are by stock option.
(8) All 2,100 shares are by stock option.
(9) Includes 2,750 shares owned of record, 2,750 shares owned in the name of
his spouse and 3,475 stock options.
(10) Includes 550 shares owned of record and 3,475 stock options.
(11) Includes 550 shares owned of record, 15,950 shares owned in trust and in
the name of his spouse and 3,819 stock options.
(12) Includes 550 shares owned of record, 26,985 shares owned jointly with his
spouse, in the name of his spouse, in the name of his spouse in Trust and
held in corporate name, and 3,819 stock options.
(13) Includes 550 shares owned of record, 3,387 shares owned jointly with his
spouse in broker accounts and 2,788 stock options.
(14) Includes 550 shares owned of record, 43,450 shares held in Trust from
himself and in Trust in the name of his spouse and 3,819 stock options.
(15) Includes 7,700 shares owned of record and 3,819 stock options.
Except as described above, we have no knowledge that any person, or any "group"
as the term is used in Section 13(d)(3) of the Securities Exchange Act of 1934,
owns, as of September 30, 1999, of record or beneficially, more than 5 percent
of our outstanding Shares.
CERTAIN TRANSACTIONS
Some of our directors, as well as the companies with which such directors are
associated, are customers of, and have had transactions with us in the ordinary
course of our business in 1998 and 1999. These transactions consisted of
extensions of credit in the ordinary course of business and were made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with non-affiliated persons.
In our opinion, these transactions do not involve more than normal risk of
collectibility or present other unfavorable features. Below is a summary of
material related party transactions as of September 23, 1999.
Director Marvin Feldman, has a line of credit with the Bank. This line
originated in October 1997 in the principal amount of $300,000. The line accrues
interest at 9.25% per annum and the balance as of September 23, 1999 was
$299,969. Additionally, Mr. Feldman's wife, Vickie, has a loan which originated
in March 1996 in the principal amount of $13,046, accruing interest at 9.50% per
annum, with an outstanding balance as of September 23, 1999 of $2,473.
Director Stephen Cooper has a line of credit at the Bank which originated in
June 1998 in the principal amount of $110,000, accruing interest at 10% per
annum. The outstanding balance as of September 23, 1999 was $109,516. Mr. Cooper
also has a loan in the original principal amount of $14,697 accruing interest at
11% per annum. The outstanding balance as of September 23, 1999 was $9,403.
23
<PAGE>
Director William Blair has two lines of credit at the Bank which were originated
in April, 1999. Both lines of $50,000 and $220,000, respectively, accrue
interest at 9.25% per annum. The outstanding balances as of September 23, 1999
were $30,000 and $198,500, respectively.
President and Director Charles Lang has a loan with the Bank which originated in
December 1998 in the principal amount of $16,521, which accrues interest at
8.50% per annum. The outstanding balance as of September 23, 1999 was $14,225.
Additionally, Mr. Lang has a mortgage with the Bank which originated in August
1998 in the principal amount of $60,000, accruing interest at 8.00% per annum.
The outstanding balance as of September 23, 1999 was $57,554.
Director G. Allen Dickey has a line of credit with the Bank which originated in
July 1994 in the principal amount of $100,000. This line accrues interest at
9.75% per annum, and as of September 23, 1999, the outstanding balance was
$50,000.
Director Roger D. Sanford has five (5) mortgages with the Bank which were
originated, respectively, in November 1998, April 1994, December 1994, and
November 1998 (2 mortgages). The original principal amounts and interest rates
are, respectively, $20,000 at 8.0% per annum, $35,000 at 10.25% per annum,
$18,000 at 10.0% per annum, $17,000 at 8.0% per annum, and $18,000 at 8.0% per
annum. The outstanding balances as of September 23, 1999, respectively, were
$18,957, $3,441, $13,258, $16,095 and $17,066. Additionally, Mr. Sanford's
daughter has a loan with the Bank, which originated in June 1998 in the original
principal amount of $13,536. The loan accrues interest at 9.0% per annum and the
outstanding balance as of September 23, 1999 was $10,752.
We expect to have in the future, banking transactions, in the ordinary course of
our business with directors, officers, principal shareholders, and their
associates, on substantially the same terms, including interest rates and
collateral on loans, as those prevailing at the same time for comparable
transactions with others and which do not involve more than the normal risk of
collectibility or present other unfavorable features.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is Management's discussion and analysis of the financial condition
and results of operations of Tri-State 1st Bank, Inc. for the nine months
ended September 30, 1999 and 1998, and the years ended December 31, 1998 and
1997. The discussion should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere in this prospectus.
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 loans and
investment securities portfolio 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.
24
<PAGE>
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. Lending practices of the Bank have historically
focused on the origination and retention of real estate commercial mortgages,
one-to-four family mortgage loans and, to a lessor extent, working capital
commercial loans in the form of credit lines and term notes, personal loans,
automobile loans and home equity loans. Commercial real estate loans are granted
for the acquisition or improvement of real estate. Generally, commercial real
estate loans do not exceed 70% of the appraised value of the property pledged to
secure the transaction. The focus of prudent underwriting standards by the Bank
is designed to reduce the risk of loss on its 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 constant 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 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 tax-exempt
Municipal and State obligations.
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 rates to its customers. Historically, the Bank has had
minimal borrowings and relies mostly upon its customer deposit base as its
primary source of funds.
Comparison of Financial Condition at September 30, 1999 and December 31, 1998
The consolidated assets of Tri-State 1st Bank were $62,922,000 at September 30,
1999, an increase of $4,689,000 or 8.0% over total assets at December 31, 1998.
The increase in total assets for the first nine months of 1999 was fueled by the
Company's deposit growth, which increased by $4,071,000 or 7.9% during the same
period. Total earning assets, which principally include loans, investment
securities and federal funds sold equaled $55,617,000 at September 30, 1999 and
represented an increase of $3,840,000 or 7.4% over total earning assets at
December 31, 1998.
Total stockholders' equity equaled $5,054,000 at September 30, 1999,
representing a decrease of $24,000 from total equity at December 31, 1998. The
decrease in the Company's equity for the first nine months 1999 was a
result of a decrease in the accumulated other comprehensive income which is a
direct reflection of a temporary decline in the market values for the Bank's
investment securities available for sale, offset by net income earned, less
dividends paid to shareholders.
Federal Funds Sold and Investment Securities
- --------------------------------------------
Federal funds sold at September 30, 1999 totaled $2,000,000 up $900,000 from
year-end 1998. On an average basis, federal funds sold were $3.6 million for the
first nine months of 1999. Management has generally attempted to have available
between $2 million and $4 million in federal funds sold in order to meet the
liquidity needs and loan demand of bank customers. However, this range may shift
upward as deposits increase or as cash liquidity needs change.
25
<PAGE>
The investment securities available for sale portfolio was $21,190,000 at
September 30, 1999 compared to $19,958,000 at December 31, 1998, an increase of
$1,232,000 or 6.2%. Management's overall investment strategy is to invest funds
in the investment portfolio methodically in order to employ funds not required
for loan demand in a manner which will provide safety, liquidity and improved
earnings potential. Total purchases during the first nine months of 1999 totaled
$5.5 million, offset by regular pay downs, calls and maturities of $3.6 million.
In June and August of this year, the Federal Reserve Board raised short-term
interest rates, causing a decline in the market value of the Company's
investment portfolio. Unrealized losses on the available for sale portfolio
totaled $364,000 at September 30, 1999 compared to an unrealized gain of
$299,000 at December 31, 1998.
Investment securities held to maturity decreased $47,000 or 2.8% in the first
nine months of 1999 when compared to the prior year-end. This decrease was
attributable to scheduled principal repayments as there were no additions to the
held to maturity portfolio during the period.
Loans
- -----
Loans receivable at September 30, 1999 were $30,679,000 up $1,740,000 or 6.0%
from year-end 1998. Loan originations for the first nine months of 1999 have
exceeded originations from the same prior year period. Demand for commercial and
residential real-estate loans was strong during the period as commercial type
loans increased $2.1 million or 47.5% and residential real-estate loans
increased $1.5 million or 11.4%. Consumer loans also increased during the period
by $398,000 or 9.4% while commercial real-estate loans decreased. Much of the
increase in the loan portfolio can be attributed to a stable and healthy
economy, a favorable interest rate environment and the deployment of a Business
Development Officer by the Bank to generate new business within the Bank's
market area.
The Company's allowance for loan losses was $351,000 at September 30, 1999
compared to $340,000 at December 31, 1998. This represents an $11,000 or 3.2%
increase over December 31, 1998. Constituting the increase was a $56,000 loan
loss provision charged to operations during the first nine months of 1999 offset
by net charge-offs of $45,000. The charge-offs for the period related mostly to
various consumer-type installment loans.
Deposits and Borrowings of Funds
- --------------------------------
Total deposits increased $4,071,000 or 7.9% when compared to total deposits at
December 31, 1998. Although increases were experienced in almost all of the
Bank's deposit types, a significant portion of the growth occurred in time
deposits, which increased $2,959,000 or 18.5%. Savings increased $696,000 or
6.8%, money market accounts were up by $37,000 or 0.8% and demand deposits
increased $379,000 or 1.9%. The deposit growth for the first nine months of 1999
is due to the strategic expansion of the Bank's branch offices as well as an
ongoing commitment of the Bank to provide exceptional deposit services at a
competitive rate.
Total borrowings increased $678,000 or 43.3% at September 30, 1999 from year-end
1998. Total borrowings consist of securities sold under repurchase agreements,
which are agreements with "in-market" customers of the bank that are
collateralized by various securities and upon maturity, returned back to the
bank, and advances with the Federal Home Loan Bank of Cincinnati. During the
first nine months of 1999, repurchase agreements increased by $745,000 or 49.7%
while other borrowings decreased by $67,000. Business customer demand
contributed to the increase in repurchase agreements, while the decrease in
advances is attributable to the maturity of two separate advances with the
Federal Home Loan Bank of Cincinnati.
26
<PAGE>
Comparison of Financial Condition at December 31, 1998 and December 31, 1997
The consolidated assets of Tri-State 1/st/ Bank were $58,303,000 at December 31,
1998, an increase of $9,977,000 or 20.6% over assets at December 31, 1997. The
strong asset growth for 1998 was driven by the Company's exceptional deposit
growth experienced throughout 1998. Total deposits increased $8,446,000 or 19.7%
and were used to fund the $6,672,000 or 44.5% increase in total investment
securities and the $2,927,000 or 11.3% in loans receivable.
The investment securities available for sale portfolio was $19,958,000 at
December 31, 1998 compared to $13,088,000 at December 31, 1997, an increase of
$6,869,000 or 52.5%. The significant increase for 1998 was attributable to the
strong influx of deposit growth in the same period.
Investment securities held to maturity decreased $197,000 or 10.4% in 1998 when
compared to the prior year. This decrease was attributable to scheduled
maturities and principal repayments as there were no additions to the held to
maturity portfolio in 1998.
Loans grew 11.3% in 1998, increasing to $28,939,000 at December 31, 1998 from
$26,012,000 at prior end of year. Total loans originated for 1998 were
$13,343,000. This growth was due to an overall increase in loan demand.
Total deposits increased $8,446,000 or 19.7% when compared to total deposits at
December 31, 1997. Money Market accounts decreased by $446,000 or 8.8% while
savings increased $973,000 or 10.4%. The Company's core growth occurred mostly
in noninterest and interest-bearing demand deposits and time deposits which
increased $1,830,000 or 28.0%, $3,837,000 or 46.5%, and $2,252,000 or 16.4%,
respectively.
Total borrowings increased $891,000 or 131.7% at December 31, 1998 from year-end
1997. Securities sold under repurchase agreements increased $1,000,000 or 200.0%
when compared to the prior year period. Other borrowings decreased $109,000 or
62.0% as a result of scheduled principal and interest pay-downs on two advances
with the Federal Home Loan Bank of Cincinnati.
27
<PAGE>
Average Balances and Average Yields
- -----------------------------------
The following table sets forth certain information relating to the Company's
average balance sheets and statements of income for the nine months ending 1999
and 1998, and reflects the average yield on assets and average cost of
liabilities for the periods indicated. Such yields and costs are derived by
dividing income or expense by the average daily balance of earning assets or
interest bearing liabilities respectively, for the periods shown.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 1998
------------------------------------- -------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------------------------------------- -------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest bearing deposits $ 77 $ 3 5.19% $ 48 $ 2 5.56%
Federal funds sold 3,579 130 4.84% 4,548 193 5.66%
Taxable investment securities 12,462 540 5.78% 11,696 526 6.00%
Non taxable investment
securities (2) 9,678 346 7.22% 7,091 230 6.55%
Loans (1)(2) 29,663 2,099 9.43% 27,268 2,001 9.78%
---------- ---------- ----------- ---------- ---------- -----------
Total interest-earning assets 55,459 3,118 7.50% 50,651 2,952 7.77%
---------- ----------
Noninterest-earning assets 6,425 5,805
---------- ----------
Total assets $ 61,884 $ 56,456
========== ==========
Interest-bearing liabilities:
Interest bearing demand $ 12,052 248 2.74% $ 10,978 263 2.86%
Money Market Accounts 4,855 78 2.14% 4,909 62 2.25%
Savings deposits 10,901 203 2.48% 9,880 219 2.96%
Time deposits 17,944 675 5.02% 15,828 633 5.33%
Repurchase agreements 2,348 67 3.80% 1,554 54 4.63%
---------- ---------- ----------- ---------- ---------- -----------
Total interest-bearing liabilities 48,100 1,271 3.52% 43,149 1,231 3.80%
----------
Noninterest-bearing liabilities 8,747 8,885
Stockholders' equity 5,037 4,422
---------- ----------
Total liabilities and
stockholders' equity $ 61,884 $ 56,456
========== ==========
Net earning assets $ 7,359 $ 7,502
========== ==========
Net interest income $ 1,847 $ 1,721
========== ==========
Net interest spread (3) 3.97% 3.98%
=========== ===========
Net interest margin (4) 4.44% 4.53%
=========== ===========
</TABLE>
(1) For the purpose of these computations, non-accrual loans (if any) are
included in the daily average loan amounts outstanding and interest on
loans includes fee income.
(2) Yields are computed on a tax equivalent basis using a 34% federal income
tax rate.
(3) Net interest rate spread represents the difference between the average
yield on interest-earning assets on the average cost of interest-bearing
liabilities.
(4) Net interest margin is calculated by dividing the difference between total
interest earned and total paid by total interest earning assets.
28
<PAGE>
Average Balances and Average Yields
- -----------------------------------
The following table sets forth certain information relating to the Company's
average balance sheets and statements of income for the twelve months ending
1998 and 1997, and reflects the average yield on assets and average cost of
liabilities for the periods indicated. Such yields and costs are derived by
dividing income or expense by the average daily balance of earning assets or
interest bearing liabilities respectively, for the periods shown.
<TABLE>
<CAPTION>
For the Year Ended December 31,
------------------------------
1998 1997
------------------------------------- --------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------------------------------------- --------------------------------------
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold $ 4,311 $ 235 5.46% $ 2,493 $ 137 5.51%
Taxable investment securities 11,215 693 6.18% 8,227 517 6.29%
Non taxable investment
securities (2) 7,154 530 7.40% 4,729 356 7.52%
Loans (1)(2) 27,138 2,655 9.78% 25,394 2,507 9.87%
---------- ---------- ---------- ---------- ---------- ----------
Total interest-earning assets 49,818 4,113 8.26% 40,843 3,517 8.61%
---------- ---------- ----------
Noninterest-earning assets 5,339 4,772
---------- ----------
Total assets $ 55,157 $ 45,615
========== ==========
Interest-bearing liabilities:
Interest bearing demand $ 10,418 291 2.80% $ 8,035 220 2.74%
Money market accounts 4,918 143 2.91% 4,938 147 2.99%
Savings deposits 9,810 287 2.92% 8,429 254 3.01%
Time deposits 15,766 861 5.46% 12,845 684 5.32%
Repurchase agreements 1,278 56 4.42% 258 12 4.49%
Other Borrowings 118 8 6.71% 224 15 6.72%
---------- ---------- ---------- ---------- ---------- ----------
Total interest bearing liabilities 42,308 1,646 3.89% 34,729 1,332 3.84%
---------- ----------
Noninterest-bearing liabilities 8,033 6,620
Stockholders' equity 4,816 4,266
---------- ----------
Total liabilities and
stockholders' equity $ 55,157 $ 45,615
========== ==========
Net earning assets $ 7,510 $ 6,113
========== ==========
Net interest income $ 2,467 $ 2,185
========== ==========
Net interest spread (3) 4.37% 4.78%
========== ==========
Not interest margin (4) 4.95% 5.35%
========== ==========
</TABLE>
(1) For the purpose of these computations, non-accrual loans (if any) are
included in the daily average loan amounts outstanding and interest on
loans includes fee income.
(2) Yields are computed on a tax equivalent basis using a 34% federal income
tax rate.
(3) Net interest rate spread represents the difference between the average
yield on interest-earning assets on the average cost of interest-bearing
liabilities.
(4) Net interest margin is calculated by dividing the difference between total
interest earned and total paid by total interest earning assets.
29
<PAGE>
Rate/Volume Analysis
- --------------------
Changes in net interest income are attributable to three factors: (1) a change
in the volume of an interest-earning asset or interest-bearing liability, (2) a
change in interest rates or, (3) a change attributable to a combination of
changes in volume and rate. The following table 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 asset and interest-
bearing liability, information is provided on changes attributable to (a)
changes in volume (changes in volume multiplied by the prior interest rate); and
(b) changes in rates (changes in interest rates multiplied by the prior average
volume). The change in interest due to both rate and volume in the rate/volume
analysis table have been allocated to changes due to rate and volume in
proportion to the absolute amounts of the changes in each.
<TABLE>
<CAPTION>
Nine Months Ended September 30, Year Ended December 31
1999 vs. 1998 1998 vs. 1997
------------------------------ ----------------------
Total Total
Increase Increase
Volume Rate (Decrease) Volume Rate (Decrease)
----------- ------------ ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
(In Thousands)
Interest-earning assets:
Interest-bearing deposits $ (1) $ 1 $ - $ - $ - $ -
Federal funds sold (29) (33) (62) 99 (1) 98
Taxable investment securities 26 (12) 14 185 (9) 176
Nontaxable investment securities(1) 22 94 116 179 (5) 174
Loans 137 (39) 98 170 (23) 147
----------- ------------ ------------- ------------ ------------ -------------
Total interest-earning assets 155 11 166 633 (38) 595
----------- ------------ ------------- ------------ ------------ -------------
Interest-bearing liabilities:
Interest-bearing demand deposits (207) 213 6 67 5 72
Money market deposits (1) (4) (5) - (4) (4)
Savings deposits 28 (44) (16) 39 (7) 32
Time deposits 113 (71) 42 159 16 175
Repurchase agreements 16 ( 3) 13 45 - 45
----------- ------------ ------------- ------------ ------------ -------------
(51) 91 40 310 10 320
----------- ------------ ------------- ------------ ------------ -------------
Total interest-bearing liabilities
Net change in net interest income $ 206 $ (80) $ 126 $ 323 $ (48) $ 275
=========== ============ ============= ============ ============ =============
<CAPTION>
Year Ended December 31
1997 vs. 1996
----------------------
Total
Increase
Volume Rate (Decrease)
----------- ----------- -----------
<S> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits $ - $ - $ -
Federal funds sold (19) 5 (14)
Taxable investment securities 36 14 50
Nontaxable investment securities(1) 93 (1) 92
Loans 270 (9) 261
----------- ----------- -----------
Total interest-earning assets 380 9 389
----------- ----------- -----------
Interest-bearing liabilities:
Interest-bearing demand deposits 15 (3) 12
Money market deposits 4 (2) 2
Savings deposits 27 - 27
Time deposits 57 (3) 54
Repurchase agreements - 11 11
----------- ----------- -----------
Total interest-bearing liabilities 103 3 106
----------- ----------- -----------
Net change in net interest income $ 277 $ 6 $ 283
=========== =========== ===========
</TABLE>
(1) Computed on a tax equivalent basis using a 34% federal income tax rate.
30
<PAGE>
Comparison of Results of Operations for the Nine Months Ended September 30, 1999
and 1998.
Net income for the nine months ended September 30, 1999 and 1998 was $428,000
respectively. On a per share basis, net income for the 1999 period was $0.76
and $0.74 for basic and diluted shares, respectively. This compares to $0.76
and $0.75 for basic and diluted shares, respectively in 1998. While net income
remained unchanged from 1998 to 1999, net interest income and noninterest income
were up moderately in 1999. However these increases were offset by increases in
noninterest expenses and provision for loan losses. Noninterest expenses were
up mostly as a result of the Bank expanding its branch network through the
addition of an in-store Wal-Mart office that occurred in late 1998 and the
formation of a new non-bank subsidiary, Gateminder Corporation, in the second
quarter of 1999.
Interest income on loans increased $98,000 or 4.9% for the nine months ended
September 30, 1999 compared to the same prior year period. This increase was a
result of a $2.4 million or 8.8% increase in the average loan balance
outstanding during the 1999 period offset by a 33 basis point decrease on the
yield earned.
Interest income on federal funds sold decreased $63,000 or 32.6% during the
first nine months of 1999 when compared to the same prior year period. This
decrease was a result of a $970,000 or 21.3% decrease in the average balance
outstanding during the 1999 period as well as a decrease of 83 basis points in
the yield earned.
Interest income earned on investment securities increased during the first nine
months of 1999 by $130,000 or 17.2% from the same prior year period. This
increase was a result of an increase of $2.4 million or 10.3% in the average
balance outstanding as well as a slight increase in the yield earned on the
investment portfolio.
Interest expense on deposits increased $27,000 or 2.3% in the first nine months
of 1999 when compared to the same prior year period. This increase was due to an
increase of $5.0 million or 11.5% in the average balance of deposits
outstanding, offset by a decrease of 24 basis points in the rate paid on these
funds.
Interest expense on repurchase agreements and other borrowings increased $13,000
or 24.1% for the nine months ended September 30, 1999 when compared to the same
prior year period. This increase was due to an increase of $794,000 or 51.1% in
the average balance of borrowed funds outstanding, offset by a decrease of 32
basis points in the rate paid on these funds.
Net interest income is the amount that interest income generated by earning
assets, including securities and loans, exceeds interest expense associated with
interest-bearing liabilities, including deposits and borrowed funds. Net
interest income for the nine month period ended September 30, 1999 totaled
$1,847,000, an increase of $126,000, or 7.3%, over the same prior year period.
The increase in net interest income was the result of an increase in the
Company's average earning assets offset by lesser increases in the average
balance and cost of funds on interest-bearing liabilities.
The provision for loan losses charged to operations in the first nine months of
1999 was $56,000, an increase of $15,000 or 36.6% from the prior year period.
The amount of the provision for both periods was based on such factors as the
credit risks inherent in the loan portfolio, increase in the balance of the loan
portfolio outstanding and Management's ongoing analysis of the adequacy of the
allowance for loan losses.
Total noninterest income increased $51,000 or 14.5% in the first nine months of
1999 compared to the same prior year period. Other income increased $7,000 or
5.4%. Service fees on deposit accounts increased $44,000 or 19.6% relating to an
increase in the number of deposit accounts serviced by the bank and to a lesser
extent, an overall increase in service related fees charged to customers.
31
<PAGE>
Total salary and employee benefits increased $109,000 or 15.0% during the nine
months ended September 30, 1999. Salaries and wages increased primarily due to
the hiring of additional personnel throughout the past twelve months ended
September 30, 1999, and to a lesser extent, normal merit increases relating to
existing employees. Total full-time equivalent employees increased by 11.9% from
September 30, 1998 to September 30, 1999 as a result of increased staffing level
needs. Employee benefit costs were also up in the first nine months of 1999
with much of the increase stemming from increased health insurance costs.
Net occupancy expense increased $50,000 or 34.3% in the first nine months of
1999 primarily as a result of the addition of the Wal-Mart in-store branch,
expansion of the main office facility and an overall general increase in
occupancy costs.
Furniture and equipment expense increased $9,000 or 7.4% in the first nine
months of 1999 when compared to the same prior year period. This increase is
attributable to increases in capital investments relating to new equipment and
furniture, resulting in higher depreciation costs.
Other expenses increased $22,000 or 4.3%, in the first nine months of 1999 due
to increases in overall general and administrative expenses such as, stationery
and printing, postage and telephone costs and MAC expenses.
The provision for income tax was $72,000 for the first nine months of 1999
Compared to $100,000 in the same prior year period. This represents a decrease
of $28,000 and is due to a decrease in taxable income.
Comparison of Results of Operations for the Years Ended December 31, 1998 and
1997
The Company's 1998 net income was $547,911, increasing $22,856, or 4.4%, from
1997's net income of $525,055. On a per share basis net income for 1998 was
$1.21 and $1.20 reflected on a basic and diluted earnings per share basis,
respectively. This compares to 1997's net income per share of $1.16 (for basic
and diluted). Average shares outstanding, which are used to calculate net
income on a per share basis, increased by 10% in 1998 as a result of Tri-State
paying a stock dividend to shareholders in June of 1998. The increase in net
income for 1998 was achieved through strong increases in net interest income and
noninterest income, offset by increases in noninterest expenses.
Interest income on loans increased $149,000 or 5.9% during 1998 when compared to
1997. This increase was a result of a $1,745,000 or 6.9% increase in the average
loan balance outstanding during the 1998 period offset by a decrease of 9 basis
points on the yield earned.
Interest income on federal funds sold increased $98,000 or 72.9% during 1998
when compared to 1997. This increase was a result of a $1,817,000 or 72.9%
increase in the average balance outstanding during the 1998 period offset by a
decrease on the yield earned.
Interest income earned on investment securities increased in 1998 by $291,000 or
38.7% from 1997. This increase was a result of an increase of $5,413,000 or
41.8% in the average balance outstanding offset by a decrease in the yield
earned on the investment portfolio.
Interest expense on deposits for 1998 increased $276,000 or 21.2% over 1997's
interest expense due to a $6,665,000 or 19.5% increase in total average
interest-bearing deposits outstanding in 1998 as well as an increase in the cost
of funds paid on these deposits during the same period.
Interest expense on repurchase agreements and other borrowings increased $38,000
or 141.2% in 1998 when compared to 1997. This increase was due to an increase of
$914,000 or 189.5% in the average balance of borrowed funds outstanding, offset
by a decrease in the rate paid on these funds.
32
<PAGE>
Net interest income for 1998 totaled $2,287,000, an increase of $223,000, or
10.8%, over 1997. The increase in net interest income was the result of an
increase in Tri-State's average earning assets offset by a slight decrease on
the yield earned on these assets, offset by lessor increases in the average
balance and cost of funds on interest-bearing liabilities.
Interest on loans to and investments in securities of states and political
subdivisions are not fully subject to federal income tax. As such, the pretax
yields stated on these assets are lower than taxable assets of similar risk and
maturity. Therefore, it is also meaningful to analyze net interest income on a
tax equivalent basis. The tax equivalent adjustment is based on the federal
corporate income tax rate of 34%. Net interest income on a tax equivalent basis
increased $282,000, or 12.9%, in 1998.
Net interest margin is equal to net interest income on a tax equivalent basis
divided by average earning assets. It is affected by changes in the level of
earning assets, the proportion of earning assets funded by noninterest-bearing
liabilities and interest rate spread. The table that follows illustrates that
the net interest margin was 4.95% in 1998 compared to 5.35% in 1997. The
decrease of 40 basis points in the net interest margin was mostly attributable
to an overall lower rate earned on total interest-earning assets and a slightly
higher cost of funds on interest-bearing liabilities.
The provision for loan losses charged to operations in 1998 and 1997 was
$54,000. Actual losses, net of recoveries, were $23,000 in 1998, and $35,000 in
1997. Net charge-offs as a percentage of the balance of the allowance for loan
losses at the beginning of the year was 7.5% and 12.2% in 1998 and 1997,
respectively. The amount of the provision for both periods was based on such
factors as the increase in the balance of the loan portfolio outstanding and
Management's ongoing analysis of the adequacy of the allowance for loan losses.
Total noninterest income increased $136,000 or 38.6% in 1998 compared to 1997.
Other income increased $73,000 or 68.2% in 1998 and was attributable to an
increase in ATM-related fees, an increase in insurance commissions and an
overall increase in other related service fees. Service fees on deposit
accounts increased $54,000 or 21.6% which was related to the increase in the
number of deposit accounts serviced by the bank. Net gains or (losses) from the
sale of securities increased in 1998 as a result of the sale of $600,000 in
investment securities available for sale at a gross gain of $6,000 compared to a
gross loss of $3,000 from the sale of $348,000 securities in 1997.
Total salary and employee benefits increased $213,000 or 28.0% in 1998.
Salaries and wages increased $180,000 or 27.2% primarily due to the hiring of
additional personnel throughout 1998, and to a lessor extent, normal merit
increases relating to existing employees. Total full-time equivalent employees
increased 17% in 1998 as a result of increased staffing level needs and the
opening of the new Wal-Mart in-store branch. Total employee benefit costs also
increased in 1998 with much of the increase stemming from increased health
insurance costs.
Net occupancy expense increased $32,000 or 17.9% in 1998 and was primarily
associated with the addition of the Wal-Mart in-store branch office as well as
an overall general increase in occupancy costs.
Furniture and equipment expense increased $32,000 or 23.6% from 1997 to 1998.
This increase is attributable to increases in capital investments relating to
new equipment and furniture and resulted in higher depreciation costs. In
addition, the Bank opened the Wal-Mart in-store branch office during 1998, also
increasing furniture and equipment costs. Other expenses increased $96,000 or
15.6%, in 1998 which was due to increases in overall general and administrative
expenses such as, stationery and printing, postage and telephone costs,
accounting and exam related fees and MAC expenses.
The provision for income tax was $115,000 in 1998 compared to $151,000 in 1997.
This represents a decrease of $36,000 or 23.8% and is due to an increase in tax
exempt income, offset by an overall decrease in taxable income.
33
<PAGE>
Liquidity
The liquidity of a banking institution reflects its ability to provide funds to
meet loan requests, to accommodate the possible outflows of deposits and to take
advantage of interest rate market opportunities. It requires continuous
analysis by management in order to match the maturities of short-term loans and
investments with the various types of deposits and borrowings. Bank liquidity
is normally considered in terms of the nature and the mix of the Bank's sources
and uses of funds.
The Bank's primary sources of funds are deposits, proceeds from principal and
interest payments on loans and mortgage-backed securities and interest payments
and maturities on investment securities. While scheduled principal repayments
on loans and mortgage-backed securities and interest payments on investment
securities are a relatively predictable source of funds, deposit outflows and
mortgage-backed prepayments are greatly influenced by general interest rates,
economic conditions, competition and other factors.
Management is not aware of any known trends, events or uncertainties that would
have a material effect on the liquidity, capital resources or operations of the
Corporation. Management is not aware of any current recommendations by the
regulatory authorities, which, if implemented, would have a material effect on
the liquidity, capital resources or operations of the Company.
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.
The effects of inflation on the local economy and Tri-State's operating results
have been relatively modest for the past several years. However, 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 or 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 the acceptable performance levels.
Lending Activities
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.
34
<PAGE>
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.
At September 30, 1999, the Bank's loan portfolio totaled $30.7 million of which
$15.1 million or 49.2% was residential real estate mortgage loans, and $6.6
million or 21.4% of total loans were commercial and agricultural, and $4.6
million or 15.0% were consumer loans. Commercial real estate mortgages
comprised $4.0 million or 13.0% of the portfolio, while real estate construction
loans totaled $467,000 or 1.5%.
The following table sets forth the composition of the loan portfolio by type of
loan at the dates indicated.
<TABLE>
<CAPTION>
At September 30, At December 31,
-----------------------------------------------
1999 1998 1997
-------------------- ---------------------- --------------------
Amount Percent Amount Percent Amount Percent
-------------------- ---------------------- --------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial and agricultural $ 6,562 21.37% $ 4,444 15.34% $ 5,639 21.65%
Real estate mortgages:
Construction 467 1.52% - - - -
Residential 15,103 49.17% 13,559 46.80% 12,192 46.81%
Commercial 3,988 12.98% 6,772 23.37% 4,477 17.19%
Consumer Loans 4,596 14.96% 4,199 14.49% 3,737 14.35%
------------------ -------------------- ------------------
Total 30,716 100.00% 28,974 100.00% 26,045 100.00%
====== ====== ======
Less:
Net deferred loan
origination fees
and costs 37 35 32
Allowance for
possible loan losses 351 340 309
-------- ---------- --------
Net loans $ 30,328 $ 28,599 $ 25,704
======== ========== ========
</TABLE>
35
<PAGE>
Non-Performing Assets
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 realestate 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 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.
Mortgage loans on one-to-four family properties and all consumer loans are large
groups of smaller balance homogeneous loans and are measured for impairment
collectively. Loans that experience insignificant payment delays, which are
defined as 90 days or less, generally are not classified as impaired.
Management determines the significance of payment delays on a case - by - case
basis, taking into consideration all of the circumstances surrounding the loan
and the borrower, including the length of the delay, the borrower's prior
payment record, and the amount of shortfall in relation to the principal and
interest owed.
On September 30, 1999, non-performing loans, which are comprised of commercial,
mortgage and consumer loans contractually past due 90 days or more as to
interest or principal payments but not on nonaccrual status because of
collateral considerations or collection status, and nonaccrual commercial loan
types which are not considered impaired, amounted to $116,000, a decrease of
$63,000 or 35.2% from December 31, 1998. This decrease was a result of a
decrease in loans past due 90 days or more resulting from ongoing collection
efforts. At September 30, 1999, loans past due 90 days or more consisted of
five separate loans, four of which are secured by residential real estate and
are considered by management to be adequately secured. There were no impaired
loans at September 30, 1999.
In September 1999, the Bank transferred a $27,000 loan balance that was past due
90 days or more, to real estate owned. The loan was secured by residential real
estate which the Bank acquired through Sheriff's sale in September, 1999. The
Bank intends to liquidate this asset in an orderly manner and anticipates no
losses to be incurred.
36
<PAGE>
The following table sets forth information regarding non-performing assets:
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, At December 31,
----------------- ----------------
1999 1998 1998 1997
------ ------ ------ ------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Loans past due 90 days or more
and still accruing interest $ 116 $ 249 $ 179 $ 102
Nonaccrual loans - - - -
Impaired loans - - - -
======= ====== ====== ======
Total non-performing loans 116 249 179 102
Other real estate owned 21 - - -
======= ====== ====== ======
Total non-performing assets $ 137 $ 249 $ 179 $ 102
======= ====== ====== ======
Non-performing loans as a
percentage of total loans 0.38% 0.89% 0.62% 0.39%
Non-performing assets as a percentage
of total assets 0.22% 0.44% 0.31% 0.21%
Non-performing assets as a percentage
of allowance for loan losses 39.0% 78.4% 52.7% 33.0%
</TABLE>
Allowance for Loan Losses
The possibility of loan losses is one of the inherent risks associated with
lending. Management realizes, and experience indicates, that losses may exist
at any point in time in the loan portfolio. As a result, periodic provisions
are made to the allowance for loan losses each year and charged to expense.
Such provisions are made to maintain the allowance at a level sufficient to
recognize this inherent risk.
The current expense reflecting expected credit losses is referred to as the
provision for loan losses on the consolidated statements of income. Actual
losses on loans are charged against the allowance for loan losses, which is a
reserve built up on the consolidated balance sheet. The Company's policy is to
charge-off loans when, in Management's opinion, the collection of loan principal
is in doubt. All loans charged-off are subject to continuous review and
concerted efforts are made to maximize the recovery of charged-off loans.
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, Year 2000 issues and inherent risks in the various credit portfolios.
37
<PAGE>
The following table illustrates the activity in the allowance for loan losses:
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, At December 31,
----------------- ------------------
1999 1998 1998 1997
----------------- ------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Balance, January 1 $ 340 $ 309 $ 309 $ 290
Charge - offs,
Commercial and agricultural - - - -
Real estate mortgages 7 5 5 -
Consumer 50 32 33 47
----- ----- ----- -----
Total charge - offs 57 37 38 47
----- ----- ----- -----
Loan recoveries;
Commercial and agricultural - - - -
Real estate mortgages 5 - - -
Consumer 7 13 15 12
----- ----- ----- -----
Total loan recoveries 12 13 15 12
----- ----- ----- -----
Net charge - offs 45 24 23 35
----- ----- ----- -----
Provision charged to operations 56 41 54 54
----- ----- ----- -----
Balance at period end $ 351 $ 326 $ 340 $ 309
===== ===== ===== =====
Net charge - offs as a percent
of average loans 0.15% 0.09% 0.08% 0.14%
</TABLE>
The following table provides a breakdown of the allowance for loan losses for
the periods indicated:
<TABLE>
<CAPTION>
At September 30, At December 31,
----------------------------------------------
1999 1998 1997
---------------------- -------------------- ----------------------
% of Loans % of Loans % of Loans
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
---------------------- -------------------- ----------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial and agricultural $ 25 21.37% $ 36 15.34% $ 33 21.65%
Real estate mortgages:
Construction 6 1.52% - - -
Residential 72 49.17% 85 46.80% 78 46.81%
Commercial 48 12.98% 44 23.37% 24 17.19%
Consumer 87 14.96% 90 14.49% 96 14.35%
------ ------ ------
Unallocated 113 85 78
---- ---- ----
Total $351 100.00% $340 100.00% $309 100.00%
==== ====== ==== ====== ==== ======
</TABLE>
38
<PAGE>
The Company believes that the allowance for loan losses at September 30, 1999 of
$351,000 is adequate to cover losses inherent in the portfolio as of such date.
However, there can be no assurance that the Company will not sustain losses in
future periods, which could be substantial in relation to the size of the
allowance at September 30, 1999.
Investment Portfolio
Income from investing activities provides a significant portion of the Bank's
total income. The Bank maintains an investment portfolio of securities such as
U.S. Government and agency securities, state and municipal debt obligations, and
to a lesser extent, mortgage-backed securities. Management generally maintains
an investment portfolio with relatively short maturities to minimize overall
interest rate risk.
Investment decisions are made within policy guidelines established by the Board
of Directors. This policy is aimed at maintaining a diversified investment
portfolio, which complements the overall asset/liability and liquidity
objectives of the Bank, while limiting the related credit risk to an acceptable
level.
39
<PAGE>
The following table sets forth the carrying value of the Bank's investment
portfolio including equity securities at the dates indicated.
<TABLE>
<CAPTION>
At September 30, At December 31,
------------------------------------------
1999 1998 1997
------------------------- --------------------------------------------
Available Held to Available Held to Available Held to
for Sale Maturity for Sale Maturity for Sale Maturity
------------- ------------ ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities and
other Government agency
securities $ 11,842 $ - $ 11,852 $ - $ 8,565 $ -
Obligations of states and
political subdivisions 8,813 1,499 7,513 1,499 4,069 1,599
Mortgage-backed securities 269 154 356 201 231 298
Equity securities 266 - 237 - 223 -
------------- ------------ ------------- ------------ ------------- ------------
$ 21,190 $ 1,653 $ 19,958 $ 1,700 $ 13,088 $ 1,897
============= ============ ============= ============ ============= ============
</TABLE>
40
<PAGE>
The following table sets forth certain information regarding the carrying
values, weighted average yields, and contractual maturities of the Bank's
investment securities portfolio at September 30, 1999, exclusive of investments
in equity securities of the Federal Reserve and Federal Home Loan Banks.
<TABLE>
<CAPTION>
After One Year But After Five Years But
Within One Year Within Five Years Within Ten Years After Ten Years Total
------------------ --------------------- -------------------- ------------------- ------------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------------------ --------------------- -------------------- ------------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury securities
and other U.S. Government
agency securities $2,894 5.12% $7,536 5.91% $1,412 6.30% $ -- --% $11,842 5.76%
Obligations of states and
political subdivisions -- -- 1,896 6.14 6,005 4.95 912 5.21 8,813 5.23
Mortgage-backed
securities -- -- -- -- 188 6.00 81 6.48 269 6.14
------ ---- ------ ---- ------ ---- ------ ---- ------- ----
Total $2,894 5.12% $9,432 5.96% $7,605 5.23% $ 993 5.32% $20,924 5.55%
====== ==== ====== ==== ====== ==== ====== ==== ======= ====
HELD TO MATURITY
Obligations of states and
political subdivisions $ 181 6.24% $ 507 4.96% $ 811 5.17% $ -- --% $ 1,499 5.23%
Mortgage-backed
securities -- -- 122 6.51 -- -- 32 8.68 154 6.96
------ ---- ------ ---- ------ ---- ------ ---- ------- ----
Total $ 181 6.24% $ 629 5.26% $ 811 5.17% $ 32 8.68% $ 1,653 5.39%
====== ==== ====== ==== ====== ==== ====== ==== ======= ====
</TABLE>
41
<PAGE>
Sources of Funds
Deposits are the primary source of the Bank's funds for lending and investing
activities. Secondary sources are derived from principal and interest payments
on loans and mortgage-backed securities and interest payments and maturities on
investment securities, repurchase agreements and borrowings with the Federal
Home Loan Bank of Cincinnati ("FHLB"). While scheduled principal repayments on
loans and mortgage-backed securities and interest payments on investment
securities are a relatively predictable source of funds, deposit outflows and
mortgage-backed prepayments are greatly influenced by general interest rates,
economic conditions, competition and other factors.
The Bank offers a wide variety of retail deposit account products to both
consumer and commercial deposit customers. Time deposits, consisting principally
of retail fixed-rate certificates of deposit, represent approximately 34% of the
deposit portfolio at September 30, 1999. Core deposits considered to be
noninterest bearing and interest bearing demand deposit accounts, savings
deposits, and money market accounts accounted for 66% of the deposit portfolio
at September 30, 1999.
The Bank intends to continue to emphasize retail deposit accounts as its primary
source of funds. Deposit products are promoted through advertising in the Bank's
local market area. The Bank does not broker certificates of deposits. The Bank's
market strategy is based on its reputation as a community bank that provides
quality products and personal customer service.
The Bank pays interest rates on its interest bearing deposit products that are
competitive with rates offered by other financial institutions in its market
area. Interest rates on deposits are reviewed weekly by management considering a
number of factors including (1) the Bank's internal cost of funds; (2) rates
offered by competing financial institutions; (3) investing and lending
opportunities; and (4) the Bank's liquidity position.
The following table sets forth the types of deposits at the periods indicated.
<TABLE>
<CAPTION>
At September 30, At December 31,
----------------------- -------------------------------------------------
1999 1998 1997
----------------------- -------------------- -------------------
Average Average Average
Balance Rate Balance Rate Balance Rate
---------- -------- --------- -------- --------- ------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand $ 7,839 -- $ 7,155 -- $ 6,300 --
Interest bearing demand 12,052 2.25% 10,418 2.25% 8,073 2.75%
Savings 10,901 2.50 9,810 2.50 8,492 2.99
Money market 4,855 2.75 4,918 2.75 4,946 2.99
Certificates of deposit 17,944 4.89 15,766 5.29 12,921 5.37
---------- --------- ---------
Total $53,591 $48,067 $40,732
========== ========= =========
</TABLE>
42
<PAGE>
The Bank offers certificates of deposits in denominations of $100,000 or more.
These accounts totaled $5.3 million at September 30, 1999. The following table
sets forth the remaining maturity of time certificates of deposits in
denominations of $100,000 or more.
September 30,
1999
------------------
(In thousands)
3 months or less $2,320
Over 3 months through 6 months 1,968
Over 6 months through 12 months 818
Over 12 months 232
---------
$5,338
=========
At September 30, 1999 other borrowings consisted solely of securities sold under
repurchase agreements, which are agreements with "in-market" customers of the
bank that are collateralized by various securities and upon maturity, returned
back to the Bank. The Bank also has ready access to funds through credit
facilities made available by the FHLB.
The outstanding balances and related information for securities sold under
agreement to repurchase is summarized as follows:
<TABLE>
<CAPTION>
December
September 30, -----------------------------------------------------
1999 1998 1997
----------------------- ---------------------- -----------------------
Amount Rate Amount Rate Amount Rate
--------- -------- ---------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at period end $2,245,000 3.96% $1,500,000 3.64% $500,000 4.49%
Average balance outstanding
during the period 2,348,000 3.80% 1,278,461 4.42% 258,064 4.51%
Maximum amount outstanding
at any month 2,735,190 - 1,500,000 - 500,000 -
</TABLE>
Average amounts outstanding during the year represent daily average balances and
average interest rates represent interest expense divided by the related average
balance.
43
<PAGE>
SELECTED FINANCIAL DATA
The following tables set forth certain information concerning the
consolidated position and certain performance ratios of the Company and its
subsidiaries at the date indicated:
<TABLE>
<CAPTION>
At or for the
Nine Months
Ended At or for the Year Ended December 31,
------------- ---------------------------------------------------------------
September 30,
1999 1998 1997 1996 1995 1994
------------- ----------- ----------- ----------- ----------- -----------
(Dollars in Thousands, Except Per Share Information)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data
- ------------------
Assets $ 62,992 $ 58,303 $ 48,326 $ 43,175 $ 38,636 $ 34,915
Investment securities 22,843 21,657 14,985 12,187 10,477 9,840
Loans 30,679 28,939 26,012 24,052 22,117 19,048
Allowance for loan losses 351 340 309 290 266 233
Deposits 55,420 51,349 42,904 38,690 34,358 31,111
Other borrowings - 67 177 279 375 115
Stockholder's equity 5,054 5,078 4,515 4,036 3,686 3,225
Summary of Operations
- ---------------------
Interest income $ 3,118 $ 3,933 $ 3,396 $ 3,039 $ 2,704 $ 2,274
Interest expense 1,271 1,646 1,332 1,223 1,043 825
--------- -------- -------- -------- -------- --------
Net interest income 1,847 2,287 2,064 1,816 1,661 1,449
Provision for loan losses 56 54 54 49 68 50
--------- -------- -------- -------- -------- --------
Net interest income after
provision for loan losses 1,791 2,233 2,010 1,767 1,593 1,399
Other operating income 404 487 351 349 309 248
Other operating expense 1,695 2,057 1,685 1,485 1,355 1,290
--------- -------- -------- -------- -------- --------
Income before income taxes 500 663 676 631 547 357
Income taxes 72 115 151 161 145 75
--------- -------- -------- -------- -------- --------
Net income $ 428 $ 548 $ 525 $ 470 $ 402 $ 282
========= ======== ======== ======== ======== ========
Per Share Data (1)
- ------------------
Basic Earnings $ 0.76 $ 0.97 $ 0.93 $ 0.83 $ 0.71 $ 0.50
Diluted earnings 0.74 0.96 0.93 0.83 0.71 0.50
Cash dividends declared 0.12 0.23 0.21 0.18 0.18 0.16
Book value 8.93 8.97 7.98 7.13 6.51 5.70
Average shares outstanding 566,186 564,836 564,836 564,836 564,836 564,836
Market Information (1)
- ----------------------
High $ 27.00 $ 26.40 $ 15.84 $ 12.24 $ 11.43 $ 6.84
Low 23.25 20.80 11.52 10.80 7.47 6.66
At period end 27.00 26.40 15.84 12.24 11.43 6.84
Selected Financial Ratios
- -------------------------
Return on average assets 0.92% 0.99% 1.15% 1.14% 1.12% 0.87%
Return on average equity 11.33 11.38 12.31 12.21 11.54 8.79
Average equity to average assets 8.14 8.73 9.35 9.33 9.63 9.94
Equity to assets at end of period 8.02 8.71 9.34 9.35 9.54 9.24
Non-performing assets to total assets 0.22 0.30 0.21 0.80 1.11 0.74
Non-performing loans to total loans 0.38 0.59 0.39 1.44 1.44 0.76
</TABLE>
(1) Adjusted for 5-for-4 stock split effective August 25, 1999, a 10% stock
dividend effective June 26, 1998 and 2-for-1 stock splits effective July 9, 1997
and February 22, 1995
44
<PAGE>
SUPERVISION AND REGULATION
The following is a summary of certain statutes and regulations affecting us.
This summary is qualified in its entirety by such statutes and regulations.
The Company
We are a registered bank holding company under the Bank Holding Company Act of
1956 (the "Banking Act") as amended, and as such are subject to regulation by
the Federal Reserve Board ("FRB"). A bank holding company is required to file
with the FRB annual reports and other information regarding its business
operations and those of its subsidiaries. A bank holding company and its
subsidiary banks are also subject to examination by the FRB.
The Banking Act requires every bank holding company to obtain the prior approval
of the FRB before acquiring substantially all the assets of any bank or bank
holding company or ownership or control of any voting shares of any bank or bank
holding company, if, after such acquisition, it would own or control, directly
or indirectly, more than five percent (5%) of the voting shares of such bank or
bank holding company. The Banking Act currently permits bank holding companies
from any state to acquire banks and bank holding companies in any other state,
subject to certain conditions, including certain nationwide and state-imposed
concentration limits. Bank holding companies have the ability, subject to
certain restrictions, including state opt-out provisions, to acquire by
acquisition or merger branches outside their home state. The establishment of
new interstate branches also is possible in those states that expressly permit
it. Competition may increase further as banks branch across state lines and
enter new markets.
The Banking Act does not place territorial restrictions on the activities of
nonbank subsidiaries of a bank holding company.
In approving acquisitions by bank holding companies of companies engaged in
banking-related activities, the FRB considers whether the performance of any
such activity by a subsidiary of the holding company reasonably can be expected
to produce benefits to the public, such as greater convenience, increased
competition, or gains in efficiency, which outweigh possible adverse effects,
such as overconcentration of resources, decrease of competition, conflicts of
interest, or unsound banking practices.
Bank holding companies are restricted in, and subject to, limitations regarding
transactions with subsidiaries and other affiliates.
In addition, bank holding companies and their subsidiaries are prohibited from
engaging in certain "tie in" arrangements in connection with any extensions of
credit, leases, sales of property, or furnishing of services.
In accordance with FRB policy, Tri-State will be expected to act as a source of
financial strength to the Bank and to commit resources to support the Bank in
circumstances in which Tri-State might not otherwise do so. Under the Banking
Act, the FRB may require a bank holding company to terminate any activity or
relinquish control of a nonbank subsidiary, other than a nonbank subsidiary of a
bank, upon the FRB's determination that such activity or control constitutes a
serious risk to the financial soundness or stability of any subsidiary
depository institution of the bank holding company. Further, federal bank
regulatory authorities have additional discretion to require a bank holding
company to divest itself of any bank or nonbank subsidiary if the agency
determines that divestiture may aid the depository institution's financial
condition.
45
<PAGE>
Bank
The Bank is a national banking association incorporated under the laws of the
United States and subject to examination by the Office of the Comptroller of the
Currency ("OCC"). Deposits in the bank are insured by the Federal Deposit
Insurance Corporation ("FDIC") up to a maximum amount, which is generally
$100,000 per depositor subject to aggregation rules.
The OCC and the FDIC regulate or monitor virtually all areas of the bank's
operations, including
. security devices and procedures,
. adequacy of capitalization and loss reserves,
. loans,
. investments,
. borrowings,
. deposits,
. mergers,
. issuances of securities,
. payment of dividends,
. interest rates payable on deposits,
. interest rates or fees chargeable on loans,
. establishment of branches,
. corporate reorganizations,
. maintenance of books and records, and
. adequacy of staff training to carry on safe lending and deposit
gathering practices.
The OCC requires the Bank to maintain certain capital ratios and imposes
limitations on the Bank's aggregate investment in real estate, bank premises,
and furniture and fixtures and to prepare quarterly reports on the Bank's
financial condition and to conduct an annual audit of its financial affairs in
compliance with its minimum standards and procedures.
Under the FDIC Improvement Act, all insured institutions must undergo regular on
site examinations by their appropriate banking agency. The cost of examinations
of insured depository institutions and any affiliates may be assessed by the
appropriate agency against each institution or affiliate as it deems necessary
or appropriate. Insured institutions are required to submit annual reports to
the FDIC, their federal regulatory agency, and state supervisor when applicable.
The FDIC Improvement Act directs the FDIC to develop a method for insured
depository institutions to provide supplemental disclosure of the estimated fair
market value of assets and liabilities, to the extent feasible and practicable,
in any balance sheet, financial statement, report of condition or any other
report of any insured depository institution. The FDIC Improvement Act also
requires the federal banking regulatory agencies to prescribe, by regulation,
standards for all insured depository institutions and depository institution
holding companies relating, among other things, to the following:
. internal controls,
. information systems and audit systems,
. loan documentation,
. credit underwriting,
. interest rate risk exposure, and
. asset quality.
46
<PAGE>
National banks and their holding companies which have been chartered or
registered or have undergone a change in control within the past two years or
which have been deemed by the OCC or the FRB to be troubled institutions must
give the OCC or the FRB thirty days prior notice of the appointment of any
senior executive officer or director. Within the thirty day period, the OCC or
the FRB, as the case may be, may approve or disapprove any such appointment.
Deposit Insurance.
The FDIC establishes rates for the payment of premiums by federally insured
banks and thrifts for deposit insurance. A separate Bank Insurance Fund and
Savings Association Insurance Fund are maintained for commercial banks and
savings associations with insurance premiums from the industry used to offset
losses from insurance payouts when banks and thrifts fail. In 1993, the FDIC
adopted a rule which establishes a risk-based deposit insurance premium system
for all insured depository institutions. Under this system, until mid-1995
depository institutions paid to Bank Insurance Fund or Savings Association
Insurance Fund from $0.23 to $0.31 per $100 of insured deposits depending on its
capital levels and risk profile, as determined by its primary federal regulator
on a semiannual basis. Once the Bank Insurance Fund reached its legally
mandated reserve ratio in mid-1995, the FDIC lowered premiums for well-
capitalized banks, eventually to $00 per $100, with a minimum semiannual
assessment of $1,000. However, in 1996 Congress enacted the Deposit Insurance
Funds Act of 1996, which eliminated even this minimum assessment. It also
separated the Financial Corporation (FICO) assessment to service the interest on
its bond obligations. The amount assessed on individual institutions, including
the bank, by FICO is in addition to the amount paid for deposit insurance
according to the risk-related assessment rate schedule. Increases in deposit
insurance premiums or changes in risk classification will increase the bank's
cost of funds, and there can be no assurance that such cost can be passed on to
the bank's customers.
Transactions With Affiliates and Insiders.
The bank is subject to the provisions of Section 23A of the Federal Reserve Act,
which place limits on the amount of loans or extensions of credit to, or
investments in, or certain other transactions with, affiliates and on the amount
of advances to third parties collateralized by the securities or obligations of
affiliates. The aggregate of all covered transactions is limited in amount, as
to any one affiliate, to 10% of the Bank's capital and surplus and, as to all
affiliates combined, to 20% of the Bank's capital and surplus. Furthermore,
within the foregoing limitations as to amount, each covered transaction must
meet specified collateral requirements. Compliance is also required with certain
provisions designed to avoid the taking of low quality assets.
The Bank is also subject to the provisions of Section 23B of the Federal Reserve
Act which, among other things, prohibits an institution from engaging in certain
transactions with certain affiliates unless the transactions are on terms
substantially the same, or at least as favorable to such institution or its
subsidiaries, as those prevailing at the time for comparable transactions with
nonaffiliated companies. The Bank is subject to certain restrictions on
extensions of credit to executive officers, directors, certain principal
shareholders, and their related interests. Such extensions of credit (i) must
be made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
third parties and (ii) must not involve more than the normal risk of repayment
or present other unfavorable features.
47
<PAGE>
Dividends.
The Bank is subject to a dividend restriction that generally limits the amount
of dividends that can be paid by a national bank. Prior approval of the OCC 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.
Branching.
National banks are required by the National Bank Act to adhere to branch office
banking laws applicable to state banks in the states in which they are located.
Under current Ohio law, the Bank may open branch offices throughout Ohio with
the prior approval of the OCC. In addition, with prior regulatory approval, the
Bank will be able to acquire existing banking operations in Ohio. Furthermore,
federal legislation has recently been passed which permits interstate branching.
The new law permits out-of-state acquisitions by bank holding companies,
interstate branching by banks if allowed by state law, and interstate merging by
banks.
Community Reinvestment Act.
The Community Reinvestment Act requires that, in connection with examinations of
financial institutions within their respective jurisdictions, the FRB, the FDIC,
or the OCC, shall evaluate the record of each financial institution in meeting
the credit needs of its local community, including low and moderate income
neighborhoods. These factors are also considered in evaluating mergers,
acquisitions, and applications to open a branch or facility. Failure to
adequately meet these criteria could impose additional requirements and
limitations on the Bank.
Other Regulations.
Interest and certain other charges collected or contracted for by the Bank are
subject to state usury laws and certain federal laws concerning interest rates.
The Bank's loan operations are also subject to certain federal laws applicable
to credit transactions, such as:
. the Federal Truth-In-Lending Act, governing disclosures of credit terms
to consumer borrowers;
. the Home Mortgage Disclosure Act of 1975, requiring financial
institutions to provide information to enable the public and public
officials to determine whether a financial institution is fulfilling its
obligation to help meet the housing needs of the community it serves;
. the Equal Credit Opportunity Act, prohibiting discrimination on the basis
of race, creed or other prohibited factors in extending credit;
. the Fair Credit Reporting Act of 1978, governing the use and provision of
information to credit reporting agencies;
. the Fair Debt Collection Act, governing the manner in which consumer
debts may be collected by collection agencies; and
48
<PAGE>
. the rules and regulations of the various federal agencies charged with
the responsibility of implementing such federal laws.
The deposit operations of the bank also are subject to:
. the Right to Financial Privacy Act, which imposes a duty to maintain
confidentiality of consumer financial records and prescribes procedures
for complying with administrative subpoenas of financial records; and
. the Electronic Funds Transfer Act and Regulation E issued by the Federal
Reserve Board to implement that act, which governs automatic deposits to
and withdrawals from deposit accounts and customers' rights and
liabilities arising from the use of automated teller machines and other
electronic banking services.
Capital
The FRB, OCC, and FDIC require banks and holding companies to maintain minimum
capital ratios.
The banking regulatory agencies have adopted risk-based capital guidelines.
These ratios involve a mathematical process of assigning various risk weights to
different classes of assets, then evaluating the sum of the risk-weighted
balance sheet structure against our capital base. The rules set the minimum
guidelines for the ratio of capital to risk-weighted assets (including certain
off-balance sheet activities, such as standby letters of credit) at 8%. At
least half of the total capital is to be composed of common equity, retained
earnings, and a limited amount of perpetual preferred stock less certain
goodwill items ("Tier 1 Capital"). The remainder may consist of a limited
amount of subordinated debt, other preferred stock, or a limited amount of loan
loss reserves. At September 30, 1999, the Company's risk-adjusted Tier 1 Capital
and total capital, as defined by the regulatory agencies were 16.5% and 17.6% of
risk-weighted assets, respectively.
At September 30, 1999, the Bank's risk-adjusted Tier 1 Capital and total
capital, as defined by the regulatory agencies were 16.2% and 17.3% of risk-
weighted assets, respectively.
In addition, banking regulatory agencies have adopted leverage capital
guidelines for banks and bank holding companies. Under these guidelines, banks
and bank holding companies must maintain a minimum ratio of three percent (3%)
Tier 1 to total assets. As of September 30, 1999, the Company's core leverage
ratio was 8.4%, well above the regulatory minimum. As of September 30, 1999, the
Bank's core leverage ratio was 8.3%, well above the regulatory minimum.
Regulatory authorities may increase such minimum requirements for all banks and
bank holding companies or for specified banks or bank holding companies.
Increases in the minimum required ratios could adversely affect us, including
our ability to pay dividends.
Government Policies and Legislation
The policies of regulatory authorities, including the FRS, OCC and the FDIC,
have had a significant effect on the operating results of commercial banks in
the past and are expected to do so in the future. An important function of the
FRS is to regulate aggregate national credit and money supply through such means
as open market dealings in securities, establishment of the discount rate on
member bank borrowings, and changes in reserve requirements against member bank
deposits. Policies of these agencies may be influenced by many factors,
including inflation, unemployment, short-term and long-term changes in the
international trade balance and fiscal policies of the United States government.
49
<PAGE>
The United States Congress has periodically considered and adopted legislation
which has resulted in further deregulation of both banks and other financial
institutions, including mutual funds, securities brokerage firms and investment
banking firms. No assurance can be given as to whether any additional
legislation will be adopted or as to the effect such legislation would have on
our business.
Year 2000
As a holding company owning a financial institution, Tri-State is highly
dependent upon computers and computer programs and the accuracy of these
computer programs is critical to Tri-State's operations. The approach of the
year 2000 presents the possibility that the Bank or its customers, suppliers or
correspondent banks may be subject to errors caused by computer programs not
correctly recognizing the year 2000 and making inaccurate calculations.
The Company has been actively working on the Year 2000 computer problem since
1997 and has completed a comprehensive plan of action addressing system-related
Year 2000 issues. The Company has completed its awareness, assessment,
renovation, validation, implementation, and testing phases: the results of which
reflect the Company's internal systems to be Year 2000 ready. FFIEC's
guidelines have been followed, customer relations training has been achieved,
and the Company is actively involved in the final stages of contingency planning
training sessions.
Many of the Company's business system applications have either been modified or
replaced. The Company in conjunction with its vendors, has tested all of its
mission critical systems and has required representations from its vendors that
the products are or will be Year 2000 compliant. Both internal and external
resources were utilized in completing the Company's testing objectives.
Internal tests have been completed, and test results, which have been documented
and validated, are deemed to be year 2000 compliant.
The Company has established a contingency and business resumption plan in the
unlikely event that the systems tested do not, in fact, operate properly when
the year 2000 does arrive. The business resumption plan focuses on steps needed
to maintain the Bank's customer accounts, deposit and loans, as well as
accounting systems on a manual basis, if needed, to ensure business continuation
while systems are being corrected.
The ability of the Bank's loan customers to repay their obligations could also
be affected by business interruptions caused by Year 2000 data processing
problems. The Bank has established and put into place an ongoing monitoring
system to assess its largest borrowers and their Year 2000 readiness in relation
to their ability to repay their obligations to the Bank.
Much attention has also been given to the Bank's deposit customers, as they may
believe they need additional cash on hand in the latter part of 1999. In
response to anticipated cash demands, which are not expected to be material, the
Company will maintain higher liquidity levels in the latter part of 1999.
The Company believes that the Year 2000 issue will not pose significant
operational problems and is not anticipated to be material to its financial
position or results of operations. The Company currently believes that all
major capital and operating expenditures relating to Year 2000 have been
incurred and totaled approximately $40,000 net of taxes. The Company does not
anticipate any significant additional costs to insure its readiness for the Year
2000 having regularly scheduled software and hardware upgrades.
50
<PAGE>
INDEMNIFICATION
Our Code of Regulations provide for the indemnification of officers, directors,
employees and agents to the fullest extent permitted by Ohio law. Ohio law
provides for indemnification in both derivative and nonderivative actions.
Ohio law generally provides for the payment of expenses, including attorneys'
fees, judgments, fines and amounts paid in settlement actually and reasonably
incurred by the indemnitees provided such person acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the corporation and with respect to any criminal action or proceeding if he had
no reasonable cause to believe his conduct was unlawful.
However, in derivative suits, if the suit is lost, no indemnification is
permitted in respect of any claim, issue or matter as to which the prospective
indemnitee is adjudged to be liable for negligence or misconduct in the
performance of his duty to the corporation and then only if, and only to the
extent that, a court of competent jurisdiction determines upon view of all the
circumstances of the case, the prospective indemnitee is fairly and reasonably
entitled to indemnity for such expenses as the court deems proper. Further,
this indemnity in derivative suits is limited to expenses incurred in defending
the suit, not the amount of any judgment, fine or other penalty levied against
the prospective indemnitee. Finally, no indemnification may be provided in any
action or suit in which the only liability asserted against a director is
pursuant to a statutory provision outlawing loans, dividends, and distribution
of assets under certain circumstances.
Our Code of Regulations provides that we shall indemnify our past and present
directors if Tri-State determines that such indemnification is proper in the
circumstances because the indemnified person has met the applicable standard of
conduct as set forth in the Ohio General Corporation Law. Such determination
may be made by either:
(1) a majority of a quorum of directors not party to the proceedings; or
(2) if such quorum is not obtainable, or if the majority vote described
in (1) above so directs, in a written opinion by independent legal
counsel; or
(3) by the shareholders; or
(4) by the court in which such proceeding was brought.
The provisions regarding indemnification may not be applicable under certain
federal banking and securities laws and regulations.
The indemnification provisions of our Code of Regulations, in conjunction with
provisions of the Ohio Revised Code, provide that we may purchase and maintain
insurance on behalf of any director against any liability asserted against such
person and incurred by him or her in any such capacity, whether or not we would
have had the power to indemnify against such liability. We are not aware of any
pending or threatened action, suit or proceeding involving any of our directors
or officers for which indemnification from us may be sought.
Insofar as indemnification for liabilities (primarily relating to public
distribution of securities) arising under the Securities Act of 1933, as
amended, may be permitted to directors, officers and controlling persons of Tri-
State, or to an affiliate of Tri-State pursuant to our Articles of Incorporation
or Code of Regulations or
51
<PAGE>
otherwise, the Board of Directors has been advised that, in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the 1933 Act and is, therefore, unenforceable.
Accordingly, it is possible that the indemnification provisions may not apply to
liabilities arising under the 1933 Act unless the person to be indemnified is
successful on the merits of the claim or proceeding.
LEGAL OPINIONS
The validity of the Shares offered hereby will be passed upon for us by Doepken
Keevican & Weiss Professional Corporation, Pittsburgh, Pennsylvania.
EXPERTS
The consolidated financial statements of Tri-State 1st Bank, Inc. as of December
31, 1998 and 1997 and for the years then ended, appearing in this Prospectus
have been audited by S.R. Snodgrass, A.C., independent auditors, as set forth in
their report thereon appearing elsewhere herein, and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
52
<PAGE>
TRI-STATE 1ST BANK, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors F-1
Consolidated Balance Sheet as of December 31, 1998 and 1997 F-2
Consolidated Statement of Income for the Years
Ended December 31, 1998 and 1997 F-3
Consolidated Statement of Changes in Stockholders' Equity
for the Years Ended December 31, 1998 and 1997 F-4
Consolidated Statement of Cash Flows for the
Years Ended December 31, 1998 and 1997 F-5
Notes to Consolidated Financial Statements F-6
Unaudited Consolidated Balance Sheet as of
September 30, 1999 and December 31, 1998 S-1
Unaudited Consolidated Statement of Income for the
Three Months Ended September 30, 1999 and 1998 S-2
Unaudited Consolidated Statement of Income for the
Nine Months Ended September 30, 1999 and 1998 S-3
Unaudited Consolidated Statement of Changes in Stockholders'
Equity for the Nine Months Ended September 30, 1999 S-4
Unaudited Consolidated Statement of Cash Flows for the
Nine Months ended September 30, 1999 and 1998 S-5
Notes to Unaudited Consolidated Financial Statements S-6
53
<PAGE>
[LOGO OF SNODGRASS]
Certified Public Accountants and Consultants
REPORT OF INDEPENDENT AUDITORS
------------------------------
Board of Director and Stockholders
Tri-State 1st Bank, Inc.
We have audited the consolidated balance sheet of Tri-State 1st Bank, Inc. and
Subsidiary as of December 31, 1998 and 1997, 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 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, 1998 and 1997, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ S.R. Snodgrass, A.C.
Wexford, PA
January 8, 1999
F-1
<PAGE>
TRI-STATE 1ST BANK, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 4,319,381 $ 4,031,922
Interest-bearing deposits with other banks 80,356 101,381
Federal funds sold 1,100,000 1,550,000
Investment securities available for sale 19,957,516 13,088,215
Investment securities held to maturity (market value
of $1,765,465 and $1,937,040) 1,699,589 1,897,147
Loans 28,939,322 26,012,431
Less allowance for loan losses 340,197 309,015
------------ ------------
Net loans 28,599,125 25,703,416
Premises and equipment 1,850,095 1,422,125
Accrued interest and other assets 697,365 531,750
------------ ------------
TOTAL ASSETS $ 58,303,427 $ 48,325,956
============ ============
LIABILITIES
Deposits:
Noninterest-bearing demand $ 8,362,305 $ 6,532,262
Interest-bearing demand 12,087,939 8,250,728
Money market 4,598,841 5,044,746
Savings 10,297,040 9,324,176
Time 16,003,144 13,751,635
------------ ------------
Total deposits 51,349,269 42,903,547
Securities sold under agreement to repurchase 1,500,000 500,000
Other borrowings 67,311 176,783
Accrued interest and other liabilities 309,134 230,847
------------ ------------
TOTAL LIABILITIES 53,225,714 43,811,177
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, no par value; 1,000,000 shares authorized,
451,869 shares issued and outstanding 3,890,423 2,894,500
Retained earnings 989,510 1,567,189
Net unrealized gain on securities 197,780 53,090
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 5,077,713 4,514,779
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 58,303,427 $ 48,325,956
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
F-2
<PAGE>
TRI-STATE 1ST BANK, INC.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997
----------- -----------
<S> <C> <C>
INTEREST INCOME
Loans, including fees $ 2,655,293 $ 2,506,697
Interest-bearing deposits with other banks 3,547 3,267
Federal funds sold 231,715 134,047
Investment securities:
Taxable 693,116 517,233
Exempt from federal income tax 349,628 234,634
----------- -----------
Total interest income 3,933,299 3,395,878
----------- -----------
INTEREST EXPENSE
Deposits 1,581,659 1,305,364
Securities sold under agreement to repurchase 56,508 11,639
Other borrowings 7,944 15,084
----------- -----------
Total interest expense 1,646,111 1,332,087
----------- -----------
NET INTEREST INCOME 2,287,188 2,063,791
Provision for loan losses 54,272 54,195
----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,232,916 2,009,596
----------- -----------
OTHER OPERATING INCOME
Service fees on deposit accounts 302,233 248,522
Investment securities gains (losses) 6,141 (3,354)
Other 178,993 106,421
----------- -----------
Total other operating income 487,367 351,589
----------- -----------
OTHER OPERATING EXPENSE
Salaries and employee benefits 971,380 758,600
Occupancy 209,020 177,311
Furniture and equipment 167,641 135,654
Other 709,260 613,612
----------- -----------
Total other operating expense 2,057,301 1,685,177
----------- -----------
Income before income taxes 662,982 676,008
Income taxes 115,071 150,953
----------- -----------
NET INCOME $ 547,911 $ 525,055
=========== ===========
EARNINGS PER SHARE
Basic $ 1.21 $ 1.16
Diluted 1.20 1.16
</TABLE>
See accompanying notes to the consolidated financial statements.
F-3
<PAGE>
TRI-STATE 1ST BANK, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net
Unrealized
Common Retained Gain (Loss) Comprehensive
Stock Earnings on Securities Total Income
----------- ------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ 2,894,500 $ 1,159,212 $ (17,823) $ 4,035,889
Net income 525,055 525,055 $ 525,055
Other comprehensive income:
Unrealized gain on securities, net of
reclassification adjustment 70,913 70,913 70,913
---------------
Comprehensive income $ 595,968
===============
Dividends declared ($.26 per share) (117,078) (117,078)
----------- ------------- --------------- -------------
Balance, December 31, 1997 2,894,500 1,567,189 53,090 4,514,779
Net income 547,911 547,911 $ 547,911
Other comprehensive income:
Unrealized gain on securities, net of
reclassification adjustment 144,690 144,690 144,690
---------------
Comprehensive income $ 692,601
===============
Dividends declared ($.29 per share) (129,667) (129,667)
Ten percent stock dividend 995,923 (995,923)
----------- ------------- --------------- -------------
Balance, December 31, 1998 $ 3,890,423 $ 989,510 $ 197,780 $ 5,077,713
=========== ============= =============== =============
1998 1997
------------- ---------------
Components of comprehensive income:
Change in net unrealized gain on
investment securities held for sale $ 148,743 $ 68,699
Realized (gains) losses included in net
income, net of tax (4,053) 2,214
------------- ---------------
Total $ 144,690 $ 70,913
============= ===============
</TABLE>
See accompanying notes to the consolidated financial statements.
F-4
<PAGE>
TRI-STATE 1ST BANK, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 547,911 $ 525,055
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 54,272 54,195
Depreciation and amortization, net 101,725 170,637
Investment securities (gains) losses (6,141) 3,354
Deferred income taxes 21,134 712
Increase in accrued interest receivable (146,110) (12,844)
Increase (decrease) in accrued interest payable (1,579) 5,940
Other (35,311) (265)
------------ ------------
Net cash provided by operating activities 535,901 746,784
------------ ------------
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from sales 600,179 348,372
Proceeds from principal repayments and maturities 4,990,211 3,259,230
Purchases of securities (12,228,271) (6,617,597)
Investment securities held to maturity:
Proceeds from principal repayments and maturities 197,633 331,869
Net increase in loans (2,908,056) (1,709,734)
Purchase of premises and equipment (577,746) (177,899)
Proceeds from sale of real estate owned - 54,421
Branch acquisitions:
Purchase of loans - (330,219)
Purchase of premises and equipment - (157,000)
Net deposit proceeds - 2,334,890
------------ ------------
Net cash used for investing activities (9,926,050) (2,663,667)
------------ ------------
FINANCING ACTIVITIES
Net increase in deposits 8,445,722 1,742,537
Increase in securities sold under agreement to repurchase 1,000,000 500,000
Principal payments on other borrowings (109,472) (102,373)
Cash dividends paid (129,667) (117,078)
------------ ------------
Net cash provided by financing activities 9,206,583 2,023,086
------------ ------------
Increase (decrease) in cash and cash equivalents (183,566) 106,203
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 5,683,303 5,577,100
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5,499,737 $ 5,683,303
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
F-5
<PAGE>
TRI-STATE 1ST BANK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Basis of Presentation
----------------------------------------------
A summary of significant accounting and reporting policies applied in the
presentation of the accompanying financial statements follow:
Tri-State 1st Bank, Inc. (the "Company") is an Ohio corporation organized
as the holding company of the 1st National Community Bank (the "Bank"). The
Bank is a national banking association headquartered in East Liverpool,
Ohio. The Bank's principal sources of revenue emanate from its commercial,
commercial mortgage, residential real estate, consumer loan financing, and
its investment securities portfolio as well as a variety of deposit
services offered to its customers through three offices which are located
in the East Liverpool and Lisbon, Ohio and New Cumberland, West Virginia
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.
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 balance sheet and revenues and expenses
for the period. Actual results could differ significantly from those
estimates.
Investment Securities
---------------------
Investment securities are classified at the time of purchase, based on
management's abilities and intention, as securities held to maturity or
available for sale. Debt securities acquired with the ability and 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 that are wholly owned by other
financial institutions. These equity securities are accounted for at cost
and are classified as equity securities available for sale.
Loans
-----
Loans are reported at their principal amount, net of the allowance for loan
losses. Interest on all loans is recognized as income when earned on the
accrual method. The Company'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.
Loan origination fees and certain direct loan origination costs are being
deferred and the net amount amortized as an adjustment of the related
loan's yield. The Company is amortizing these amounts over the contractual
life of the related loans.
F-6
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses
-------------------------
The allowance for loan losses represents the amount which management
estimates is adequate to provide for potential losses in its loan
portfolio. The allowance method is used in providing for loan losses.
Accordingly, all loan losses are charges and all recoveries are credits to
the allowance. The allowance for loan losses is established through a
provision for loan losses charged to operations. The provision for loan
losses is based on management's periodic evaluation of individual loans,
economic factors, past loan loss experience, changes in the composition and
volume of the portfolio, and other relevant factors. The estimates used in
determining the adequacy of the allowance for loan losses, including the
amounts and timing of future cash flows expected on impaired loans, are
particularly susceptible to changes in the near term.
Impaired loans are commercial and commercial real estate loans for which it
is probable the Company will not be able to collect all amounts due
according to the contractual terms of the loan agreement. The Company
individually evaluates such loans for impairment and does not aggregate
loans by major risk classifications. The definition of "impaired loans" is
not the same as the definition of "nonaccrual loans," although the two
categories overlap. The Company may choose to place a loan on nonaccrual
status due to payment delinquency or uncertain collectibility, while not
classifying the loan as impaired provided the loan is not of a commercial
or commercial real estate classification. Factors considered by management
in determining impairment include payment status and collateral value. The
amount of impairment for these types of loans is determined by the
difference between the present value of the expected cash flows related to
the loan, using the original interest rate, and its recorded value, or as a
practical expedient in the case of collateralized loans, the difference
between the fair value of the collateral and the recorded amount of the
loans. When foreclosure is probable, impairment is measured based on the
fair value of the collateral.
Mortgage loans secured by one-to-four family properties and all consumer
loans are large groups of smaller balance homogeneous loans and are
measured for impairment collectively. Loans that experience insignificant
payment delays, which are defined as 90 days or less, generally are not
classified as impaired. Management determines the significance of payment
delays on a case-by-case basis taking into consideration all circumstances
concerning the loan, the credit worthiness and payment history of the
borrower, the length of the payment delay, and the amount of shortfall in
relation to the principal and interest owed.
Premises and Equipment
----------------------
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed on the straight-line 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.
Intangible Asset
----------------
The intangible asset consists exclusively of a core deposit acquisition
premium. This core deposit acquisition premium, which was developed based
upon a specific core deposit life study, is amortized using the straight-
line method over eight years. Annual assessments of carrying value and
remaining amortization periods are made to determine possible carrying
value impairment and appropriate adjustments as deemed necessary. This
asset is a component of other assets on the balance sheet.
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.
F-7
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Employee Benefits
-----------------
Pension and other employee benefits include contributions to a defined
contribution Section 401(k) plan covering eligible employees. Contributions
matching those made by eligible employees and an elective contribution are
made annually at the discretion of the Board of Directors.
Stock Options
-------------
The Company maintains a stock option plan for the Directors, officers, and
employees. The stock options typically have expiration terms of five years
subject to certain extensions and early terminations. The per share
exercise price of a stock option shall be, at a minimum, equal to the fair
value of a share of common stock on the date the option is granted. Because
the exercise price of the Company's stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized in the Company's financial statements. Pro forma net income and
earnings per share are presented to reflect the impact of the stock option
plan assuming compensation expense had been affected based on the fair
value of the stock options granted under this plan.
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.
Earnings Per Share
------------------
The Company provides dual presentation of Basic and Diluted earnings per
share. Basic earnings per share utilizes net income as reported as the
numerator and the actual average shares outstanding as the denominator.
Diluted earnings per share includes any dilutive effects of options,
warrants, and convertible securities.
Stockholders' Equity
--------------------
During 1998, retroactive recognition was given for the elimination of the
stated value of the Company's Common Stock. This caused the surplus to be
reduced to zero, with the balance of $1,610,750 being reclassified to
Common Stock. Such action had no effect on Total Stockholders' Equity
disclosed previously.
Comprehensive Income
--------------------
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." In adopting
Statement No. 130, the Company is required to present comprehensive income
and its components in a full set of general purpose financial statements
for all periods presented. The Company has elected to report the effects of
Statement No. 130 as part of the Statement of Changes in Stockholders'
Equity.
Cash Flow Information
---------------------
The Company has defined cash and cash equivalents as those amounts included
in the balance sheet captions Cash and due from banks, Interest-bearing
deposits with other banks, and Federal funds sold. Cash payments for
interest expense in 1998 and 1997 were $1,647,690 and $1,326,147,
respectively. Cash payments for income taxes in 1998 and 1997 were $157,816
and $156,137, respectively.
F-8
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Pending Accounting Pronouncements
---------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The statement provides accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, by requiring the
recognition of those items as assets or liabilities in the consolidated
balance sheet, recorded at fair value. Statement No. 133 precludes a held-
to-maturity security from being designated as a hedged item; however, at
the date of initial application of this Statement, an entity is permitted
to transfer any held-to-maturity security into the available-for-sale or
trading categories. The unrealized holding gain or loss on such transferred
securities shall be reported consistent with the requirements of Statement
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Such transfers do not raise an issue regarding an entity's
intent to hold other debt securities to maturity in the future. This
Statement applies prospectively for all fiscal quarters of all years
beginning after June 15, 1999. Earlier adoption is permitted for any fiscal
quarter that begins after the issue date of this Statement.
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This SOP, which is
effective for fiscal years beginning after December 15, 1998, provides
guidance on accounting for the costs of computer software developed or
obtained for internal use and provides guidance for determining whether
computer software is for internal use. The Company will adopt SOP 98-1 in
the first quarter of 1999 and does not believe the effect of adoption will
be material.
2. EARNINGS PER SHARE
The following table sets forth the computation of Basic and Diluted
earnings per share. There were no convertible securities which would effect
the numerator in calculating Basic and Diluted earnings per share;
therefore, net income as presented on the Consolidated Statement of Income
will be used as the numerator. The following table sets forth a
reconciliation of the denominator of the Basic and Diluted earnings per
share computation.
1998 1997
-------- --------
Denominator:
Denominator for Basic earnings per
share-weighted-average shares 451,869 451,869
Employee stock options 6,559 -
------- --------
Denominator for Diluted earnings per
share-adjusted weighted-average
shares assumed conversions 458,428 451,869
======= ========
3. STOCK DIVIDEND
On May 28, 1998, the Board of Directors approved a ten percent stock
dividend for security holders of record on June 26, 1998. As a result of
this dividend, 41,069 shares of Tri-State 1st Bank stock were issued.
Fractional shares were paid in cash.
Average shares outstanding and all per share amounts included in the
consolidated financial statements are based on the increased number of
shares giving retroactive effect to the stock dividend.
F-9
<PAGE>
4. INVESTMENT SECURITIES
The amortized cost and estimated market value of investment securities
available for sale are as follows:
<TABLE>
<CAPTION>
1998
------------------------------------------------------------
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
agency securities $11,792,785 $ 65,966 $ (7,110) $11,851,641
Obligations of states and
political subdivisions 7,273,717 242,080 (3,053) 7,512,744
Mortgage-backed securities 354,396 1,983 (198) 356,181
------------ ------------ ------------ ------------
Total debt securities 19,420,898 310,029 (10,361) 19,720,566
Equity securities 236,950 - - 236,950
------------ ------------ ------------ ------------
Total $19,657,848 $ 310,029 $ (10,361) $19,957,516
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
1997
------------------------------------------------------------
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
agency securities $ 8,577,254 $ 19,444 $ (31,540) $ 8,565,158
Obligations of states and
political subdivisions 3,979,340 90,926 (1,173) 4,069,093
Mortgage-backed securities 227,731 2,815 (32) 230,514
-------------- ----------- ----------- ------------
Total debt securities 12,784,325 113,185 (32,745) 12,864,765
Equity securities 223,450 - - 223,450
-------------- ----------- ----------- ------------
Total $13,007,775 $ 113,185 $ (32,745) $13,088,215
============== =========== =========== ============
</TABLE>
The amortized cost and estimated market value of investment securities held
to maturity are as follows:
<TABLE>
<CAPTION>
1998
------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C>
Obligations of states and
political subdivisions $ 1,498,790 $ 62,854 $ - $ 1,561,644
Mortgage-backed securities 200,799 3,022 - 203,821
----------- ----------- ---------- -------------
Total $ 1,699,589 $ 65,876 $ - $ 1,765,465
=========== =========== ========== =============
</TABLE>
F-10
<PAGE>
4. INVESTMENT SECURITIES (Continued)
<TABLE>
<CAPTION>
1997
--------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Obligations of states and
political subdivisions $ 1,598,715 $ 38,950 $ (1,071) $ 1,636,594
Mortgage-backed securities 298,432 3,088 (1,074) 300,446
------------ ----------- ---------- -----------
Total $ 1,897,147 $ 42,038 $ (2,145) $ 1,937,040
============= =========== ========== ===========
</TABLE>
The amortized cost and estimated market value of debt securities by contractual
maturity at December 31, 1998 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 $ 1,990,952 $ 1,995,987 $ 107,239 $ 108,247
Due after one year through
five years 10,063,216 10,154,072 745,387 761,602
Due after five years through
ten years 6,542,446 6,740,354 811,254 858,324
Due after ten years 824,284 830,153 35,709 37,292
------------ ------------- ----------- -----------
Total $ 19,420,898 $ 19,720,566 $1,699,589 $ 1,765,465
============ ============= =========== ===========
</TABLE>
Proceeds from the sales of securities available for sale and the gross realized
gains and losses for the years ended December 31, 1998 and 1997 were as follows:
1998 1997
----------- ------------
Proceeds from sales $ 600,179 $ 348,372
Gross realized gains 6,141 -
Gross realized losses - 3,354
Investment securities with an amortized cost of $5,550,039 and $2,949,386 and an
estimated market value of $5,559,221 and $2,941,301 were pledged to secure
public deposits, securities sold under agreements to repurchase, and other
purposes as required by law at December 31, 1998 and 1997, respectively.
F-11
<PAGE>
5. LOANS
Major classifications of loans are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Commercial and agricultural $ 4,449,554 $ 5,638,758
Real estate mortgages:
Residential 13,476,313 12,116,820
Commercial 6,772,323 4,482,295
Consumer 4,241,132 3,774,558
----------- -----------
28,939,322 26,012,431
Less allowance for loan losses 340,197 309,015
----------- -----------
Net loans $28,599,125 $25,703,416
=========== ===========
</TABLE>
The Company grants consumer, commercial, and residential loans to customers
throughout its trade area that encompasses East Liverpool and Lisbon, Ohio,
New Cumberland, West Virginia, and the surrounding communities. Although
the Company 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.
Non-performing loans are comprised of commercial, mortgage, and consumer
loans which are on a nonaccrual basis, or 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 Company had
non-performing loans of $178,727 and $102,054 as of December 31, 1998 and
1997, respectively. The Company had no impaired loans at December 31, 1998
or 1997.
As of December 31, 1998, aggregate loans of $60,000 or more extended to
officers, Directors, and related affiliates or associates were $677,392. A
summary of activity during the year is as follows:
<TABLE>
<CAPTION>
Amount
1997 Additions Collected 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C>
$ 662,185 $ 646,400 $ 631,193 $ 677,392
</TABLE>
6. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the years ended December 31,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Balance, January 1 $ 309,015 $ 290,247
Add:
Provision charged to operations 54,272 54,195
Recoveries 15,029 11,845
Less loans charged off 38,119 47,272
---------- ----------
Balance, December 31 $ 340,197 $ 309,015
========== ==========
</TABLE>
F-12
<PAGE>
7. PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as follows
at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land and improvements $ 318,560 $ 314,760
Buildings and improvements 1,278,481 1,061,373
Leasehold improvements 238,310 66,447
Furniture, fixtures, and equipment 935,010 762,086
---------- ----------
2,770,361 2,204,666
Less accumulated depreciation 920,266 782,541
---------- ----------
Total $1,850,095 $1,422,125
========== ==========
</TABLE>
Depreciation and amortization charged to operations was $149,776 in 1998
and $128,689 in 1997.
8. DEPOSITS
Time deposits include certificates of deposit in denominations of $100,000
or more. Such deposits aggregated $3,009,473 and $2,394,578 at December 31,
1998 and 1997, respectively.
Maturities on time deposits of $100,000 or more are as follows at December
31, 1998:
<TABLE>
<S> <C>
Three months or less $ 1,646,612
Three to twelve months 1,252,203
Over one year 110,658
------------
Total $ 3,009,473
============
</TABLE>
9. SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE
The outstanding balances and related information for securities sold under
agreement to repurchase is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
Amount Rate Amount Rate
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Balance at year end $1,500,000 3.64% $500,000 4.49%
Average balance outstanding
during the year 1,278,461 4.42 258,064 4.51
Maximum amount outstanding
at any month end 1,500,000 500,000
</TABLE>
Average amounts outstanding during the year represent daily average
balances and average interest rates represent interest expense divided by
the related average balance.
Investments in U.S. Government agency securities with market values in
excess of outstanding balances of securities sold under agreement to
repurchase have been pledged at December 31, 1998 and 1997.
F-13
<PAGE>
10. OTHER BORROWINGS
The Bank has a line of credit with a borrowing limit of approximately $1.9
million with the Federal Home Loan Bank of Cincinnati ("FHLB") as of
December 31, 1998. This credit line is subject to annual renewal and incurs
no service charges. Outstanding borrowings on this line, and the term loans
noted below, are collateralized by a blanket security agreement on
qualifying residential mortgage loans and the Bank's investment in stock of
the FHLB. There were no borrowings outstanding on this line of credit for
the years ended December 31, 1998 or 1997.
The Bank also has two term loans outstanding with the FHLB totaling $67,311
and $176,983 at December 31, 1998 and 1997, respectively. These loans bear
interest rates of 6.70 percent and 6.75 percent (weighted average of 6.73
percent), respectively, during both years and have remaining payment
periods extending to August 1, 1999.
11. OTHER EXPENSES
The following is an analysis of other expenses:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Stationery, printing, and supplies $ 121,557 $104,830
Postage 60,930 48,857
Professional services 77,473 67,185
Directors fees 46,250 37,350
State franchise tax 64,318 60,145
Other 338,732 295,245
--------- --------
Total $ 709,260 $613,612
========= ========
</TABLE>
12. INCOME TAXES
The provision for income taxes consists of:
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
Current $ 93,937 $150,241
Deferred 21,134 712
--------- --------
Total $ 115,071 $150,953
========= ========
</TABLE>
The components of the net deferred tax liability are as follows at
December 31:
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
Deferred tax assets:
Provision for loan losses $ 99,956 $ 89,882
Other 3,596 -
--------- --------
Gross deferred tax assets 103,552 89,882
--------- --------
Deferred tax liabilities:
Net unrealized gain on securities 101,887 27,350
Depreciation 18,243 17,393
Accrual to cash conversion 75,463 45,568
Other 30,773 26,714
--------- --------
Gross deferred tax liabilities 226,366 117,025
--------- --------
Net deferred tax liability $(122,814) $(27,143)
========= ========
</TABLE>
F-14
<PAGE>
12. INCOME TAXES (Continued)
The reconciliation of the federal statutory rate and the Company's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------- ---------------------
% of % of
Pre-tax Pre-tax
Amount Income Amount Income
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Provision at statutory rate $ 225,414 34.0 % $ 229,843 34.0 %
Effect of tax-free income (105,070) (15.8) (85,950) (12.7)
Other (5,273) (0.8) 7,060 1.0
--------- -------- --------- -------
Actual tax expense and
effective rate $ 115,071 17.4 % $ 150,953 22.3 %
========= ======== ========= =======
</TABLE>
13. EMPLOYEE BENEFITS
Profit Sharing Plan and 401(k) Plan
-----------------------------------
At December 31, 1997, the Bank had a trusteed, defined contribution profit
sharing plan cover substantially all employees and officers. Contributions
to this plan were determined annually by the Board of Directors. The
contribution to this plan for 1997 amounted to $18,360. Effective January
1, 1998, this trusteed, defined contribution plan was converted to a
trusteed Section 401(k) plan. The Bank makes matching contributions for
eligible employees of 25 percent of the employee contributions annually, to
a maximum of 12 percent of base salary. Substantially all employees and
officers are eligible to participate in the plan. The Bank's contribution
to this plan was $15,698 in 1998.
ESOP
----
The Company 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 $6,500 and $7,000 were recorded during
1998 and 1997, respectively. The Trustee held 3,434 and 2,884 shares of the
Company's common stock at December 31, 1998 and 1997, respectively.
Stock Option Plan
-----------------
On January 23, 1997, the Board of Directors approved and stockholders
subsequently ratified the formation of a stock option plan. The plan
provides for granting incentive stock options and nonstatutory stock
options for executive officers and nonemployee Directors of the Company. A
total of 53,900 shares of authorized but unissued common stock were
initially reserved for issuance under the plan.
F-15
<PAGE>
13. EMPLOYEE BENEFITS (Continued)
No compensation expense has been recognized with respect to the options
granted under the stock option plan. Had compensation expense been
determined on the basis of fair value, net income and earnings per share
would have been reduced as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Net Income:
As reported $547,911 $525,055
======== ========
Pro forma $473,229 $431,709
======== ========
Basic earnings per share:
As reported $ 1.21 $ 1.16
======== ========
Pro forma $ 1.05 $ 0.96
======== ========
Diluted earnings per share:
As reported $ 1.20 $ 1.16
======== ========
Pro forma $ 1.03 $ 0.96
======== ========
</TABLE>
The following table presents share data related to the stock option plan:
<TABLE>
<CAPTION>
Weighted-
Shares average
Under Exercise
Option Price
---------- ---------
<S> <C> <C>
Outstanding, January 1, 1997 - -
Granted 18,700 $ 19.09
Exercised - -
Forfeited - -
--------
Outstanding, December 31, 1997 18,700 $ 19.09
Granted 15,800 $ 28.00
Exercised - -
Forfeited (1,100) $ 19.09
--------
Outstanding, December 31, 1998 33,400 $ 23.30
========
Available for future grant 20,500
========
</TABLE>
F-16
<PAGE>
14. COMMITMENTS
In the normal course of business, the Company makes various commitments not
reflected in the accompanying financial statements. The Company 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
Company'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 Company 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:
1998 1997
------------ ------------
Commitments to extend credit $ 4,804,106 $ 2,956,264
Standby letters of credit 173,372 75,894
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 and personal lines of credit and loans granted but not yet
funded. The Company does not charge fees for the 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
Company 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 Company holds collateral for these instruments as deemed
necessary.
The Bank leases two branch office sites under agreements that expire by the
years 2002 and 2005, respectively. These branch agreements contain five-
year renewal options that are available if elected by the Bank. At December
31, 1998, the minimum rental commitment for these noncancelable operating
leases is as follows:
1999 $ 71,796
2000 71,796
2001 71,796
2002 71,796
2003 61,381
2004 and thereafter 93,600
---------
Total $ 442,165
=========
Occupancy expense includes rental expenditures of $62,815 and $50,880 for
1998 and 1997, respectively.
15. ACQUISITION OF BRANCH OFFICE
Effective August 29, 1997, the Bank, pursuant to a purchase and assumption
agreement entered into with United National Bank of West Virginia (Seller),
assumed deposit liabilities and acquired the branch banking property,
facility, all cash funds on-hand, and selected commercial and consumer
loans of the New Cumberland, West Virginia operations.
F-17
<PAGE>
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values at December 31 of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------- --------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks,
interest-bearing deposits with
with other banks, and federal
funds sold $ 5,499,737 $ 5,499,737 $ 5,683,303 $ 5,683,303
Investment securities 21,657,105 21,722,981 14,985,362 15,025,255
Net loans 28,599,125 29,858,000 25,703,416 26,093,000
Accrued interest receivable 358,904 358,904 318,956 318,956
----------- ----------- ----------- -----------
Total $56,114,871 $57,439,622 $46,691,037 $47,120,514
=========== =========== =========== ===========
Financial liabilities:
Deposits $51,349,269 $51,556,000 $42,903,547 $43,015,000
Securities sold under agreement
to repurchase 1,500,000 1,500,000 500,000 500,000
Other borrowings 67,311 67,311 176,783 178,000
Accrued interest payable 55,402 55,402 73,417 73,417
----------- ----------- ----------- -----------
Total $52,971,982 $53,178,713 $43,653,747 $43,766,417
=========== =========== =========== ===========
</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.
F-18
<PAGE>
16. 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, Securities Sold Under
----------------------------------------------------------------------
Agreements to Repurchase, and Accrued Interest Payable
------------------------------------------------------
The fair value is equal to the current carrying value.
Investment Securities
---------------------
The fair value of investment securities 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.
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, non- interest income, credit quality, and prepayment risk.
Demand, savings, and money market deposit accounts which are due within 30
days are valued at the amount payable 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
14.
17. REGULATORY MATTERS
Cash and Due from Banks
-----------------------
The district Federal Reserve Bank requires the Bank to maintain certain
reserve balances. As of December 31, 1998 and 1997, the Bank had required
reserves of $552,000 and $434,000, respectively, comprised of vault cash
and a depository amount held with the Federal Reserve Bank.
Loans
-----
Federal law prevents the Company from borrowing from the Bank unless the
loans are secured by specific obligations. Further, such secured loans are
limited in amount to ten percent of the Bank's capital.
F-19
<PAGE>
17. REGULATORY MATTERS (Continued)
Dividends
---------
The Bank is subject to a dividend restriction that 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 1999, without approval of the Comptroller, will be limited to
$834,320 plus 1999 net profits retained up to the date of the dividend
declaration.
Capital Requirements
--------------------
The Company and the Bank are subject to various regulatory capital
requirements administered by 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 the 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, 1998 and 1997, that the Company and
the Bank meet all capital adequacy requirements to which they are subject.
As of December 31, 1998, the most recent notification from the appropriate
regulatory authorities categorized the Company and Bank as well capitalized
under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, an entity 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 this category.
F-20
<PAGE>
17. REGULATORY MATTERS (Continued)
Capital Requirements (Continued)
-------------------------------
The capital position of the Company does not materially differ from the
Bank's; therefore, the following table sets forth the Company's capital
position and minimum requirements as of December 31:
<TABLE>
<CAPTION>
1998 1997
--------------------------- -------------------------
Amount Ratio Amount Ratio
------------ ------------ ---------- -----------
<S> <C> <C> <C> <C>
Total Capital to
Risk-weighted Assets
---------------------------
Actual $ 5,106,895 16.64% $ 4,640,404 17.62%
For Capital Adequacy 2,455,680 8.00 2,107,040 8.00
To Be Well Capitalized 3,069,600 10.00 2,633,800 10.00
Tier I Capital to
Risk-weighted Assets
---------------------------
Actual $ 4,766,698 15.53% $ 4,331,389 16.45%
For Capital Adequacy 1,227,840 4.00 1,053,520 4.00
To Be Well Capitalized 1,841,760 6.00 1,580,280 6.00
Tier I Capital to Average Assets
--------------------------------
Actual $ 4,766,698 8.19% $ 4,331,389 8.81%
For Capital Adequacy 2,329,200 4.00 1,971,480 4.00
To Be Well Capitalized 2,911,500 5.00 2,464,350 5.00
</TABLE>
18. PARENT COMPANY
Following are condensed financial statement for the parent company:
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1998 1997
----------- ------------
<S> <C> <C>
ASSETS
Cash $ 8,800 $ -
Investment in subsidiary bank 5,041,638 4,469,714
Other assets 27,824 45,065
----------- -----------
TOTAL ASSETS $ 5,078,262 $4,514,779
=========== ===========
TOTAL LIABILITIES $ 549 $ -
STOCKHOLDERS' EQUITY 5,077,713 4,514,779
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $ 5,078,262 $4,514,779
=========== ===========
</TABLE>
F-21
<PAGE>
18. PARENT COMPANY (Continued)
CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
December 31,
1998 1997
------------ ----------
<S> <C> <C>
INCOME
Dividends from subsidiary $ 131,620 $ 137,473
EXPENSES 16,643 29,551
----------- ---------
Income before income taxes 114,977 107,922
Income tax benefit (5,700) (10,047)
----------- ---------
Income before equity in undistributed earnings of subsidiary 120,677 117,969
Equity in undistributed earnings of subsidiary 427,234 407,086
----------- ---------
NET INCOME $ 547,911 $ 525,055
=========== =========
</TABLE>
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
December 31,
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 547,911 $ 525,055
Adjustment to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of subsidiary (427,234) (407,086)
Other, net 17,790 (891)
----------- ---------
Net cash provided by operating activities 138,467 117,078
----------- ---------
FINANCING ACTIVITIES
Cash dividends paid (129,667) (117,078)
----------- ---------
Net cash used for financing activities (129,667) (117,078)
----------- ---------
Net increase in cash 8,800 -
CASH AT BEGINNING OF PERIOD - -
----------- ---------
CASH AT END OF PERIOD $ 8,800 $ -
=========== =========
</TABLE>
F-22
<PAGE>
TRI-STATE 1ST BANK, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 4,900 $ 4,319
Interest-bearing deposits with other banks 95 80
Federal funds sold 2,000 1,100
Investment securities available for sale 21,190 19,958
Investment securities held to maturity (estimated
market value of $1,669 and $1,765) 1,653 1,700
Loans 30,679 28,939
Less allowance for loan losses 351 340
------------ ------------
Net loans 30,328 28,599
Premises and equipment 1,956 1,850
Accrued interest and other assets 870 697
------------ ------------
TOTAL ASSETS $ 62,992 $ 58,303
============ ============
LIABILITIES
Deposits:
Noninterest-bearing demand $ 7,968 $ 8,362
Interest-bearing demand 12,861 12,088
Money market 4,636 4,599
Savings 10,993 10,297
Time 18,962 16,003
------------ ------------
Total deposits 55,420 51,349
Securities sold under agreement to repurchase 2,245 1,500
Other borrowings -- 67
Accrued interest and other liabilities 273 309
------------ ------------
TOTAL LIABILITIES 57,938 53,225
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, no par value; 1,000,000 shares authorized;
567,784 and 565,159 issued and outstanding 3,945 3,890
Retained earnings 1,349 990
Accumulated other comprehensive income (loss) (240) 198
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 5,054 5,078
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 62,992 $ 58,303
============ ============
</TABLE>
See accompanying unaudited notes to the consolidated financial statements.
S-1
<PAGE>
TRI-STATE 1ST BANK, INC.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 736 $ 690
Interest-bearing deposits with other banks 1 -
Federal funds sold 32 45
Investment securities:
Taxable 184 210
Tax exempt 122 83
------ ------
Total interest income 1,075 1,028
------ ------
INTEREST EXPENSE
Deposits 408 409
Other borrowings 24 23
------ ------
Total interest expense 432 432
------ ------
NET INTEREST INCOME 643 596
Provision for loan losses 23 8
------ ------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 620 588
------ ------
NONINTEREST INCOME
Service fees on deposit accounts 105 76
Other 43 37
------ ------
Total noninterest income 148 113
------ ------
NONINTEREST EXPENSE
Salaries and employee benefits 298 274
Occupancy 68 52
Furniture and equipment 43 45
Other 180 184
------ ------
Total noninterest expense 589 555
------ ------
INCOME BEFORE INCOME TAXES 179 146
Income taxes 35 20
------ ------
NET INCOME $ 144 $ 126
====== ======
EARNINGS PER SHARE
Basic $0.25 $0.22
Diluted 0.25 0.22
</TABLE>
See accompanying unaudited notes to the consolidated financial statements.
S-2
<PAGE>
TRI-STATE 1ST BANK, INC.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
-------- -------
(In thousands )
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $2,099 $2,001
Interest-bearing deposits with other banks 3 2
Federal funds sold 130 193
Investment securities:
Taxable 540 526
Tax exempt 346 230
------ ------
Total interest income 3,118 2,952
------ ------
INTEREST EXPENSE
Deposits 1,204 1,177
Other borrowings 67 54
------ ------
Total interest expense 1,271 1,231
------ ------
NET INTEREST INCOME 1,847 1,721
Provision for loan losses 56 41
------ ------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,791 1,680
------ ------
NONINTEREST INCOME
Service fees on deposit accounts 268 224
Other 136 129
------ ------
Total noninterest income 404 353
------ ------
NONINTEREST EXPENSE
Salaries and employee benefits 837 728
Occupancy 196 146
Furniture and equipment 130 121
Other 532 510
------ ------
Total noninterest expense 1,695 1,505
------ ------
INCOME BEFORE INCOME TAXES 500 528
Income taxes 72 100
------ ------
NET INCOME $ 428 $ 428
====== ======
EARNINGS PER SHARE:
Basic $ 0.76 $ 0.76
Diluted 0.74 0.75
</TABLE>
See accompanying unaudited notes to the consolidated financial statements.
S-3
<PAGE>
TRI-STATE 1ST BANK, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Other
Common Retained Comprehensive
Stock Earnings Income (Loss) Total
-------- ------------- ----------------- ---------------
(In thousands)
<S> <C> <C> <C> <C>
Balance, December 31, 1998 $ 3,890 $ 990 $ 198 $ 5,078
Comprehensive Income:
Net income 428 428
Other comprehensive income:
Unrealized loss on securities (438) (438)
---------
Total comprehensive income (loss) (10)
Dividends declared ($.12 per share) (68) (68)
Cash paid in lieu of fractional
Shares (1) (1)
Stock options exercised (2,625
Shares) 55 55
--------- ------ ------ ---------
Balance, September 30, 1999 $ 3,945 $1,349 $ (240) $ 5,054
========= ====== ====== =========
</TABLE>
See accompanying unaudited notes to the consolidated financial statements.
S-4
<PAGE>
TRI-STATE 1ST BANK, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------
1999 1998
------------ ------------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 428 $ 428
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 56 41
Depreciation, amortization, and accretion, net 116 87
Increase in accrued interest receivable (100) (249)
Increase in accrued interest payable 57 65
Other, net 81 (114)
------------ ------------
Net cash provided by operating activities 638 258
------------ ------------
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from maturities and repayments 3,602 3,632
Purchases (5,479) (10,183)
Investment securities held to maturity:
Proceeds from maturities and repayments 47 177
Net increase in loans (1,811) (2,077)
Purchases of premises and equipment (236) (301)
------------ ------------
Net cash used for investing activities (3,877) (8,752)
------------ ------------
FINANCING ACTIVITIES
Net increase in deposits 4,071 6,333
Increase in securities sold under agreement to repurchase 745 1,464
Principal payments on other borrowings (67) (82)
Stock options exercised 55 -
Cash dividends paid (69) (62)
------------ ------------
Net cash provided by financing activities 4,735 7,653
------------ ------------
Increase (decrease) in cash and cash equivalents 1,496 (841)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,499 5,683
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,995 $ 4,842
============ ============
</TABLE>
See accompanying unaudited notes to the consolidated financial statements.
S-5
<PAGE>
TRI-STATE 1ST BANK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
- ---------------------------
The consolidated financial statements of Tri-State 1st Bank, Inc., (the
"Company"), includes its wholly-owned subsidiaries, 1st National Community
Bank, (the "Bank") and Gateminder Corporation, ("Gateminder"). All significant
intercompany balances and transactions have been eliminated.
Nature of Operations
- --------------------
Tri-State 1st Bank, Inc. is the parent company of 1st National Community Bank
and Gateminder Corporation. The Company was formed as an Ohio corporation on
April 24, 1996 and owns and controls all of the capital stock of the Bank, a
national banking association and Gateminder Corporation, an Ohio corporation.
The Company is a bank holding company which, under existing laws, is
restricted to activities generally relating to banking. 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 September 1987,
headquartered near East Liverpool, Ohio. Business is conducted through its
four full service offices located in Columbiana County, Ohio, and one full
service office in Hancock County, West Virginia. 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 to the legal
maximum amount by the Federal Deposit Insurance Corporation.
On April 14, 1999, Gateminder Corporation was incorporated under the laws of
the state of Ohio as a wholly owned non-bank subsidiary of the Company.
Headquartered in East Liverpool, Ohio, Gateminder was established by the
Company to provide non-bank activities for Automated Teller Machines ("ATM").
The non-bank subsidiary sells ATM machines to businesses and merchants that
operate ATMs at their place of business and provides the means for processing
the transactions and distributing the funds taken from the account of the
user/cardholder back to the operator of the ATM. Gateminder commenced
operations on June 25, 1999.
Basis of Presentation
- ---------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with instructions to Form 10-QSB and, therefore, do not
necessarily include all information which would be included in audited
financial statements. The information furnished reflects all normal recurring
adjustments which are, in the opinion of management, necessary for the fair
statement of the results of the period. The results of operations for the
interim periods are not necessarily indicative of the results to be expected
for the full year.
Stock Split
- -----------
On July 22, 1999, the Board of Directors declared a 5-for-4 stock split to
stockholders of record on August 4, 1999. As a result of this split, 113,290
shares of Tri-State 1st Bank stock were issued on August 25, 1999. Total
shares issued and outstanding, as well as, per share information have been
retroactively restated to reflect the stock split for all prior periods
presented.
S-6
<PAGE>
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements
- --------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The statement provides accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, by requiring the recognition of those items as
assets or liabilities in the statement of financial position, recorded at fair
value. Statement No. 133 precludes a held-to-maturity security from being
designated as a hedged item, however, at the date of initial application of
this statement, an entity is permitted to transfer any held-to-maturity
security into the available-for-sale or trading categories. The unrealized
holding gain or loss on such transferred securities shall be reported
consistent with the requirements of Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Such transfers do not raise an
issue regarding an entity's intent to hold other debt securities to maturity
in the future. In June 1999, this statement was delayed to fiscal years
beginning after June 15, 2000.
Earnings Per Share
- ------------------
The following table sets forth the comparison of Basic and Diluted earnings
per share. There were no convertible securities which would effect the
numerator in calculating Basic and Diluted earnings per share: therefore, net
income as presented on the Consolidated Statement of Income will be used as
the numerator. The following table sets forth a reconciliation of the
denominator of the Basic and Diluted earnings per share computation.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average common shares
used to calculate basic earnings
per share 566,833 564,836 566,186 564,836
Common stock equivalents (stock
options) used to calculate diluted
earnings per share 9,234 4,250 9,234 4,250
---------- ---------- ---------- ----------
Weighted average common shares
and Common stock equivalents
used to calculate diluted earnings
per share 576,067 569,086 575,420 569,086
========== ========== ========== ==========
</TABLE>
Supplemental Disclosure of Cash Flow Information
- ------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
---------- ----------
<S> <C> <C>
Cash paid during the period for:
Interest $ 1,214 1,166
Income taxes 16 119
</TABLE>
S-7
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the sale
and distribution of the Common Stock being registered. All amounts shown are
estimates except the SEC registration fee, and assume the sale of 148,200
Shares, the maximum number of Shares offered.
<TABLE>
<S> <C>
SEC registration fee $ 1,112
EDGAR, printing and mailing costs 4,000
Fees and expenses of counsel 30,000
Accounting and related expenses 10,000
Blue Sky fees and expenses 6,000
Miscellaneous 3,888
-------
Total $55,000
=======
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The Company has not sold any securities within the past three years without
registering them under the Securities Act.
ITEM 27. EXHIBITS
The exhibits filed pursuant to this Item 27 immediately follow the Exhibit
Index. The following is a description of the applicable exhibits required for
Form SB-2 provided by Item 601 of Regulation S-B.
Exhibit Number Description
- -------------- -----------
3.1 Articles of Incorporation of the Company
3.2 Code of Regulations of the Company
5.1 Opinion of Doepken Keevican & Weiss, Professional Corporation regarding
Tri-State 1st Bank, Inc. Common Stock, and Consent
8.1 Opinion of Doepken Keevican & Weiss, Professional Corporation regarding
tax matters
21.1 The Subsidiaries of the Company
23.1 Consent of S.R. Snodgrass, A.C.
23.2 Consent of Doepken Keevican & Weiss Professional Corporation (the consent
is contained in the opinion filed as Exhibit 5.1)
II-2
<PAGE>
23.3 Consent of Doepken Keevican & Weiss Professional Corporation (the consent
is contained in the opinion filed Exhibit 8.1)
99.1 Form of Subscription Agreement for Rights Offering
99.2 Form of Subscription Agreement for Public Offering
99.3 Cover letter to accompany prospectus delivery to shareholders
* Incorporated by reference from the Company's Registration Statement on Form
S-4 filed with the SEC on March 6, 1996.
ITEM 28. UNDERTAKINGS.
(a) The small business issuer undertakes to supplement the prospectus,
after the end of the initial subscription period for existing
shareholders of the small business issuer, to include the results of
the subscription offer. If the Company makes any public offering of
the securities on terms different from those on the cover page of the
prospectus, the small business issuer will file a post-effective
amendment to state the terms of such offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to officers, directors, and
controlling persons of the small business issuer pursuant to the
foregoing provisions, or otherwise, the small business issuer has been
advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred
or paid by a director, officer, or controlling person of the small business
issuer in the successful defense of any action, suit, or proceeding) is
asserted by such director, officer, or controlling person in connection
with the securities being registered, the small business issuer will,
unless in the opinion of its counsel that matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in Securities Act and will be governed by the final adjudication
of such issue.
II-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the city of East
Liverpool, State of Ohio on October 13, 1999.
TRI-STATE 1ST BANK, INC.
Charles B. Lang
President
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
SIGNATURE TITLE DATE
/s/ Charles B. Lang Director and President October 13, 1999
- --------------------------- --------------------
Charles B. Lang
/s/ Keith R. Clutter Director and Secretary October 13, 1999
- --------------------------- --------------------
Keith R. Clutter
/s/ Kevin Anglemyer Vice President and Chief October 13, 1999
- --------------------------- --------------------
Kevin Anglemyer Financial Officer
/s/ William E. Blair Director October 13, 1999
- --------------------------- --------------------
William E. Blair
/s/ Stephen W. Cooper Director October 13, 1999
- --------------------------- --------------------
Stephen W. Cooper
/s/ G. Allen Dickey Director October 13, 1999
- --------------------------- --------------------
G. Allen Dickey
/s/ Marvin H. Feldman Director October 13, 1999
- --------------------------- --------------------
Marvin H. Feldman
/s/ R. Lynn Leggett Director October 13, 1999
- --------------------------- --------------------
R. Lynn Leggett
/s/ John P. Scotford Director October 13, 1999
- --------------------------- --------------------
John P. Scotford
/s/ John C. Thompspon Director October 13, 1999
- --------------------------- --------------------
John C. Thompson
II-4
<PAGE>
Exhibit Index
-------------
Exhibit 3.1 Amended Articles of Incorporation of the Company*
Exhibit 3.2 Code of Regulations of the Company*
Exhibit 5.1 Opinion of Doepken Keevican & Weiss Professional Corporation
Tri-State 1st Bank, Inc.
Exhibit 8.1 Opinion of Doepken Keevican & Weiss regarding tax matters
Exhibit 21.1 Description of Subsidiary of the Company, filed herewith
Exhibit 23.1 Consent of S.R. Snodgrass, A.C.
Exhibit 23.2 Consent of Doepken Keevican & Weiss Professional Corporation
(the consent is contained in the opinion filed as Exhibit
5.1)
Exhibit 23.3 Consent of Doepken Keevican & Weiss Professional Corporation
(the consent is contained in the opinion filed as Exhibit
8.1)
Exhibit 99.1 Form of Subscription Agreement for Rights Offering
Exhibit 99.2 Form of Subscription Agreement for Public Offering
Exhibit 99.3 Cover letter to accompany prospectus delivery to
shareholders
* Incorporated by Reference from the Company's Registration
Statement on form S-4 filed with the SEC on March 6, 1996.
II-5
<PAGE>
EXHIBIT 5.1
OPINION OF DOEPKEN KEEVICAN & WEISS, P.C.
REGARDING LEGALITY
October 19, 1999
Tri-State 1st Bank, Inc.
16924 St. Clair Avenue
East Liverpool, Ohio 43920
Re: Tri-State 1st Bank, Inc., Registration Statement on Form SB-2
-------------------------------------------------------------
Gentlemen:
We have acted as counsel for Tri-State 1st Bank, Inc., an Ohio
corporation (the "Company"), in connection with the proposed offering (the
"Offering") by it of up to 148,200 shares of its common stock (the "Stock")
pursuant to the Securities Act of 1933, as amended, (the "Act") and applicable
state securities laws.
In connection with the offering, we have examined the Articles of
Incorporation and Code of Regulations of the Company, resolutions of the Board
of Directors of the Company authorizing the issuance of the Stock, the
Registration Statement on Form SB-2 (the "Registration Statement") and the
prospectus contained therein (the "Prospectus") and such other agreements,
documents, records, opinions, certificates and papers as we have deemed
necessary or appropriate in order to give the opinions hereinafter set forth.
The opinions hereinafter expressed are subject to the following
qualifications and assumptions:
(i) In our examination, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us
as originals and the conformity of all documents submitted to
us as copies to the originals thereof.
(ii) As to the accuracy of certain factual matters, we have relied
on certificates of officers of the Company and certificates,
letters, telegrams or statements of public officials.
(iii) We express no opinion on the laws of any jurisdiction other
than the United States of America and the State of Ohio.
<PAGE>
Tri-State 1st Bank, Inc.
October ___, 1999
Page 2
Based upon and subject to the foregoing, we are pleased to advise you
that it is our opinion that the shares of Stock proposed to be offered in the
Offering have been duly authorized and will, when issued upon payment of the
offering price, be legally and validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" in the Prospectus. In giving this consent, we do not admit that this
firm is in the category of persons whose consent is required under Section 7 of
the Act or the rules and regulations promulgated thereunder.
Very truly yours,
/s/ DOEPKEN KEEVICAN & WEISS
PROFESSIONAL CORPORATION
<PAGE>
EXHIBIT 8.1
OPINION OF DOEPKEN KEEVICAN & WEISS, P.C.
REGARDING TAX MATTERS
October 19, 1999
Tri-State 1st Bank, Inc.
16924 St. Clair Avenue
East Liverpool, Ohio 43920
Gentlemen:
You have asked that we furnish Tri-State 1st Bank, Inc. (the "Company") an
opinion of our firm with respect to certain federal income tax issues in
connection with the Company's proposed offering of 113,356 Shares of its common
stock pursuant to the Rights Offering as specifically set forth in its
Registration Statement on Form SB-2 and related Prospectus to be filed with the
Securities and Exchange Commission. We have reviewed the Registration Statement
and have made such investigation of laws and regulations that we have deemed
necessary under the circumstances. All capitalized terms used herein shall have
the same meaning as given to them in the Registration Statement on Form SB-2 of
the Company, utilized in connection with the offering. Based upon our review
and investigation, we are of the following opinion.
(a) Neither the receipt nor the exercise of the Rights will result in taxable
income to the shareholders of the Company who receive such Rights in
connection with the offering;
(b) No deductible loss will be realized if Rights are allowed to expire without
exercise;
(c) The tax basis of Shares acquired upon the exercise of Rights or in the
Public Offering will be the Subscription Price; and
(d) There is no allocation of an existing shareholders' tax basis in current
Shares held to such shareholders' Rights, whether or not such Rights are
exercised, because (based on the limited time period in which the
shareholders have the option to exercise their Rights and the fact that the
purchase price per share on the exercise of a Right is equal to the per
share price of the Shares sold in the Public Offering) the Company has
determined that such value is zero. We understand that no independent
determination of value of the Rights distributed has been made.
This opinion is based upon current authorities and upon facts and assumptions as
of this date. It addresses only the specific federal income tax consequences
described in paragraphs (a), (b), (c) and (d) above, and does not address any
other federal, state, local or foreign tax consequences that may result from the
Offering or any other transaction, related or otherwise. It is subject to
change in the event of a change in the applicable law or a change in the
interpretation of such law by the courts or by the Internal Revenue Service.
There can be no assurance that legislative or administrative changes or court
decisions will not be forthcoming that would significantly modify this opinion.
Any such changes may or may not be retroactive with respect to transactions
prior to the date of such changes. This opinion has no binding effect or
official status, and accordingly, no assurance can be given that the positions
set forth herein will be sustained by a court, if contested. No ruling will be
obtained from the Internal Revenue Service with respect to the Rights Offering.
We hereby consent to the filing of this opinion as an Exhibit to said
Registration Statement as amended, and to reference to our firm under the
caption, "Plan of Distribution - Federal Income Taxes" in the Prospectus.
Very truly yours,
/s/ Doepken Keevican & Weiss, P.C.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
1st National Community Bank
a national banking association
Gateminder Corporation
an Ohio corporation
<PAGE>
EXHIBIT 23.1
[LOGO OF SNODGRASS]
Certified Public Accountants and Consultants
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in the Prospectus which is part of this Registration
Statement of Tri-State 1st Bank, Inc. on Form SB-2 of our report dated January
8, 1999 relating to the consolidated financial statements of Tri-State 1st Bank,
Inc. as of December 31, 1998 and 1997 and for the years then ended.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ S.R. Snodgrass, A.C.
Wexford, PA
October 14, 1999
<PAGE>
EXHIBIT 99.1 FORM OF SUBSCRIPTION AGREEMENT FOR RIGHTS OFFERING
RIGHTS SUBSCRIPTION AGREEMENT
Tri-State 1st Bank, Inc.
16924 St. Clair Avenue
P.O. Box 796
East Liverpool, Ohio 43920
Gentlemen:
The undersigned hereby subscribes for and agrees to purchase the number of
shares of common stock, no par value (the "Shares"), of TRI-STATE 1ST BANK,
INC., an Ohio corporation (the "Company"), indicated below. The undersigned has
executed and delivered this Subscription Agreement in connection with the
Company's offering of Shares described in its Prospectus dated ______________,
1999. (Such Prospectus, including any amendments and supplements thereto, is
herein called the "Prospectus.")
The undersigned agrees to purchase the Shares subscribed for herein for the
purchase price of $27.00 per share and has delivered to the Company with this
Subscription Agreement a check made payable to "Tri-State 1st Bank, Inc." in an
amount equal to the aggregate purchase price of all Shares subscribed. The
undersigned acknowledges receipt of a copy of the Prospectus.
______________________________________ _________________________________
Number of Shares owned of Record Please PRINT OR TYPE exact
in on September 23, 1999 name(s) to which undersigned
desires shares to be registered
______________________________________ _________________________________
Number of shares eligible for purchase Signature of Investor
(one share for every five shares held on
the record date)
______________________________________ _________________________________
Number of rights shares purchased Signature of Joint Owner, if any
______________________________________
Total subscription price
(at $27.00 per share)
<PAGE>
EXHIBIT 99.2 FOR OF SUBSCRIPTION AGREEMENT FOR PUBLIC OFFERING
SUBSCRIPTION AGREEMENT
Tri-State 1st Bank, Inc.
16924 St. Clair Avenue
P.O. Box 796
East Liverpool, Ohio 43920
Gentlemen:
The undersigned hereby subscribes for and agrees to purchase the number of
shares of common stock, no par value (the "Shares"), of TRI-STATE 1ST BANK,
INC., an Ohio corporation (the "Company"), indicated below. The undersigned has
executed and delivered this Subscription Agreement in connection with the
Company's offering of Shares described in its Prospectus dated _____________,
1999. (Such Prospectus, including any amendments and supplements thereto, is
herein called the "Prospectus.")
The undersigned agrees to purchase the Shares subscribed for herein for the
purchase price of $27.00 per share and deliver to the Company a check made
payable to "Tri-State 1st Bank, Inc." in an amount equal to the aggregate
purchase price of all Shares purchased.
The undersigned acknowledges receipt of a copy of the Prospectus.
The undersigned acknowledges that the Company may accept in full the
undersigned's subscription, accept the undersigned's subscription for some but
not all of the Shares subscribed for herein, or completely reject the
undersigned's subscription. The undersigned agrees to deliver payment for the
Shares subscribed for herein for which the subscription is accepted by the
Company immediately upon call by the Company.
_________________________________ ___________________________________
Number of Shares Subscribed Please PRINT OR TYPE exact name(s)
to which the undersigned desires shares
to registered
The undersigned certifies that I am a ___________________________________
resident of ______________________ Signature of Subscriber
(insert state here)
___________________________________
Signature of Joint Subscriber, if any
DO NOT SEND PAYMENT FOR SUBSCRIPTION PRICE AT THIS TIME
<PAGE>
EXHIBIT 99.3
(TRI-STATE 1ST BANK, INC. LETTERHEAD)
______________ ____, 1999
Dear Shareholder:
Tri-State 1st Bank, Inc. is making an offer to its shareholders of 113,356
shares of its common stock at a price of $27.00 per share. You are entitled to
purchase a maximum of 1 share for every 5 shares of common stock that you owned
as of the close of business on September 23, 1999. The offering of stock to
existing shareholders only will expire on ____________.
Any of the 113,356 shares not purchased by our current shareholders plus an
additional 34,644 shares of our Common Stock will be offered to the public at a
price of $27.00 per share. You may also subscribe to purchase shares in this
public offering. The Company will decide on a case by case basis which of the
public offering subscriptions to accept.
I have enclosed the prospectus for this stock offering, along with the
subscription agreements that you may sign and return to me to purchase shares.
One of the subscription agreements is titled "Rights Subscription Agreement."
The other is titled "Subscription Agreement." Complete, sign and return the
Rights Subscription Agreement, along with a check for the total purchase price,
to purchase shares at $27 per share to which you are entitled as a current
shareholder. In making out your check, remember that you are entitled to buy a
maximum of 1 share for every 5 shares you owned at September 23, 1999.
Complete, sign and return the Subscription Agreement for any additional shares
you want to buy, but do not send a check for the amount in the Subscription
Agreement. We will contact you later if you get to purchase additional shares
and you can send the check at that time.
Please read the prospectus carefully. It describes the terms of the stock
offering and contains important information about Tri-State 1st Bank, Inc.
We believe that this common stock offering presents the opportunity for you to
increase your participation in what we believe will be the continued successful
growth of Tri-State 1st Bank, Inc. Thank you for your continued support and
interest. Again, please read the enclosed prospectus carefully and I hope that
you will chose to invest.
Sincerely,
Charles B. Lang
President
