ITEM 1. BUSINESS OF THE COMPANY
FIRST PLACE FINANCIAL CORPORATION
First Place Financial Corporation, ("First Place" or the "Company"), a New Mexico corporation, is a multi-bank holding company located in Farmington, New Mexico. First Place is engaged in the commercial banking business through its wholly-owned subsidiaries First National Bank of Farmington, New Mexico ("FNBF"), Burns National Bank of Durango, Colorado ("BNBD"), and Western Bank, Gallup, New Mexico ("WBG") (collectively, the "Subsidiary Banks").
On August 30, 1995, First Place acquired 100 percent of the outstanding stock of WBG for cash and stock valued at $3,819,577 in the aggregate. WBG's total assets on the date of acquisition were $31.0 million. The transaction was accounted for using the purchase method of accounting; therefore, WBG's results of operations are included from the date of acquisition. In accordance with the purchase method of accounting, the assets and liabilities of purchased companies are stated at estimated fair values at the date of acquisition, and the excess of cost over fair value of net assets acquired is amortized on the straight-line basis over 15 years.
The following table is a summary level consolidating balance sheet at December 31, 1996 (in thousands):
Each of the Subsidiary Banks engage in general commercial banking business primarily within its respective delineated market area. The majority of the Subsidiary Banks' loans are direct loans to individuals and businesses in their service areas. Similarly, most of the Subsidiary Banks' deposits are attracted from individuals and businesses in their respective areas.
The Subsidiary Banks rely substantially upon local promotional activity, personal contact by their officers, directors, employees and stockholders, personalized service, and their reputation in their respective communities to compete with other financial institutions.
The Bank Holding Company Act of 1956, as amended, limits the activities which may be engaged in by First Place and its subsidiaries to certain specific activities, including those activities which the Federal Reserve Board may find, by order or regulation, to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. First Place has no non-bank subsidiaries and currently engages in no other activities permited under the Bank Holding Company Act.
FIRST NATIONAL BANK OF FARMINGTON
FNBF is a national banking association chartered under the laws of the United States. FNBF conducts a commercial banking and trust business in Farmington, New Mexico, and the surrounding communities of San Juan County, New Mexico. FNBF operates at eight branch locations and operates ten automated teller machines, five of which are located on branch premises. In addition, during the last three years, FNBF has developed a significant correspondent banking business which has extended its lending area throughout New Mexico and southwest Colorado. Of the $42 million increase in FNBF's net loans outstanding during 1996, approximately 70% was to out-of-area borrowers.
FNBF has also developed a significant check clearing business with these correspondents. In order to meet the growing demand for this business, FNBF opened a check processing center in Albuquerque in June 1996. As the largest New Mexico bank not owned by an out-of-state bank holding company, FNBF has become the primary upstream correspondent for many of the state's independent banks.
As the bank with the largest total assets in San Juan County, FNBF emphasizes loans to small businesses and consumers, including 15-year, fixed-rate mortgage loans. FNBF seeks to have branch facilities strategically located throughout the county, including one branch on the Navajo Nation. The branches in Aztec, Bloomfield, and Shiprock have lending officers. FNBF also offers trust services, including corporate and personal trusts as well as cash management services and correspondent banking services to other financial institutions.
COMPETITION
The primary competitors of FNBF are Citizens Bank, Sunwest Bank, and Animas Credit Union, each of which has its main office in Farmington, New Mexico. Bank of America (Albuquerque), Bank of the Southwest (Truth or Consequences), and Centennial Savings Bank FSB (Durango, Colorado) have branches in Farmington. Some of these competitors have other branches, and operate automated teller machines in Farmington and San Juan County. At June 30, 1996, FNBF held approximately 58% of total commercial bank deposits in San Juan County.
BURNS NATIONAL BANK OF DURANGO
BNBD is a national banking association chartered under the laws of the United States. BNBD conducts a commercial banking and trust business in Durango and the surrounding communities of La Plata County, Colorado. BNBD operates at three branch locations and also operates six automated teller machines one of which is in neighboring Montezuma County.
As the second largest commercial bank in Durango, BNBD offers all types of loans but specializes in real estate lending, particularly interim construction loans.
COMPETITION
The primary competitors of BNBD are the First National Bank of Durango, Norwest Bank of Durango, Centennial Savings Bank FSB, and Bank of Durango. Bank of the Southwest (Pagosa Springs) also has a branch in Durango. At June 30, 1996, BNBD held approximately 24% of total commercial bank deposits in La Plata County.
WESTERN BANK GALLUP
WBG is a state bank chartered under the laws of the State of New Mexico. WBG was incorporated in 1973 under the name Citizens Bank of Gallup, and the name was changed to Western Bank in 1980. WBG conducts a commercial banking business from one location in Gallup, serving the surrounding community of McKinley County, New Mexico. WBG operates two automated teller machines.
WBG concentrates its lending activities in three principal areas: commercial loans, real estate loans, and installment loans, with commercial real estate and residential real estate loans making up approximately 64% of WBG's loan portfolio.
COMPETITION
WBG's primary competitors are Sunwest Bank of Gallup, Norwest Bank of Gallup, and Gallup Federal Savings and Loan Association. Bank of America (Albuquerque) also has a branch in Gallup. At June 30, 1996, WBG held approximately 14% of commercial bank deposits in McKinley County.
EMPLOYEES AND EMPLOYEE BENEFITS
First Place currently employs approximately 310 full-time equivalent people. First Place provides a defined benefit pension plan as well as a profit sharing plan with 401(k) provisions to its employees. First Place also provides its employees with group medical, dental, life, and long-term disability insurance.
SUPERVISION AND REGULATION
GENERAL
First Place, as a bank holding company, is subject to the supervision of the Federal Reserve Board ("FRB"). First Place is required to obtain the approval of the FRB before acquiring all or substantially all of the assets of any bank or ownership or control of the voting shares of any bank if, after giving effect to such acquisition of shares, it would own or control more than 5 percent of the voting shares of such bank. The Bank Holding Company Act also provides that no application for approval by First Place to acquire any voting shares of interest in, or all or substantially all of the assets of, a bank located outside the State of New Mexico will be approved unless such acquisition is specifically authorized by the laws of the state in which such bank is located.
The Bank Holding Company Act requires First Place to file reports with the FRB and provide additional information requested by the FRB. The FRB also has the authority to examine First Place and each of the Subsidiary Banks with the cost thereof to be borne by First Place, and possesses cease and desist powers over them if their actions represent unsafe or unsound practices. Particularly important in the FRB's evaluation of a bank holding company is its ability to satisfy the FRB's capital adequacy guidelines.
First Place, and any subsidiary which it may acquire or organize, is deemed to be an affiliate of the Subsidiary Banks within the meaning set forth in the Federal Reserve Act and therefore is subject to certain restrictions which limit the extent to which any of the Subsidiary Banks can supply funds to it. First Place is also subject to restrictions on the underwriting and the public sale and distribution of securities, and is prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, sale or lease of property, or furnishing of services.
The Federal Reserve Act limits the loans and advances that banks may make to their affiliates. For purposes of the Federal Reserve Act, the Company is an affiliate of the Subsidiary Banks. The Subsidiary Banks may not make any loans, extensions of credit, or advances to the Company if the aggregate amount of such loans, extensions of credit, advances, and any repurchase agreements and investments exceed 10% of the capital stock and surplus of the Subsidiary Banks. Any such permitted loan or advance by the Subsidiary Banks must be secured by collateral of a type and value set forth in the Act.
THE SUBSIDIARY BANKS
Two of the Subsidiary Banks, FNBF and BNBD, are national banks organized under the laws of the United States. As national banks, they are subject to regulation, supervision, and regular examination by the Office of the Comptroller of the Currency ("OCC"). The third subsidiary bank, WBG, is a state chartered bank and is therefore subject to federal and state statutes applicable to banks chartered under the banking laws of New Mexico. The bank's operations are also subject to the regulations of the FRB. All of the Company's Subsidiary Banks are insured and are therefore subject to regulation by the Federal Deposit Insurance Corporation ("FDIC") and the FDIC is the primary federal supervisory authority for WBG.
ITEM 2.

ITEM 2. PROPERTIES
First Place has its principal office at 100 East Broadway, Farmington, New Mexico 87401, which is owned and occupied principally by FNBF. FNBF also owns six branches and a motor bank and leases five stand-alone ATM facilities in Farmington and surrounding communities. The WBG and BNBD main office buildings are owned. BNBD owns a motor bank and leases a branch office and four stand-alone ATM facilities in Durango and surrounding communities. WBG owns one stand-alone ATM and leases one stand-alone ATM.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
First Place and the Subsidiary Banks are not a party to any pending legal proceedings, other than ordinary routine litigation incidental to its business, before any court, administrative agency, or other tribunal, nor is First Place aware of any such proceedings threatened against it. The Company believes that none of this litigation, individually or in the aggregate, will be material to the business of the Company.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to the vote of security holders during the fourth quarter of 1996.
PART II
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Effective September, 1996, the common stock of First Place is quoted on the NASDAQ Bulletin Board under the symbol "FPLF". The NASDAQ Bulletin Board is only a quotation service and is not a part of the NASDAQ over-the-counter market. Stockholders can obtain quotes on the Company's stock by contacting a stockbroker. Prior to September, 1996, the common stock was not traded on any exchange, nor were there any active market makers in the stock or any other established public trading market for the stock. However, First Place maintained an informal market for its stock and, during the relevant period, stood ready to purchase as treasury stock shares offered at the prices listed for 1995 and the first three quarters of 1996 in the following table:
PRICE OF COMMON STOCK
1996 1995 ------ ------ First Quarter $42.27 $37.00 Second Quarter $43.79 $38.33 Third Quarter $45.05 $39.33 Fourth Quarter $50.00-56.00* $40.33
*Range of sales price obtained from an information service.
The holders of common stock of the Company are entitled to receive cash dividends when and as declared by the Board of Directors, out of funds legally available. Under New Mexico General Corporation Law, a corporation may make a distribution to its stockholders if the corporation's retained earnings equal at least the amount of the proposed distribution.
First Place, as the sole stockholder of its three Subsidiary Banks, is entitled to the dividends when and as declared by the Subsidiary Banks' respective Boards of Directors, out of funds legally available. As national banks, FNBF and BNBD are subject to the dividend restrictions contained in 12 U.S.C. 60 which provides generally that a national bank may make quarterly distributions provided they do not exceed the lesser of: (1) the bank's retained earnings, or (2) the bank's net income for the last three fiscal years, less the amount of any distributions made by the bank to its stockholders during such period. The OCC may order a national bank to refrain from making a proposed distribution when, in its opinion, the payment of such would be an unsafe or unsound practice. Under New Mexico law, WBG, as a state chartered bank, may only pay dividends if such dividends do not impair capital and surplus or other reserves required under New Mexico banking law. The following table summarizes dividends declared for 1996 and 1995:
DIVIDENDS DECLARED PER SHARE
Increase 1996 1995 (Decrease) ---- ---- ---------- First Quarter $0.3167 $0.2500 $ 0.0667 Second Quarter 0.3200 0.2500 0.0700 Third Quarter 0.3200 0.2833 0.0367 Fourth Quarter 0.3200 0.2833 0.0367 Special Fourth Quarter 0.3600 0.3667 (0.0067) ------- ------- --------- $1.6367 $1.4333 $ 0.2034 ------- ------- --------- ------- ------- ---------
As of March 5, 1997, there were approximately 628 holders of record of the Company's common stock.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
The selected financial data begins on page 14 in the Appendix.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis is presented beginning on page 13 in the Appendix and should be read in conjunction with the related financial statements and notes thereto included under Item 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and its subsidiaries begin on page 33 in the Appendix. The reports of the Company's independent certified public accountants on the consolidated financial statements are presented on pages 59 and 60 in the Appendix.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See the Company's Proxy Statement for the annual meeting of shareholders to be held on April 23, 1997 under the caption "Management of the Company," which is incorporated herein by this reference.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
See the Company's Proxy Statement for the annual meeting of shareholders to be held on April 23, 1997 under the caption "Compensation of Management," which is incorporated herein by this reference.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See the Company's Proxy Statement for the annual meeting of shareholders to be held on April 23, 1997 under the caption "Principal Shareholders," which is incorporated herein by this reference.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTION
See the Company's Proxy Statement for the annual meeting of shareholders to be held on April 23, 1997 under the caption "Certain Transactions By And With Management and Others," which is incorporated herein by this reference.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K
(a) The following documents are filed or incorporated by reference as part of this Form 10-K:
(1) Index to Financial Statements: A list of the consolidated financial statements of the Registrant is incorporated herein at Item 8 of this Report.
(2) Financial Statement Schedules: All schedules have been omitted because they are not required, do not apply, or the information is set forth either in Management's Discussion and Analysis of Financial Condition and Results of Operations, or are in the financial statements or notes thereto.
(b) Reports on Form 8-K
First Place filed the folowing reports on Form 8-K during the last quarter of 1996:
(1) Report dated November 8, 1996, regarding the Company's financial results for the third quarter and for the nine months ending September 30, 1996.
(2) Report dated December 23, 1996, regarding the Company's regular quarterly dividend and special dividend.
(c) Exhibits
3(i) First Place Articles of Incorporation*
3(ii) First Place By-Laws*
21 Subsidiaries of First Place - see Item 1, Part I under the caption "Business of the Company."
23.1 Consent of KPMG Peat Marwick LLP re: incorporation by reference into the previously filed registration statement on Form S-8 and this Form 10-K.
23.2 Consent of Chandler & Company LLP re: incorporation by reference into the previously filed registration statement on Form S-8 and this Form 10-K.
27 Financial Data Schedule.
* Incorporated herein by this reference from the Exhibits to the Registrant's Registration Statement on Form S-4 filed with the Commission on April 18, 1995, SEC Registration No. 33-91310.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 19th day of March, 1997.
First Place Financial Corporation (Registrant)
By: /s/ Richard I. Ledbetter ------------------------------------- Richard I. Ledbetter Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.
By: /s/ James D. Rose ------------------------------------- James D. Rose President and Chief Operating Officer (Principal Financial Officer and Principal Accounting Officer)
/s/ Marlo L. Webb Chairman of the Board -------------------------------- Marlo L. Webb
/s/ Robert S. Culpepper Vice-Chairman of the Board -------------------------------- Robert S. Culpepper
/s/ Tom Bolack Director -------------------------------- Tom Bolack
/s/ Ben Heikkinen Director -------------------------------- Ben Heikkinen
/s/ Richard I. Ledbetter Director -------------------------------- Richard I. Ledbetter
/s/ J. Gregory Merrion Director -------------------------------- J. Gregory Merrion
/s/ Jack M. Morgan Director -------------------------------- Jack M. Morgan
/s/ Roy L. Owen Director -------------------------------- Roy L. Owen
/s/ James D. Rose Director -------------------------------- James D. Rose
/s/ Thomas C. Taylor Director -------------------------------- Thomas C. Taylor
APPENDIX
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following review represents management's discussion and analysis of financial condition and results of operations for First Place Financial Corporation ("First Place") and its three subsidiaries (the "Subsidary Banks"): First National Bank of Farmington ("FNBF"), Burn National Bank of Durango ("BNBD"), and Western Bank Gallup ("WBG") (collectively, the "Company") on a consolidated basis. This review should be read in conjunction with the consolidated financial statements and related notes. Average balances, including such balances used in calculating certain financial ratios, are generally comprised of average daily balances for the Company.
CONTENTS
Page ---- Financial Review . . . . . . . . . . . . . . . . . . . . . . 13
Financial Statements . . . . . . . . . . . . . . . . . . . . 33
Independent Auditors' Reports. . . . . . . . . . . . . . . . 59
(A) RESULTS OF OPERATIONS
OVERVIEW
The Company reported record net income of $9,810,000 in 1996, an increase of 11.9% over earnings of $8,766,000 in 1995. Net income in 1996 included $163,000 reported by WBG compared to a loss of $52,000 for the period of August 30, 1995 through December 31, 1995 included in 1995 net income. 1995 earnings were 9.3% higher than the $8,017,000 earned in 1994. Net income per common share was $4.56 in 1996, compared to $4.27 in 1995 and $3.98 in 1994. Net income per share increased 6.8% from 1995 to 1996 and 7.3% from 1994 to 1995. Return on average equity was 15.9% in 1996 compared to 17.3% and 18.1% in 1995 and 1994, respectively. 1996's record earnings reflect the continued strong loan growth trends.
During 1996, assets of the Company grew $109,815,000, to $800,610,000, a 15.9% increase over the $690,795,000 recorded in 1995. Primarily as the result of the Company's continued growth in its correspondent bank call program, gross loans (net of unearned discount) increased $63,508,000, or 15.7%, in 1996 compared to an increase of $83,020,000, or 25.8%, in 1995.
TABLE ONE FIVE YEAR SUMMARY (dollars in thousands, except earnings per share data)
NET INTEREST INCOME
The largest component of the Company's operating income is net interest income. Net interest income on a tax-equivalent basis is the difference between interest earned on assets and interest paid on liabilities, with adjustments made to compute yields on tax-exempt assets as if
such income was fully taxable. Changes in the mix and volume of earning assets and interest-bearing liabilities, their related yields and overall interest rates have a major impact on earnings. Net interest income, on a tax-equivalent basis, expressed as a percentage of average earning assets, was 4.47% in 1996, 4.58% in 1995, and 4.78% in 1994. Tax-equivalent net interest income was $30,287,000 in 1996, or 11.9% greater than the $27,062,000 recorded in 1995. Tax-equivalent net interest income in 1995 was 10.2% greater than the $24,564,000 recorded in 1994. WBG's 1996 net interest income was $1,429,000 compared to $412,000 in 1995. This trend is attributable to the overall growth of earning assets. Average loans to total earning assets of 64.6% in 1996 and 60.9% in 1995 was the primary contributor to this trend.
INTEREST INCOME
Total actual interest earned on earning assets in 1996 was $56,767,000 compared to $49,273,000 in 1995 and $39,779,000 in 1994. The 15.2% increase from 1995 to 1996 was primarily the result of the higher loan volumes recorded in 1996. WBG's 1996 interest earned was $2,576,000 compared to 1995 reported interest income of $739,000. During 1996, the Company's principal sources of interest income were from the funds it invests in loans, securities, federal funds sold, and interest-bearing deposits held in other financial institutions.
LOANS - In 1996, the average balance of loans outstanding was $437,439,000, 21.7% greater than the average of $359,502,000 in 1995. Average loans in 1995 were 25.7% higher than the $285,994,000 average recorded in 1994. Loans, as a percent of average earning assets, were 64.6% in 1996 compared to 60.9% in 1995 and 55.7% in 1994. The higher loan volumes in 1996 resulted in a $7,668,000 increase in tax-equivalent interest income. The average yield on loans was 9.85% in 1996 compared to 10.02% in 1995 and 9.47% in 1994. The decrease in yield on loans resulted in a decrease of $603,000 to tax-equivalent interest income. These two factors netted together resulted in an increase in interest income of $7,065,000 in 1996. WBG's loans accounted for $1,588,000 of this increase.
In 1996, the Company had $1,702,000 in non-accrual loans compared to $3,517,000 in 1995 and $140,000 in 1994. The reduction of non-accrual loans from 1995 was primarily the result of the foreclosure of real estate collateral which is reported in Other Real Estate Owned for 1996.
INVESTMENT PORTFOLIO - Interest on taxable investment securities increased by $201,000 in 1996 compared to a $16,000 tax-equivalent increase in 1995. The increase in 1996 was primarily the result of a 1.3% increase in the average investment in such securities primarily due to the acquisition of WBG.
Securities issued by the U.S. treasury and U.S. government agencies comprised 42.6% of the total investment portfolio and 57.2% of the taxable securities at December 31, 1996. These securities were 41.8% and 44.3%, respectively, in 1995 and 1994 of the total investment portfolio.
Securities exempt from federal income tax comprised 25.5% of the investment portfolio in 1996 compared to 25.1% in 1995 and 23.5% in 1994. Interest in 1996 on tax-exempt securities, on a tax-equivalent basis, of $4,372,000 was a decrease of $219,000 from the $4,591,000 reported in 1995. Interest, on a tax-equivalent basis, on tax-exempt securities in 1995 was 48.2% greater than the $3,097,000 recorded in 1994.
INTEREST-BEARING DEPOSITS - Average interest-bearing deposits, consisting primarily of funds on deposit with the Federal Home Loan Bank of Dallas, increased by $11,006,000 during 1996. This increase was due to management's desire to maintain liquidity for loan growth and as an accommodation to our correspondents. The Company will purchase federal funds from the correspondents and invest these dollars in interest-bearing deposits. Higher balances of interest- bearing deposits resulted in an increase of $563,000 in tax-equivalent interest income while lower rates earned in 1996 resulted in a decrease of $22,000. These two factors resulted in a net increase in tax-equivalent interest income of $541,000 in 1996.
FEDERAL FUNDS SOLD - Average federal funds sold decreased $2,998,000, or 45.2%, in 1996 compared to 1995. Average federal funds sold in 1995 declined $1,242,000, or 15.8%, compared to 1994. The average yield decreased to 5.51% in 1996 compared to 5.80% in 1995. The average yield was 3.60% in 1994. The lower rates earned on federal funds sold in 1996 resulted in a decrease of $18,000 in tax-equivalent interest income and lower balances resulted in a decrease in tax-equivalent interest income of $166,000.
INTEREST EXPENSE
Total interest expense on interest-bearing liabilities was $28,153,000 in 1996, a 17.4% increase over the $23,974,000 recorded in 1995. Included in 1996 was $1,147,000 for WBG compared to $327,000 reported in 1995 for WBG. Total interest expense in 1995 was 46.2% greater than the $16,400,000 recorded in 1994. Increased volume of interest-bearing liabilities was responsible for $4,241,000 of the increased interest expense in 1996 compared to 1995, while lower rates reduced interest expense by $62,000.
DEPOSITS - The Company's interest-bearing deposits are of three basic types: interest-bearing demand accounts, which may be subject to a waiting period before withdrawal, but are usually withdrawn on demand by the presentment of checks; savings accounts, which may be subject to a waiting period or other limitations before withdrawal, but are normally withdrawn on demand; and time deposits, which are accepted by the Company for specific periods of time and are subject to interest penalities if withdrawn prematurely.
The average balance of interest-bearing demand deposits was $80,703,000 in 1996, 20.2% greater than the $67,160,000 in 1995. Interest-bearing demand deposits increased primarily as the result of the introduction of a new "All-In-One" checking account at the FNBF in September, 1996. The new account pays interest on all balances maintained in the account. This account replaced the bank's regular noninterest-bearing accounts and, therefore, necessitated the transfer of noninterest-bearing deposits to interest-bearing deposits at the time of conversion. Average balances in 1995 were 15.7% greater than 1994. The average rate paid by the Company on these deposits was 3.09% in 1996 compared to 2.60% in 1995 and 2.12% in 1994. The higher rates paid on interest-bearing demand deposits in 1996 resulted in a $362,000 increase in interest expense while the higher volumes of such deposits increased interest expense by $386,000. WBG's 1996 interest expense was $121,000 greater than its 1995 reported expense. Average interest-bearing demand accounts were 14.3% of total average deposits in 1996 and 1995 and 13.6% in 1994.
Savings deposits averaged $108,610,000 in 1996, a 9.8% increase over the $98,906,000 recorded in 1995. Average savings deposits in 1995 were 8.6% lower than 1994. The average
rate paid on savings accounts in 1996 was 3.44% compared to 3.56% and 2.82% in 1995 and 1994, respectively. The lower rates paid on savings accounts in 1996 resulted in a decrease of $110,000 in interest expense, while higher volumes resulted in an increase in interest expense of $329,000. Savings deposits averaged 19.3% of total average deposits in 1996 compared to 21.0% in 1995 and 25.4% in 1994.
Time deposits averaged $278,346,000 in 1996, an increase of 29.1% over the $215,610,000 recorded in 1995. This increase was primarily due to the increased sales of the Company's two-year prime rate certificate of deposit and the inclusion of a full year of WBG's balances. Average time deposits in 1995 were 25.7% greater than the $171,521,000 recorded in 1994. Interest paid on time deposits in 1996 increased by $3,643,000 over 1995 primarily as a result of higher volumes of such deposits. WBG accounted for $605,000 of this increase. Average time deposits in 1996 comprised 49.4% of total average deposits compared to 45.8% in 1995 and 40.2% in 1994.
Average noninterest-bearing deposits were $95,518,000 in 1996 compared to $89,252,000 in 1995 and $88,912,000 in 1994 and decreased to 17.0% of average total deposits in 1996 from 19.0% in 1995 and 20.8% in 1994.
SHORT-TERM BORROWINGS - Short-term borrowings include federal funds purchased and securities sold under agreements to repurchase and generally mature one to seven days following the date of sale. Short-term borrowings averaged $63,959,000 in 1996, an 11.4% decrease compared to the $72,189,000 recorded in 1995. Short-term borrowings increased $19,012,000, or 35.8%, in 1995 compared to 1994. The average rate paid was 5.04% in 1996 compared to 5.61% in 1995 and 3.98% in 1994. The lower volume in 1996 accounted for $455,000 of the decrease in interest expense compared to 1995 and lower rates accounted for $374,000 of the total $829,000 decrease in interest expense.
LONG-TERM DEBT - The Company's long-term debt consists of advances from the Federal Home Loan Bank in Dallas to match-fund 15-year fixed rate mortgages. At December 31, 1996, the Company had an average of $32,418,000 of such advances compared to $32,064,000 and $30,373,000 in 1995 and 1994, respectively. The average rates paid during 1996, 1995, and 1994 were 5.85%, 5.79%, and 5.77%, respectively. The total amount of interest paid on these advances in 1996 was $1,896,000 compared to $1,858,000 in 1995 and $1,754,000 in 1994.
OTHER NOTES PAYABLE - Other Notes Payable consists primarily of the "current" portion of the Federal Home Loan Bank of Dallas advances and treasury tax and loan note balances. In 1996, the Company had an average of $10,712,000 in other notes payable compared to $5,000,000 in 1995 and $4,945,000 in 1994. The average rate paid in 1996 was 5.49% compared to 4.56% in 1995 and 6.23% in 1994. The total amount of interest paid on other notes payable was $588,000 in 1996 compared to $228,000 in 1995 and $308,000 in 1994. The higher volume in 1996 resulted in an increase of $306,000 in interest expense and the increase in the interest rates resulted in an increase of $54,000 in interest expense.
Table Two-Average Balance Sheets, Net Interest Income Yields and Rates, and Table Three-Analysis of Volume and Rate Changes on Net Interest Income and Expenses are provided to enable the reader to understand the components and past trends of the Company's interest income and expenses. Table Two provides an analysis of change in net interest margin on earning assets
setting forth average assets, liabilities, and stockholders' equity; tax-equivalent interest income and interest expense, average yields and rates, and the net interest margin on earning assets. Table Three presents an analysis of volume and rate changes on interest income and expenses.
TABLE TWO AVERAGE BALANCE SHEETS, NET INTEREST INCOME, YIELDS AND RATES Tax-equivalent basis (dollars in thousands)
Notes: Average balances are computed principally on the basis of daily averages. Non-accrual loans are included in loans. Interest income on loans includes fees on loans (in thousands) of $1,556 in 1996; $1,282 in 1995; and $1,218 in 1994. Interest income is stated on a fully taxable equivalent basis (FTE). The rate used for this adjustment was approximately 38%. Net interest margin is computed by dividing net interest income by average earning assets.
TABLE THREE ANALYSIS OF VOLUME AND RATE CHANGES ON NET INTEREST INCOME AND EXPENSES Tax-equivalent basis (dollars in thousands)
Notes:
Non-accrual loans are included in loans. Interest income on loans includes fees on loans (in thousands) of $1,556 in 1996; $1,282 in 1995 and $1,218 in 1994. Interest income is stated on a fully taxable equivalent basis. The rate used for this adjustment was approximately 38%. The rate/volume variance is allocated based on the percentage relationship of changes in volume and changes in rate to the total "net change".
PROVISION FOR LOAN LOSSES
In 1996, the Company provided $1,155,000 for possible loan losses, which was $318,000 more than provided in 1995. The provision in 1995 was $837,000 compared to $58,000 in 1994. The Company received a large recovery in 1994. During 1996, the Company had net charge-offs of $810,000 compared to $137,000 in 1995. Gross charge-offs in 1996 were $1,805,000 compared to $852,000 in 1995. Consumer net charge-offs increased $468,000 primarily due to management's decision in 1996 to charge-off problem credits earlier in the delinquency cycle than in prior years and a rapid increase in indirect consumer loans during 1995. Based upon recent experience, Management estimates gross charge-offs for 1997 of $1,700,000, broken down as follows: Commercial - $580,000; real estate - $120,000; and consumer $1,000,000.
OTHER INCOME
SERVICE CHARGES AND FEES AND OTHER INCOME
Service charges on deposit accounts remained flat in 1996 at $2,573,000, compared to $2,594,000 in 1995. Included in 1996 and 1995 was $228,000 and $77,000, respectively, attributed to the WBG acquisition. Without the $151,000 increase due to the WBG acquisition, service charges on deposit accounts decreased $172,000 from 1995 to 1996. This decline was primarily the result of reductions in analysis service charges paid by commercial customers as well as reductions in checking account service charges from consumer accounts. The decline is service charges on consumer accounts can be attributed to a decline in the number of low balance accounts which generally incurred monthly service charges as well as the introduction in 1996 of the "All-In-One" checking account at FNBF which requires a lower minimum balance to avoid service charges. 1995 fees were up $110,000, or 4.4%, from 1994.
OTHER SERVICE CHARGES
Other service charges increased in 1996 to $1,666,000 compared to $1,580,000 in 1995 primarily due to an increase in ATM interchange fees received. Other service charges in 1995 were 15.1% higher than the $1,373,000 recorded in 1994.
SECURITIES TRANSACTIONS
During 1996, the Company incurred losses of $82,000 on the sale of investment securities. No such gains or losses were recorded in 1995. During 1994, the Company sold investment securities whose market value was $395,000 less than their recorded book value. The proceeds of these sales were reinvested in other securities which had higher yields and maturities more appropriate to the Company's asset/liability management plan. While the Company does not normally maintain a trading account in the securities market, in December 1994, it did transfer an investment security with a recorded book value of $994,000 and a market value of $861,000 into the trading account. A loss of $133,000 was reflected in Other Operating Expenses for 1994.
OTHER EXPENSES
SALARIES AND BENEFITS
Salaries and benefits expense of $10,040,000 increased $926,000 in 1996, or 10.2% over the $9,114,000 recorded in 1995. 1995 salary and benefits expense was $466,000, or 5.4% higher than 1994. The increase in 1996 resulted from normal salary increases, a slightly higher level of full-time equivalent employees added to support asset growth, and the acquisition of WBG, which accounted for $420,000 of this increase. These increases were offset somewhat by a $122,000 decrease in pension expense.
OCCUPANCY EXPENSES
Occupancy expense was $2,145,000 in 1996 compared to $1,522,000 in 1995 and $1,606,000 in 1994. The $623,000 increase in 1996 was primarily attributable to increased depreciation due to the new Main Office building for BNBD which was occupied in May, 1996 and increased depreciation at FNBF due to the Animas Valley Mall branch which was opened in October, 1995 and various purchases of bank and data processing equipment. Various repairs and maintenance expenses also increased. WBG's additional expense in 1996 was $145,000. The $84,000 reduction in expenses in 1995 was primarily the result of decreased building depreciation as a result of the tax-free exchange of the former BNBD's bank building, as well as reductions in building repairs and maintenance and an increase in rental income.
OTHER OPERATING EXPENSES
Other operating expenses were $6,438,000 in 1996, a 3.4% increase over the $6,225,000 recorded in 1995. This increase was primarily in professional fees, up $384,000, marketing, up $169,000, and supplies, up $196,000, offset by decreases in FDIC and other regulatory fees of $482,000 and VISA expenses of $166,000. WBG's 1996 other operating expenses increased $458,000. Other operating expenses of $6,225,000 in 1995 were $680,000, or 12.3% greater than the $5,545,000 recorded in 1994. The acquisition of WBG accounted for $261,000 of the $680,000 increase in other operating expenses in 1995. While the Company benefitted from reduced FDIC insurance premiums in 1995, this reduction in expenses was offset by increases in directors' deferred income benefit expense, other loan expenses, advertising and promotion expenses, other professional fees, ATM and data processing hardware expenses, and check printing expenses.
PROVISION FOR TAXES
The provision for income taxes was $3,828,000 in 1996 compared to $3,871,000 in 1995 and $3,819,000 in 1994. The effective tax rate on income was 28.1% in 1996 compared to 30.6% in 1995 and 32.3% in 1994. The decrease in the effective tax rate from 1995 to 1996 is primarily attributable to a low income housing credit of $161,000 and recognition of deferred tax credits.
RETURN ON AVERAGE ASSETS AND EQUITY
The following table sets forth certain ratios for the Company for the last three years (using average balance sheet data):
TABLE FOUR PROFITABILITY AND EQUITY RATIOS
1996 1995 1994 ---- ---- -----
Return on assets 1.33% 1.38% 1.42% Return on stockholders' equity 15.90% 17.29% 18.05% Stockholders' equity to assets 8.34% 7.96% 7.89% Stockholders' dividend payout ratio 35.31% 33.94% 31.06%
Return on assets in 1996 of 1.33% was down slightly from the 1.38% and 1.42% recorded in 1995 and 1994, respectively. Average assets increased $103,402,000 in 1996 compared to increases of $73,465,000 in 1995 and $67,820,000 in 1994.
Return on stockholders' equity declined 1.39 percentage points to 15.90% in 1996 from 17.29% in 1995 and 1995 return on stockholders' equity declined .76 percentage points from the 18.05% recorded in 1994. Average stockholders' equity as a percent of average total assets increased to 8.34% in 1996 compared to 7.96% and 7.89% in 1995 and 1994, respectively. The dividend payout ratio increased to 35.31% in 1996 compared to 33.94% in 1995 and 31.06% in 1994. Dividends declared per share in 1996 increased $.20, or 14.2%, to $1.64 per share compared to 1995.
(B) BALANCE SHEET ANALYSIS
LOANS
The Company concentrates its lending activities in five principal areas: commercial, commercial real estate, consumer, real estate residential and real estate construction loans. At December 31, 1996, these five categories were 21.9%, 34.6% 17.4%, 19.2% and 6.9%, respectively, of the Company's loan portfolio. This compares with 22.5%, 34.2%, 16.2%, 19.7% and 7.4%, respectively, at December 31, 1995. The interest rates charged for the loans made by the Company vary with the perceived degree of risk (both credit risk and interest rate risk), the size and maturity of the loans, the borrower's relationship with the Company, and the prevailing money market rates indicative of the Company's cost of funds.
The majority of the Company's loans are direct loans made to individuals and businesses. The Company relies substantially on local promotional activity and personal contacts by officers, directors, and employees of the Subsidiary Banks to compete with other financial institutions. The Company makes loans to borrowers whose applications include a sound purpose, a viable repayment source, and a plan of repayment established at inception and generally backed by a secondary source of repayment.
Loan growth remained strong in 1996 with average loans as of December 31, 1996 of $437,439,000 compared to $359,502,000 in 1995 and $285,994,000 in 1994. The 21.7% increase in loans in 1996 was the result of the acquisition of WBG and internal growth. WBG contributed approximately $16,000,000 of the increase, while internal growth accounted for $61,937,000 compared to internal growth of $54,832,000 recorded in 1995. Average loan growth in 1995 and 1994 was 25.7% and 24.6%, respectively. Total loans at December 31, 1996 were $468,188,000, an increase of $63,508,000, or 15.7%, compared to December 31, 1995. Total loans at December 31, 1995 were $404,680,000, an increase of $83,020,000, as compared to 1994. Management does not anticipate that loans will continue to increase at this rate but does expect continued loan growth as the Company expands its correspondent banking business and continues its emphasis on lending in the Subsidiary Bank's primary service areas. Consumer loans, both direct and indirect, will continue to be emphasized and loans to low and moderate-income borrowers will remain a priority. Management anticipates real estate construction lending activity will increase in 1997. Management does not foresee any significant changes occurring in the loan mix in 1997.
TABLE FIVE LOAN PORTFOLIO COMPOSITE (dollars in thousands)
NONACCRUAL, PAST DUE, AND RESTRUCTURED LOANS
Nonperforming loans as of December 31, 1996, were $2,309,000, or .49%, of total assets compared to $3,825,000, or .95%, of total assets at December 31, 1995. The decrease in nonperforming loans was primarily due to foreclosure of a large real estate loan in 1996. A portion of the foreclosed collateral is included as Other Real Estate Owned ("OREO") at December 31, 1996.
Commercial and real estate loans are reviewed on an individual basis for reclassification to nonaccrual status when any one of the following occurs: the loan becomes 90 days past due as to interest or principal (unless in Management's opinion, the loan is well secured and in the process of collection), the full and timely collection of additional interest or principal becomes uncertain, the loan is classified as doubtful by loan review or bank regulatory agencies, a portion of the principal balance has been charged off, or the Company takes possession of the collateral. The reclassification of loans to nonaccrual status does not necessarily reflect Management's judgement as to whether they are collectible. Consumer loans generally are not placed on non-accrual status; they are classified substandard upon becoming 90 days past due and are charged off upon becoming 120 days past due.
While interest income is not accrued on loans reclassified to nonaccrual status, interest income may be recognized on a cash basis if Management expects collection in full of principal and interest. When a loan is placed on nonaccrual status, any previously accrued but unpaid interest is reversed.
With respect to the Company's policy of placing loans 90 days or more past due on nonaccrual status, unless the loan is well secured and in the process of collection, a loan is considered to be in the process of collection if, based on a probable specific event, it is expected that the loan will be repaid or brought current. Generally, this collection period would not exceed 30 days.
Delinquent real estate loans are not reclassified as OREO until the Company takes title to the property, either through foreclosure or upon receipt of a deed in lieu of foreclosure. In such situations, the secured loan is reclassified on the balance sheet as OREO at the lesser of the fair value of the underlying collateral less estimated selling costs or the recorded amount of the loan.
Management considers both the adequacy of the collateral and the other resources of the borrower in determining the steps to be taken to collect nonaccrual and charged-off loans. Alternatives that are considered are foreclosure, collecting on guarantees, restructuring the loan, and collection lawsuits.
The following table sets forth the amount of the Company's nonperforming assets as of the dates indicated:
TABLE SIX NONPERFORMING ASSETS (dollars in thousands)
ALLOWANCE FOR LOAN LOSSES ACTIVITY
In determining the adequacy of the loan loss allowance, Management relies primarily on its review of the loan portfolio, both to ascertain whether there are probable losses to be written off and to assess the loan portfolio in the aggregate. Problem loans are examined on an individual basis to determine estimated probable loss. In addition, Management considers current and projected loan mix and loan volume, historical net loan loss experience for each loan category, and current and anticipated economic conditions affecting each loan category. The allowance for loan losses was 1.91% of total loans at December 31, 1996 compared to 2.12% at December 31, 1995.
Management believes that the $8,933,000 allowance for loan losses at December 31, 1996, is adequate to absorb known risks in the loan portfolio. No assurance can be given, however, that adverse economic conditions or other circumstances will not result in increased losses in the portfolio.
The primary risk elements considered by Management with respect to consumer installment and residential real estate loans are lack of timely payment and the value of the collateral. The primary risk elements considered by Management with respect to its real estate construction loans are the financial condition of the borrower, fluctuations in real estate values in the Company's market areas, fluctuations in interest rates, timeliness of payments, the availability of conventional financing, the demand for housing in the Company's market areas, and general economic
conditions. The primary risk elements with respect to commercial loans are the financial condition of the borrower, general economic conditions in the Company's market areas, the sufficiency of collateral, timeliness of payments and, with respect to adjustable rate loans, interest rate fluctuations.
The following table summarizes, for the years indicated, the activity in the allowance for loan losses:
TABLE SEVEN ALLOWANCE FOR LOAN LOSSES ACTIVITY (dollars in thousands)
INVESTMENT SECURITIES
Average investments during 1996 were $222,022,000, an increase of $492,000 from the $221,530,000 average in 1995. Average investments in 1995 were 9.7% higher than the $201,901,000 recorded in 1994. The December 31, 1996 investment securities balance was $244,687,000 up $26,437,000 from the December 31, 1995 balance of $218,250,000. Of this increase, $7,664,000 was in tax-exempt securities. Management plans to continue to look for opportunities to increase the tax-exempt portfolio to further reduce the Company's effective tax rate. The increase of $18,773,000 in taxable securities was in response to pledging requirements
to secure securities sold under agreements to repurchase and to leverage capital through investment opportunities that would be profitable when funded with borrowings at the FHLB, which is reported in Long-Term and Other Notes Payable.
In December 1995, in an effort to improve the Company's liquidity position, the investment portfolio was restructured by moving all of the securities in the "Held-to-Maturity" portfolio to the "Available-for-Sale" portfolio. The effect of this reclassification was an increase in net unrealized gains of $781,000.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment net of accumulated depreciation as of December 31, 1996, was $16,223,000 compared to $11,079,000 in 1995. The $5,144,000 increase was primarily the result of the $4,215,000 expenditure to complete BNBD's main office building.
OTHER REAL ESTATE OWNED
The December 31, 1996 balance of OREO was $1,712,000 compared to $564,000 at December 31, 1995, an increase of $1,148,000. This increase was primarily due to one property. It is anticipated that this property will be sold during 1997 with no loss anticipated.
DEPOSITS
Total deposits at December 31, 1996 were $587,893,000, compared to $529,047,000 at December 31, 1995. This 11.1% increase followed a 20.6% increase in 1995 compared to 1994. Noninterest-bearing demand, which was 16.1% and 20.3% of total deposits at December 31, 1996 and 1995, respectively, decreased $12,548,000 from 1995 to 1996. This decrease was primarily the result of the introduction of the "All-In-One" checking account at FNBF. This product shifted noninterest-bearing consumer checking accounts into interest-bearing accounts.
Interest-bearing demand increased $35,248,000 from $63,488,000 at December 31, 1995 to $98,736,000 at December 31, 1996 and represented 16.8% and 12.0% of total deposits as of year end 1996 and 1995, respectively. Average interest-bearing deposits increased 20.2% from 1995 to 1996. This increase was due to the shift from noninterest-bearing deposits due to the "All-In-One" checking account and internal growth.
Average savings accounts grew from $98,906,000 in 1995 to $108,610,000 in 1996. These deposits represented 18.8% and 19.3% of total deposits at year end 1996 and 1995, respectively.
Average time certificates increased $62,736,000 during 1996. These deposits include time certificates, $100,000 and over, and other time certificates. Time certificates, $100,000 and over, were 28.1% of total deposits at December 31, 1996 and 28.5% at December 31, 1995. While these deposits are generally more rate sensitive and therefore more likely to be withdrawn than other deposits, the Company has found these deposits to be a relatively stable funding source. Other time certificates were 20.2% and 20.0% of total deposits at year end 1996 and 1995, respectively. Most of the growth in this category has come from the sale of the Company's 2-year floating rate certificates. The rate paid on these certificates floats monthly and is based upon
75% of the prime rate in effect on the first of each month. This product was introduced to help match-fund the Company's floating-rate assets. This certificate was made available, through the first quarter of 1996, to brokers outside of the Company's general market area to help meet current liquidity requirements. These certificates were offered to the brokers on the same terms, conditions, and rates as they were to other customers. As of December 31, 1996, brokers held approximately $36,321,000 of these deposits. Brokered deposits are typically more rate sensitive than general core deposits and therefore more likely to be withdrawn. The 2-year floating rate certificates and time certificates, $100,000 and over, are the highest cost funding sources for the Company and comprise a significant portion of the Company's annual interest expense.
FEDERAL FUNDS PURCHASED
As part of its expanding correspondent bank services, the Company routinely purchases excess federal funds from its downstream correspondents and resells those funds as part of its own federal funds sold. In 1996, the Company's average federal funds purchased were $11,551,000 compared to $15,934,000 in 1995.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Average securities sold under agreements to repurchase ("repos") decreased by $3,847,000, or 6.8%, to $52,408,000 during 1996. At December 31, 1995, average repos were $56,255,000 compared to $49,094,000 in 1994. The majority of the repos are sold to public entities although some corporate customers use them as a tool in their short-term cash management strategy.
LONG-TERM AND OTHER NOTES PAYABLE
In 1992, the Company began a program of "match-funding" 15-year fixed rate residential mortgage loans with long-term fixed rate borrowings from the Federal Home Loan Bank in Dallas. The Company borrowed $19,972,000 and $3,250,000 during 1996 and 1995, respectively. At December 31, 1996 and 1995, the advances outstanding from the Federal Home Loan Bank were $49,933,000 and $36,204,000, respectively.
STOCKHOLDERS' EQUITY AND CAPITAL ADEQUACY
Total stockholders' equity at December 31, 1996 was a record $64,760,000, up 12.1% from $57,756,000 at year-end 1995. The growth was due primarily to record earnings. At December 31, 1996 and 1995, respectively, the ratio of stockholders' equity to total assets was 8.09% and 8.36%. This slight decline was due to the fact that the Company's total assets increased at a greater rate than the increase in retained earnings.
The Company and its Subsidiary Banks exceeded required regulatory minimums for "well-capitalized" status throughout 1996, and it is the Company's policy to maintain this status at both the consolidated and subsidiary bank levels.
A financial institution's risk-based capital ratio is calculated by dividing its qualifying capital by its risk-weighted assets. Qualifying capital is divided into two tiers. The Company's Tier 1 (or core) capital consists of its common stockholders' equity less intangibles. Its Tier 2 (or
supplementary) capital consists of its allowance for loan losses up to a maximum of 1.25% of its risk-weighted assets. Tier 2 capital qualifies as part of total capital up to a maximum of 100% of Tier 1 capital. Amounts in excess of these limits are included in the calculation of risk-based capital ratios as a reduction of risk-weighted assets. As of December 31, 1996, the Company and the Subsidiary Banks generally had to have a minimum ratio of qualifying total capital to risk-weighted assets of 8% and qualifying Tier 1 capital to risk-weighted assets of 4%. The Company's actual ratios were 13.02% and 11.76%, respectively compared to 13.57% and 12.31%, respectively, for the same period a year ago.
In addition, bank regulators have promulgated capital leverage guidelines designed to supplement the risk-based capital guidelines. Banks and bank holding companies must maintain a minimum ratio of Tier 1 capital to adjusted total assets (leverage ratio). The Company's required Tier 1 leverage ratio was 4% and its actual ratio was 7.84% and 8.06% at December 31, 1996 and 1995, respectively.
The following table indicates the amounts of regulatory capital of the Company.
TABLE EIGHT REGULATORY CAPITAL (dollars in thousands)
Total Risk-Based Tier 1 Leverage ----------- ------ -------- December 31, 1996: Company's 13.02% 11.76% 7.84% Regulator minimum 8.00% 4.00% 4.00% Company's capital $69,265 $62,586 $62,586 Regulatory minimum $42,567 $21,284 $31,937 Computed excess $26,698 $41,302 $30,649
Management believes that capital is adequate to support anticipated growth, meet cash dividend requirements of the Company and meet the future risk-based capital requirements of the Company and the Subsidiary Banks.
LIQUIDITY AND INTEREST RATE SENSITIVITY
Liquidity refers to the Company's ability to provide funds at an acceptable cost to meet loan demand and deposit withdrawals, as well as contingency plans to meet unanticipated funding needs or loss of funding sources. These objectives can be met from either the asset or liability side of the balance sheet.
The Company maintains an adequate liquidity position through stable core deposits (see: "Deposits"), the usage of debt (see: "Long-Term and Other Notes Payable"), and from a high quality investment portfolio (see: Table 11, "Securities Maturities and Weighted Average Yields"). To enhance the Company's ability to manage liquidity, in December 1995, the total investment portfolio was reclassified as Securities Available-for-Sale. Maturing balances in the loan portfolio also provide funds and, in addition, assets may be sold to provide flexibility in managing cash flows. Additional sources of liquidity are provided by federal fund credit lines
carried by the Subsidiary Banks with upstream correspondents, borrowings from the Federal Home Loan Bank, and borrowings from the Federal Reserve system. The Company's lead Subsidiary Bank, FNBF, also routinely enhances its liquidity through purchases of excess funds from downstream correspondent banks. While the above-mentioned sources of liquidity are expected to provide significant amounts of funds in the future, their mix, as well as the possible use of other sources of funds, will depend upon future economic and market conditions.
The securities underlying the following agreements were under the control of the Subsidiary Banks.
TABLE NINE SECURITIES SOLD UNDER REPURCHASE AGREEMENTS; ORIGINAL MATURITIES LESS THAN ONE YEAR (dollars in thousands)
1996 1995 1994 ---- ---- ----
Amount outstanding at year end $68,739 $51,929 $87,680 Average outstanding during the year 52,408 56,255 49,094 Maximum outstanding at any month end 68,739 76,994 87,680
Weighted average interest rate 4.98% 5.47% 4.01%
Note: Average balances are computed principally on the basis of daily averages.
The overall liquidity of the Company is enhanced by its core deposits which provide a relatively stable funding base. The maturity of certificates of deposit in denominations of $100,000 or more is set forth in the following table. While these deposits are generally considered to be more rate sensitive than other deposits and, therefore, more likely to be withdrawn to obtain higher yields elsewhere if available, the Company has found these deposits to be relatively stable.
Generally, investment securities which mature within one year can be converted to cash for liquidity needs at amounts which approximate their book value. Securities with maturities greater than one year are more sensitive to changes in interest rate and, therefore, their liquidation value would tend to be more volatile relative to their book value. The following tables summarize the investment portfolio maturities and yields at December 31, 1996 and the investment portfolio distribution for the last three years.
Notes: All securities are shown at book value at year-end. Yields are calculated based on purchase price. Mortgage-backed securities are included with U.S. treasury securities and obligations of U.S. government corporations and agencies. Available-for-sale securities are shown at contractual maturities, except for securities having no stated maturity, which are shown as due after ten years.
TABLE TWELVE SECURITIES PORTFOLIO DISTRIBUTION (dollars in thousands)
At December 31: 1996 1995 1994 -------- -------- --------
U.S. Treasury securities and obligations of U.S. government corporations and agencies $175,734 $156,537 $175,943 Obligations of states and political subdivisions 62,372 54,708 55,486 Other securities 6,581 7,005 6,035 -------- -------- --------
Total securities $244,687 $218,250 $237,464 -------- -------- -------- -------- -------- --------
Loan demand also affects the Company's liquidity position. The following tables present the maturities and sensitivity to changes in interest rates of loans at December 31, 1996 and 1995.
TABLE THIRTEEN LOAN MATURITIES (dollars in thousands)
Interest rate sensitivity is a function of the repricing characteristics of the Company's portfolio of assets and liabilities. These repricing characteristics are the time frames within which the interest-bearing assets and liabilities are subject to change in interest rates either at replacement, repricing, or maturity. Interest rate sensitivity management focuses on the maturity of assets and liabilities and their repricing during periods of changes in market interest rates. Interest rate sensitivity is measured as the difference between the volume of assets and liabilities in the Company's portfolio that are subject to repricing at various time horizons. The differences are referred to as interest sensitivity gaps.
The principal cash requirement of the Company is dividends on common stock when declared. A second requirement is the repayment of debt, if any. The Company is dependent upon the payment of cash dividends by the Subsidiary Banks to service these requirements. The Company expects that the cash dividends paid by the Subsidiary Banks to the Company will be sufficient to meet its cash requirements.
OFF-BALANCE SHEET ITEMS
As of December 31, 1996, commitments to extend credit were the sole source of financial instruments with off-balance sheet risk. The Company has not entered into any contracts for financial derivative instruments, such as futures, swaps, options, etc. Loan commitments (including standby letters of credit) increased by $18,441,000, or 20.2%, to $109,792,000 in 1996 as compared to $91,351,000 in 1995. This is an indicator of continued loan growth and represents 23.5% of total loans outstanding at year end as compared to 22.6% a year ago.
FIRST PLACE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 1996 and 1995
(in thousands) 1996 1995 -------- -------- ASSETS Cash and due from banks $ 49,487 $ 35,662 Interest-bearing deposits in banks 2,391 10,887 Federal funds sold 7,835 2,725 -------- -------- Total cash and cash equivalents 59,713 49,274 -------- --------
Investment securities: Available for sale (at market value) 244,687 218,250 -------- --------
Loans 468,188 404,680 Allowance for loan losses (8,933) (8,588) -------- -------- Total net loans 459,255 396,092 -------- --------
Bank premises and equipment, net 16,223 11,079 Other real estate owned 1,712 564 Other assets 19,020 15,536 -------- --------
Total Assets $800,610 $690,795 -------- -------- -------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Noninterest-bearing demand $ 94,907 $107,455 Interest-bearing demand 98,736 63,488 Savings 110,392 101,876 Time certificates, $100,000 and over 164,976 150,625 Other time certificates 118,882 105,603 -------- -------- Total deposits 587,893 529,047
Securities sold under agreements to repurchase 68,739 51,929 Federal funds purchased 15,785 4,365 Long term and other notes payable 52,020 38,642 Other liabilities 11,413 9,056 -------- -------- Total liabilities 735,850 633,039 -------- --------
Stockholders' equity: Common stock, no par value: Authorized shares - 15,000,000 Issued shares - 2,123,157 at 12/31/96 and 2,104,707 at 12/31/95 13,634 13,609 Additional paid-in-capital 124 62 Net unrealized holding gain on securities available for sale 967 922 Retained earnings 50,035 43,689 -------- -------- 64,760 58,282 Treasury stock, at cost-0 shares at 12/31/96 and 13,371 shares at 12/31/95 --- (526) -------- -------- Total stockholders' equity 64,760 57,756 -------- --------
Total Liabilities and Stockholders' Equity $800,610 $690,795 -------- -------- -------- --------
See notes to consolidated financial statements.
FIRST PLACE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1996, 1995, and 1994
See notes to consolidated financial statements.
FIRST PLACE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1996, 1995, and 1994
(in thousands) 1996 1995 1994 -------- -------- -------- Common stock: Balance at beginning of year $13,609 $ 9,759 $ 9,299 Issue of new common stock 635 3,850 460 Retirement of common stock (610) --- --- ------- ------- ------- Balance at end of year 13,634 13,609 9,759 ------- ------- ------- Additional paid-in capital: Balance at beginning of year 62 36 32 Additions related to sale of common stock 62 26 4 ------- ------- ------- Balance at end of year 124 62 36 ------- ------- ------- Net unrealized holding gain (loss) on securities available for sale: Balance at beginning of year 922 (1,083) (39) Unrealized holding gain (loss) recorded during year 45 2,005 (1,044) ------- ------- ------- Balance at end of year 967 922 (1,083) ------- ------- ------- Retained earnings: Balance at beginning of year 43,689 37,897 32,369 Net income 9,810 8,766 8,017 Cash dividends declared (3,464) (2,974) (2,489) ------- ------- ------- Balance at end of year 50,035 43,689 37,897 ------- ------- ------- Treasury stock: Balance at beginning of year (526) (84) --- Acquisition of common stock for treasury (345) (653) (1,207) Sale and retirement of common stock from treasury 871 211 1,123 ------- ------- ------- Balance at end of year --- (526) (84) ------- ------- -------
Total stockholders' equity $64,760 $57,756 $46,525 ------- ------- ------- ------- ------- -------
See notes to consolidated financial statements.
First Place Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996, 1995, and 1994
(Continued)
See notes to consolidated financial statements.
First Place Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years Ended December 31, 1996, 1995, and 1994
See notes to consolidated financial statements.
First Place Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
First Place Financial Corporation ("First Place") is a bank holding company whose wholly owned subsidiaries are FNBF, BNBD, and WBG (the "Subsidiary Banks"). First Place's sources of revenue are regional banking operations, which include commercial, personal, and mortgage loans, deposit accounts, and trust services.
This summary of significant accounting policies of First Place and Subsidiary Banks (the "Company") is presented to assist in understanding the Company's consolidated financial statements. These accounting policies, which conform to generally accepted accounting principles and to general practices within the banking industry, have been consistently applied in the preparation of the consolidated financial statements. The consolidated financial statements and notes are representations of the Company's management, who is responsible for their integrity and objectivity.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
1. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of First Place and its wholly-owned subsidiaries, First National Bank of Farmington, Burns National Bank of Durango, and Western Bank, Gallup. All significant intercompany accounts and transactions have been eliminated.
2. TRADING SECURITIES Securities held principally for resale in the near term are classified as trading account securities and recorded at their fair values. Unrealized gains and losses on trading account securities are included immediately in other income.
3. SECURITIES HELD TO MATURITY Securities for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity.
4. SECURITIES AVAILABLE FOR SALE Available-for-sale securities consist of securities not classified as trading securities nor as held-to-maturity securities. Unrealized holding gains and losses, net of the tax effect, on available-for-sale securities are reported as a net amount in a separate component of stockholders' equity until realized. Gains and losses on the sale of available-for-sale securities are determined using the specific- identification method. Premiums and discounts are recognized in interest income using the interest method over the period to maturity.
First Place Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
5. LOANS AND ALLOWANCE FOR LOAN LOSSES The Company maintains a diversified loan portfolio consisting of commercial, real estate and consumer loans made to customers throughout New Mexico and southern Colorado.
Loans are reported at the principal amount outstanding, net of deferred loan fees, premiums and discounts and the allowance for loan losses. Interest on loans generally is calculated by using the simple interest method on the daily balance of the principal amount outstanding.
Loan origination and commitment fees and certain direct loan origination costs are deferred, and the net amount is amortized as an adjustment of the related loan's yield over the estimated life of the loan.
Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Accrual of interest on loans is generally discontinued either when reasonable doubt exists as to the full, timely collection of interest or principal or when a loan becomes contractually past due by 90 days or more with respect to interest or principal. When loans are 90 days past due, but in management's judgment are well secured and in the process of collection, they are not classified as nonaccrual. When a loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed. Income on such loans is then recognized only to the extent that cash is received and where the future collection of principal is probable. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest.
Income or loss from the change in the value of impaired loans is included in the provision for loan losses in the same manner in which impairment initially was recognized or as a reduction in the amount of provision for loan losses that otherwise would be required. Interest income is then recognized only to the extent that cash is received and where the future collection of principal is probable.
The allowance for loan losses is a valuation allowance against which loan losses are charged. The allowance represents the cumulative effect of provisions charged to operating expense less loan charge-offs, net of recoveries. The provision charged to operating expense for financial reporting purposes represents management's estimate of the amount required to provide an adequate allowance for future loan losses based on an evaluation of the loan portfolio in light of current economic conditions, changes in the nature and volume of the portfolio, loan loss experience and the credit-worthiness of borrowers. Loans are charged against the allowance for loan losses when management believes it is unlikely that the principal will be collected. Because of uncertainties inherent in the estimation process, management's estimate of credit losses inherent in the loan portfolio and the related allowance may change in the near term.
First Place Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
6. BANK PREMISES AND EQUIPMENT Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using both straight-line and accelerated methods over the estimated useful lives of the related assets. Leasehold improvements are amortized over the term of the respective lease or the estimated useful life of the improvement, whichever is shorter. Maintenance and repairs are charged to expense as incurred. Renewals and betterments which materially increase the value of the property are capitalized and depreciated over the remaining life of the asset.
When property is sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the respective accounts and gains and losses are recognized currently in the statement of income.
7. INCOME TAXES Deferred income taxes have been provided for timing differences which result from income and expense items that are recognized for financial accounting purposes in different years than such items are recognized for income tax purposes.
8. NET INCOME PER SHARE OF COMMON STOCK Net income per share of common stock is based on the weighted average number of shares outstanding during each year.
9. CASH AND CASH EQUIVALENTS For purposes of the statement of cash flows, the Company includes cash on hand, cash on deposit at other institutions and federal funds sold as cash and cash equivalents.
10. STOCK OPTION PLANS The Company accounts for its stock option plans in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. In 1995 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 has been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
First Place Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
11. IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF The Company adopted the provisions of SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, on January 1, 1996. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Adoption of this Statement did not have a material impact on the Company's financial position, results of operations or liquidity.
12. TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES In June 1996, the Financial Accounting Standards Board issued SFAS No. 125, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES. SFAS No. 125 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996 and is to be applied prospectively. This Statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial-components approach that focuses on control. It distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. Management of the Company does not expect that adoption of SFAS No. 125 will have a material impact on the Company's financial position, results of operations, or liquidity.
13. RECLASSIFICATION Certain amounts in the 1995 and 1994 financial statements have been reclassified to conform to 1996 presentation.
NOTE B - RESTRICTED CASH BALANCES
Reserves (in the form of cash on hand and deposits with the Federal Reserve Bank) of $11,265,000 and $8,418,000 were maintained to satisfy federal regulatory requirements at December 31, 1996 and 1995. These reserves are included in cash and due from banks in the accompanying statements of financial position.
First Place Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1995 and 1994
NOTE C - INVESTMENT SECURITIES
A summary of the amortized cost, approximate fair value and gross unrealized gains and losses follows (amounts in thousands):
Investment securities available for sale:
A summary of amortized cost and approximate fair value of investment securities classified as available for sale, by maturity at December 31, 1996 follows (amounts in thousands):
Amortized Approximate cost fair value --------- ----------- Less than one year $ 41,944 $ 42,035 One to five years 105,415 106,204 Five to ten years 35,014 35,258 Greater than ten years 54,819 55,183 Securities not due at a single date 6,007 6,007 -------- -------- Total $243,199 $244,687 -------- -------- -------- --------
First Place Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1995 and 1994
NOTE C - INVESTMENT SECURITIES - CONTINUED
The proceeds from sales of securities available for sale and the gross realized gains and gross realized losses on those sales at December 31, follow (amounts in thousands):
1996 1995 1994 ---- ---- ---- Proceeds $11,459 $1,327 $16,960 Gross realized gains 10 --- 84 Gross realized losses 92 --- 256 Related income tax (benefit) (30) --- (60)
At December 31, 1996 and 1995, investment securities with a recorded value of approximately $204,000,000 and $180,000,000, respectively, were pledged to collateralize repurchase agreements, public or trust deposits and other notes payable.
The Company is required to have Federal Home Loan Bank stock due to Federal Home Loan Bank borrowings, in the amount equal to at least five percent of the advance and standby letters of credit divided by the qualified asset ratio. This ratio is a measurement of the Company's overall commitment to housing finance. The Company was required to have $5,021,000 at December 31, 1996 of Federal Home Loan Bank stock. At December 31, 1996 and 1995, $5,480,000 and $4,716,000, respectively of Federal Home Loan stock are included in other securities.
In November 1995, the Financial Accounting Standards Board issued a GUIDE TO IMPLEMENTATION OF STATEMENT 115 allowing a one-time reassessment of classifications of securities. On December 1, 1995, the Company took this opportunity to reclassify held-to-maturity securities with an amortized cost of $120,360,000, to the available-for-sale portfolio. The effect of this reclassification was an increase in net unrealized gains of $781,000.
NOTE D - LOANS
A summary of loans at December 31, follows (amounts in thousands):
1996 1995 ---- ---- Commercial, financial and agriculture $102,610 $ 91,232 Commercial real estate 161,959 138,487 Consumer 81,495 65,597 Real estate residential 90,105 79,546 Real estate construction 32,019 29,818 -------- -------- 468,188 404,680 Less allowance for loan losses 8,933 8,588 -------- --------
Total net loans $459,255 $396,092 -------- -------- -------- --------
First Place Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1995 and 1994
NOTE D - LOANS - CONTINUED
Changes in the allowance for loan losses follows (amounts in thousands):
1996 1995 1994 ---- ---- ---- Balance at beginning of year $ 8,588 $ 7,586 $ 5,956 Acquired in merger with Western Bank --- 302 --- Provision charged to operating expense 1,155 837 58 Recoveries on loans previously charged-off 995 715 2,328 Loans charged-off (1,805) (852) (756) -------- -------- --------
Balance at end of year $ 8,933 $ 8,588 $ 7,586 -------- -------- -------- -------- -------- --------
The collateral for the specifically reviewed loan reported in 1995 was foreclosed on in 1996 and that real estate was reported in other real estate owned at December 31, 1996.
Loans for which the accrual of interest has been discontinued, amounted to $1,702,000, $3,517,000, and $140,000 at December 31, 1996, 1995, and 1994, respectively. If interest had been accrued on these loans for 1996, 1995, and 1994, interest income would have been increased by approximately $104,000, $58,000, and $9,000, respectively.
Certain directors, officers, and companies with which they are associated, were customers of, and had banking transactions with, the Company in the ordinary course of business. It is the Company's policy that all loans and commitments to lend to officers and directors be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other borrowers of the Company. The following table summarizes the activity in these loans for 1996 (in thousands):
Balance December 31, 1995 $ 10,273 Advances/New Loans 20,103 Payments (12,812) --------- Balance December 31, 1996 $ 17,564 --------- ---------
First Place Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1995 and 1994
NOTE E - BANK PREMISES AND EQUIPMENT
The major components of Bank premises and equipment at December 31, follow (amounts in thousands):
Estimated Lives 1996 1995 --------------- ---- ---- Land --- $ 1,870 $ 1,870 Buildings 5-40 years 13,968 10,467 Furniture and equipment 3-25 years 11,003 8,571 Leasehold improvements 5-15 years 563 292 ------- ------- 27,404 21,200 Less accumulated depreciation and amortization 11,181 10,121 ------- ------- Total $16,223 $11,079 ------- ------- ------- -------
At December 31, 1994, the Company had entered into an agreement with outside parties to acquire, through an exchange of assets, a new bank facility in Durango, Colorado. The exchange took place on September 1, 1995. The acquired facility was still under construction at December 31, 1995, and $1,385,000 was included in buildings and $600,000 in land. This facility was completed and occupied in May 1996. At December 31, 1996, $5,600,000 is included in buildings.
In October 1995, the Company completed construction of a new branch facility in Farmington, New Mexico. This branch cost approximately $2,000,000, including capitalized interest of $54,000.
NOTE F - LONG TERM AND OTHER NOTES PAYABLE
Long term and other notes payable, secured by investment securities as well as certain loans from the Company's loan portfolio at December 31, consisted of the following (amounts in thousands):
1996 1995 ---- ---- Federal Home Loan Bank advances, 5.10% to 6.825% due 1996 through 2011 $49,933 $36,204 Other notes payable 2,087 2,438 ------- ------- Total $52,020 $38,642 ------- ------- ------- -------
First Place Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1995 and 1994
NOTE F - LONG TERM AND OTHER NOTES PAYABLE - CONTINUED
Maturities of notes payable at December 31, 1996 are as follows (amounts in thousands):
1997 $13,528 1998 7,906 1999 4,164 2000 3,548 2001 4,326 Later Years 18,548 ------- Total $52,020 ------- -------
NOTE G - INCOME TAXES
Income tax expense consists of the following (amounts in thousands):
1996 1995 1994 ------ ------ ---- Current tax expense $4,103 $4,293 $3,964 Deferred tax expense (benefit) (275) (422) (145) ------ ------ ------
Total $3,828 $3,871 $3,819 ------ ------ ------ ------ ------ ------
Income tax expense differs from the expected tax expense (computed using statutory rates) as a result of the following (amounts in thousands):
1996 1995 1994 ---- ---- ---- Computed "expected" tax expense $4,773 $4,423 $4,143 Tax benefit due to tax exempt interest (799) (836) (586) State tax, net of federal benefit 187 320 317 Low income housing credit (161) --- --- Other, net (172) (36) (55) ------ ------ ------ Total $3,828 $3,871 $3,819 ------ ------ ------ ------ ------ ------
First Place Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1995 and 1994
NOTE G - INCOME TAXES - CONTINUED
Deferred tax expense (benefit) results from timing differences in the recognition of income and expense for income tax and financial statement purposes. The sources of these differences and their tax effects follow (amounts in thousands):
1996 1995 1994 ------ ------ ----- Provision for loan losses $(368) $(335) $ 31 Provision for losses on other real estate (99) (16) 37 Pension expense 101 43 29 Depreciation 122 37 (15) Deferred compensation (183) (115) (5) Deferred loan fees 58 (62) (182) Stock option expense (181) (111) (98) FHLB stock dividends 152 102 72 Other, Net 123 35 (14) ----- ----- ----- Total $(275) $(422) $(145) ----- ----- ----- ----- ----- -----
Deferred tax assets and liabilities as of December 31, consisted of the following (amounts in thousands):
1996 1995 1994 ------ ------ ------ Deferred tax assets: Allowance for loan losses $2,147 $1,779 $1,444 Unrealized losses on investment securities --- --- 643 Deferred compensation 470 287 172 Deferred loan fees 301 359 297 Other real estate owned 405 306 290 Stock option expense 430 249 138 Other 61 104 88 ------ ------ ------ 3,814 3,084 3,072 ------ ------ ------
Deferred tax liabilities: Unrealized gains on investment securities 521 497 --- Bank premises and equipment 384 262 225 Pension plan 485 384 341 FHLB stock dividends 379 227 125 Other 250 170 119 ------ ------ ------ 2,019 1,540 810 ------ ------ ------ Net deferred tax asset, included in other assets $1,795 $1,544 $2,262 ------ ------ ------ ------ ------ ------
The realization of net deferred tax assets may be based on utilization of carrybacks to prior taxable periods, anticipation of future taxable income and the utilization of tax planning strategies. Management has determined that it is more likely than not that the net deferred tax asset can be supported by carrybacks to federal taxable income in excess of $32,000,000 in the three-year federal carryback period and by expected future taxable income which will exceed amounts necessary to fully realize remaining deferred tax assets.
First Place Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1995 and 1994
NOTE H - EMPLOYEE BENEFIT PLANS
The Company maintains a noncontributory defined benefit pension plan. The plan is a qualified plan which covers substantially all employees age twenty-one and over with one or more years of service. The Company's policy is to fund this plan in an amount equal to or greater than the minimum required by law, but not in excess of the maximum allowable.
Net pension costs for this plan include the following components (amounts in thousands):
1996 1995 ----- ----- Service cost of benefits earned $ 152 $ 140 Interest cost on projected benefit obligation 326 306 Return on plan assets (363) (327) Net amortization and deferral of loss $ (19) $ (4) ----- -----
Net pension costs $ 96 $ 115 ----- ----- ----- -----
The following table sets forth the funded status of the pension plan (amounts in thousands):
1996 1995 -------- -------- Actuarial present value of benefit obligations: Vested benefit obligation $(4,072) $(3,837) Non-vested benefit obligation (103) (80) ------ ------ Accumulated benefit obligation (4,175) (3,917) Effect of projected future salary increases (551) (524) ------ ------
Projected benefit obligation (4,726) (4,441)
Plan assets at fair value 5,216 4,711 ------ ------
Plan assets in excess of (less than) projected benefit obligation 490 270
Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions 1,049 1,207
Unrecognized prior service cost (117) (135)
Unrecognized net asset (209) (251) ------ ------
Prepaid (accrued) pension cost $1,213 $1,091 ------ ------ ------ ------
Major assumptions at year-end follow: 1996 1995 ------ ------ Annual discount rate 7.5% 7.5% Annual rate of increase in compensation levels 5.0% 5.0% Annual expected long-term rate of return on assets 7.5% 7.5%
First Place Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1995 and 1994
NOTE H - EMPLOYEE BENEFIT PLANS - CONTINUED
Assets of the pension plan consist primarily of bank certificates of deposit, insurance annuity contracts, mutual funds, and U.S. government and agency obligations.
The Company also has a qualified defined contribution profit sharing plan (with 401(k) provisions) covering substantially all employees. Matching and voluntary contributions under the plan are provided in amounts determined by the Company's board of directors. Total employer contributions to this plan amounted to $240,000 in 1996 and $205,000 in 1995.
The Company has a deferred compensation program that defers a specified portion of the compensation of certain directors and eligible employees. As of December 31, 1996 and 1995, the Company has accrued $1,195,000 and $914,000, respectively, for its obligations under this program. The Company's expense was $296,000, $309,000 and $253,000 for 1996, 1995 and 1994, respectively. For certain employees, benefits are forfeited if employment is terminated prior to retirement for reasons other than death.
To assist in the funding of this plan, the Company purchases corporate-owned life insurance contracts. Proceeds from the insurance policies are payable to the Company upon the death of the employee. The cash surrender value of these policies included in "other assets" in the consolidated statements of financial condition was $5,335,000 and $4,551,000 as of December 31, 1996 and 1995, respectively.
NOTE I - CONTINGENCIES AND COMMITMENTS
The Company is party to litigation and claims arising in the normal course of business. Management, after consultation with legal counsel, believes that the liabilities, if any, arising from such litigation and claims will not be material to the consolidated financial position.
The Company's consolidated financial statements do not reflect various commitments and contingent liabilities which arise in the normal course of business and which involve elements of credit risk, interest rate risk and liquidity risk. The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers, consisting essentially of commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated financial statements. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The Company controls credit risk through credit approvals, limits, and monitoring procedures.
First Place Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1995 and 1994
NOTE I - CONTINGENCIES AND COMMITMENTS - CONTINUED
Financial instruments exhibiting credit risk at December 31, 1996 and 1995 are as follows (amounts in thousands):
1996 1995 -------- ------- Commitments to extend credit $105,713 $86,543 Standby letters of credit 4,079 4,808 -------- -------
Total $109,792 $91,351 -------- ------- -------- -------
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's credit-worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.
NOTE J - CONCENTRATIONS
Substantially all of the Company's loans, commitments, and commitments to extend credit and standby letters of credit have been granted to customers in the Company's market area. Such customers are generally depositors of the Company. The concentrations of credit by type of loan are set forth in Note D. The distribution of commitments to extend credit approximates the distribution of loans outstanding. Standby letters of credit were granted primarily to commercial borrowers.
At December 31, 1996 the Company had sold securities under agreements to repurchase totaling $68,739,000, with an average interest rate of 4.98 percent. Of this total, $15,400,000 was sold to San Juan County with a maturity of one day.
Investments in state and municipal securities also involve governmental entities within the Company's market area.
At December 31, 1996 and 1995 and at various times during the years then ended, the Company maintained cash balances in correspondent banks in excess of FDIC insurable limits.
First Place Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1995 and 1994
NOTE K - FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
CASH, DUE FROM BANKS, INTEREST BEARING DEPOSITS, FEDERAL FUNDS SOLD OR PURCHASED, SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE, AND OTHER LIABILITIES
For these short-term instruments, the carrying amount is a reasonable estimate of fair value.
INVESTMENT SECURITIES
For securities, fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
LOAN RECEIVABLES
For certain homogeneous categories of loans, such as some residential mortgages and other consumer loans, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
DEPOSIT LIABILITIES
The fair value of demand deposits and savings deposits (including certain money market deposits) is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.
LONG-TERM DEBT AND OTHER NOTES PAYABLE
Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate fair value of existing debt.
COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT, AND FINANCIAL GUARANTEES WRITTEN
The estimated fair values of the Company's off-balance sheet items are not material to the fair value of financial instruments included in the statement of financial condition, and therefore, are not included in the following schedule.
The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit-worthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of guarantees and letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date.
First Place Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996, 1995 and 1994
NOTE K - FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
The estimated fair values of the Company's financial instruments at December 31, are as follows (amounts in thousands):
1996 1995 -------------------- -------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value -------- ---------- -------- ---------- Financial assets: Cash and due from banks $ 49,487 $ 49,487 $ 35,662 $ 35,662 Interest bearing deposits 2,391 2,391 10,887 10,887 Federal funds sold 7,835 7,835 2,725 2,725 Investment securities Available for sale 244,687 244,687 218,250 218,250 Net Loans 459,255 456,212 396,092 390,777 -------- ---------- -------- ---------- Total financial assets $763,655 $760,612 $663,616 $658,301 -------- ---------- -------- ---------- -------- ---------- -------- ---------- Financial liabilities: Deposits $587,893 $588,763 $529,047 $529,483 Securities sold under agreements to repurchase 68,739 68,739 51,929 51,929 Federal funds purchased 15,785 15,785 4,365 4,365 Other notes payable 52,020 51,293 38,642 38,714 -------- ---------- -------- ---------- Total financial liabilities $724,437 $724,580 $623,983 $624,491 -------- ---------- -------- ---------- -------- ---------- -------- ----------
NOTE L - PARENT COMPANY ONLY FINANCIAL INFORMATION
The assets of First Place consist primarily of the investment in the Subsidiary Banks. The principal source of First Place's cash revenues are dividends from the Subsidiary Banks. Federal and state banking laws and regulations limit the extent to which subsidiary banks can pay dividends. At December 31, 1996, the Subsidiary Banks had approximately $40,556,000 of retained earnings, of which $16,690,000 was available for distribution to First Place. Dividends from the Subsidiary Banks are the source of funds for the payment of dividends to First Place stockholders and payment of operating costs of First Place. To the extent that the cash needs exceed cash revenues, First Place would borrow funds or sell equity securities.
First Place Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996, 1995 and 1994
Condensed financial information of First Place at December 31, follows:
BALANCE SHEETS (in thousands) 1996 1995 ------- ------- ASSETS Cash $ 3,269 $ 2,282 Investment in subsidiary banks 62,922 56,823 Other assets 214 83 ------- ------- Total Assets $66,405 $59,188 ------- ------- ------- ------- LIABILITIES AND STOCKHOLDERS' EQUITY
Taxes payable $ --- $ 63 Dividends payable 1,443 1,368 Other liabilities 202 1 ------- ------- Total liabilities 1,645 1,432 ------- ------- Stockholders' equity Common stock, no par value: Authorized shares 15,000,000 Issued and outstanding shares - 2,123,157 and 2,104,707 at December 31, 1996 and 1995 13,634 13,609 Additional paid-in capital 124 62 Net unrealized holding gain on securities available for sale 967 922 Retained earnings 50,035 43,689 Treasury stock --- (526) ------- ------- Total stockholders' equity 64,760 57,756 ------- ------- Total Liabilities and Stockholders' Equity $66,405 $59,188 ------- ------- ------- ------- STATEMENTS OF INCOME (in thousands) 1996 1995 1994 ------- ------- -------
Administration expense $ 346 $ 309 $ 111 Interest expense --- --- --- ------- ------- ------- Loss before equity in net income of subsidiary banks (346) (309) (111) Equity in net income of subsidiary banks: Distributed 3,956 3,573 2,952 Undistributed 6,055 5,378 5,133 Income tax credits 145 124 43 ------- ------- ------- Net Income $ 9,810 $ 8,766 $ 8,017 ------- ------- ------- ------- ------- -------
First Place Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996, 1995 and 1994
NOTE L - PARENT COMPANY ONLY FINANCIAL INFORMATION - CONTINUED
STATEMENTS OF CASH FLOWS
(in thousands) 1996 1995 1994 ------- ------- ------- Operating activities: Net income $ 9,810 $ 8,766 $ 8,017 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of intangibles 7 4 5 Undistributed equity in subsidiary earnings (6,055) (5,378) (5,133) Decrease (increase) in other assets 133 45 511 (Increase) decrease in other liabilities (216) (127) (554) ------- ------- ------- Net cash provided by operating activities 3,679 3,310 2,846 ------- ------- ------- Investing activities: Acquisition of subsidiary --- (120) --- ------- ------- ------- Financing activities: Cash dividends paid (3,389) (2,649) (2,315) Acquisitions of treasury stock (346) (653) (1,207) Proceeds from sale and retirement of treasury stock 872 216 1,123 Issuance of common stock 171 174 464 ------- ------- ------- Net cash used by financing activities (2,692) (2,912) (1,935) ------- ------- ------- Net increase (decrease) in cash and cash equivalents 987 278 911 Cash and cash equivalents at beginning of year 2,282 2,004 1,093 ------- ------- ------- Cash and cash equivalents at end of year $ 3,269 $ 2,282 $ 2,004 ------- ------- ------- ------- ------- -------
First Place Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996, 1995 and 1994
NOTE M - COMMON STOCK AND STOCK OPTIONS
Shares of common stock at December 31, consisted of the following:
1996 1995 1994 ---------- ---------- ---------- Issued: Balance at beginning of year $2,104,707 $2,021,445 $2,007,465 Issue of new common stock 18,450 83,262 13,980 ---------- ---------- ---------- Balance at end of year $2,123,157 $2,104,707 $2,021,445 ---------- ---------- ---------- ---------- ---------- ---------- Held as treasury stock: Balance at beginning of year $ 13,371 $ 2,346 $ --- Shares acquired 8,527 16,710 35,517 Shares sold/retired (21,898) (5,685) (33,171) ---------- ---------- ---------- Balance at end of year $ --- $ 13,371 $ 2,346 ---------- ---------- ---------- ---------- ---------- ----------
In 1992, First Place adopted the First Place Financial Corporation Nonstatutory Stock Option Plan (the "Plan") covering key employees and directors. Under the Plan 120,000 shares were reserved for issuance. Options for the Plan vest at 20% per year and unexercised options expire on the fifth anniversary of the vesting date. The plan also includes stock appreciation rights (SARs) for key employees which are granted and exercisable in conjunction with the options. The Company recorded expense of $352,000, $317,000 and $282,000 during 1996, 1995, and 1994 for these SARs, and included a related liability of $1,064,166 and $712,000 in Other Liabilities at December 31, 1996 and 1995.
In 1996, First Place adopted the First Place Financial Corporation Second Nonstatutory Stock Option Plan (the "Second Plan") covering officers with specific titles and directors of subsidiary banks. Those officers who have been granted options under the Plan shall be ineligible to participate in the Second Plan. Under the Second Plan, 100,000 shares were reserved for issuance. Options, for directors, vest on the first anniversary of the date of grant and options, for officers, vest on the second anniversary. Each option agreement shall specify the period for which the option is granted and shall provide that the option shall expire at the end of such period not to exceed five years.
First Place Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996, 1995 and 1994
NOTE M - COMMON STOCK AND STOCK OPTIONS - CONTINUED
Stock option activity in the plans is summarized as follows:
1996 1995 ----------------- ----------------- Number of Option Number of Option Shares Price Shares Price ------ ------ ------ ------ Outstanding at beginning of year 90,000 $ 27 92,700 $ 27 Granted 10,700 45 3,000 39 Exercised/retired (7,200) 27-45 (5,700) 27 ------ ------ Outstanding at end of year 93,500 $27-45 90,000 $27-39 ------ ------ ------ ------ Exercisable at end of year 62,400 $27-45 49,200 $27-39 ------ ------ ------ ------
The Company applies APB Opinion No. 25 in accounting for its Plans and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands, except per share data):
1996 1995 ------ ------ Net Income As reported $9,810 $8,766 Pro forma $9,758 $8,758
Earnings per share As reported $ 4.56 $ 4.27 Pro forma $ 4.53 $ 4.26
Pro forma net income reflects only options granted in 1996 and 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income amounts presented above because compensation cost is reflected over the options' vesting period of 5 years and compensation cost for options granted prior to January 1, 1995 is not considered.
First Place Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1995 and 1994
NOTE N - CAPITAL REQUIREMENTS
The Subsidiary Banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Subsidiary Banks' financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Subsidiary Banks must meet specific capital guidelines that involve quantitative measures of the Subsidiary Banks' assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Subsidiary Banks' capital amounts and classifications are also subject to qualitative judgements by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require that the Subsidiary Banks maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to total assets.
As of December 31, 1996, the most recent notification from the Federal Deposit Insurance Corporation categorized the Subsidiary Banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Subsidiary Banks must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since notification that management believes have changed the Subsidiary Banks' categories.
First Place Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1995 and 1994
At December 31, the capital ratios were (dollars in thousands):
Notes: Tier 1 capital: Stockholders' equity minus intangibles. Tier 2 capital: Allowance for loan losses up to 1.25% of risk-weighted assets. Total capital: The sum of Tier 1 plus Tier 2 capital. Leverage ratio: Tier 1 capital divided by total adjusted assets.
INDEPENDENT AUDITORS' REPORT
The Board of Directors First Place Financial Corporation:
We have audited the accompanying consolidated balance sheets of First Place Financial Corporation and subsidiaries as of December 31, 1996, and the related consolidated statements of income, stockholders' equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides 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 First Place Financial Corporation and subsidiaries at December 31, 1996, and the results of their operations and their cash flows for the year then ended, in conformity with generally accepted accounting principles.
(signed) KPMG Peat Marwick LLP
Albuquerque, New Mexico January 27, 1997
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders First Place Financial Corporation
We have audited the accompanying consolidated balance sheet of First Place Financial Corporation and Subsidiaries as of December 31, 1995, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the two-year period ended December 31, 1995. 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of First Place Financial Corporation and Subsidiaries as of December 31, 1995, and the consolidated results of their operations and their consolidated cash flows for each of the years in the two-year period ended December 31, 1995, in conformity with generally accepted accounting principles.
(signed) Chandler & Company LLP
Farmington, New Mexico February 2, 1996
EXHIBIT INDEX
Exhibit No. Description Page No. - ----------- ------------ -------- 3(i) Articles of Incorporation of Registrant *
3(ii) Bylaws of Registrant *
21 Subsidiaries of First Place **
23.1 Consent of KPMG Peat Marwick LLP 62
23.2 Consent of Chandler & Company LLP 63
27 Financial Data Schedule 64
- ------------- * Incorporated by reference from the Exhibits to the Registrant's Registration Statement on Form S-4, dated April 18, 1995, Registration No. 33-91310
** Incorporated by reference from Item 1, Part I under the caption "Business of the Company" of this Form 10-K