<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-25956
FIRST PLACE FINANCIAL CORPORATION
--------------------------------------------------------
(Exact name of registrant as specified in its charter)
A New Mexico Corporation - I.R.S. No. 85-0317365
100 East Broadway
Farmington, New Mexico 87401
--------------------------------------------------------
(Address, including ZIP Code, or registrant's executive offices)
(505) 324-9500
--------------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
--------------------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past
91 days YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
On March 16, 1999, there were 2,170,372 shares of the registrant's common
stock outstanding. The aggregate market value of the voting stock held by
non-affiliates of the registrant as of March 16, 1999, was approximately
$99,214,716.
Documents incorporated by reference: Portions of the corporation's Notice of
Annual Meeting and Proxy Statement for the annual meeting of stockholders to
be held April 30, 1999, are incorporated by reference into Part III.
<PAGE>
FORM 10-K CROSS REFERENCE INDEX
<TABLE>
<CAPTION>
Page
<S> <C> <C>
PART I
Item 1 Business ........................................................... 3
Item 2 Properties ......................................................... 6
Item 3 Legal Proceedings .................................................. 7
Item 4 Submission of Matters to a Vote of Security Holders ................ 7
PART II
Item 5 Market for Registrant's Common Equity
and Related Stockholder Matters ................................. 8
Item 6 Selected Financial Data ............................................ 8
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations ....................................... 9
Item 7A Quantitative and Qualitative Disclosures
about Market Risks............................................... 9
Item 8 Financial Statements and Supplementary Data ........................ 9
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures ....................................... 9
PART III
Item 10 Directors and Executive Officers of the Registrant ................. 10
Item 11 Executive Compensation.............................................. 10
Item 12 Security Ownership of Certain Beneficial Owners
and Management .................................................. 10
Item 13 Certain Relationships and Related Transactions ..................... 10
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K .... 11
</TABLE>
2
<PAGE>
PART I
Item 1. Business of the Company
FIRST PLACE FINANCIAL CORPORATION
First Place Financial Corporation ("First Place"), 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"), Western Bank, Gallup, New Mexico ("WBG") and Capital
Bank, Albuquerque, New Mexico ("CBA") (collectively, the "Subsidiary Banks") and
its non-bank subsidiary, FPFC Management, LLC ("LLC"). First Place, the
Subsidiary Banks and LLC on a consolidated basis are the "Company".
The following table is a summary level consolidating balance sheet at December
31, 1998 (in thousands):
<TABLE>
<CAPTION>
PARENT FNBF BNBD WBG CBA LLC ELIM CONSOLIDATED
------- -------- -------- ------- ------- ---- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investments $ --- $273,028 $ 26,744 $19,967 $ 1,204 $--- $ --- $320,943
Loans 205 291,776 99,447 34,480 3,757 --- --- 429,665
Other earning assets --- 28,460 2,847 3,629 5,738 --- (10,753) 29,921
------- -------- -------- ------- ------- ---- --------- --------
Total earning assets 205 593,264 129,038 58,076 10,699 --- (10,753) 780,529
Allowance for loan losses --- (7,141) (2,068) (578) (20) --- --- (9,807)
Other assets 88,752 111,515 17,597 4,198 3,039 300 (94,076) 131,325
------- -------- -------- ------- ------- ---- --------- --------
Total assets $88,957 $697,638 $144,567 $61,696 $13,718 $300 $(104,829) $902,047
------- -------- -------- ------- ------- ---- --------- --------
------- -------- -------- ------- ------- ---- --------- --------
Total deposits $ --- $461,835 $116,169 $56,009 $ 3,379 $--- $ (11,995) $625,397
Other borrowed funds 9,500 173,669 14,347 857 545 --- (9,486) 189,432
------- -------- -------- ------- ------- ---- --------- --------
Total deposits and borrowed funds 9,500 635,504 130,516 56,866 3,924 --- (21,481) 814,829
Other liabilities 2,411 6,930 711 285 25 --- (190) 10,172
------- -------- -------- ------- ------- ---- --------- --------
Total liabilities 11,911 642,434 131,227 57,151 3,949 --- (21,671) 825,001
Stockholders' equity 77,046 55,204 13,340 4,545 9,769 300 (83,158) 77,046
------- -------- -------- ------- ------- ---- --------- --------
Total liabilities and stockholders'
equity $88,957 $697,638 $144,567 $61,696 $13,718 $300 $(104,829) $902,047
------- -------- -------- ------- ------- ---- --------- --------
------- -------- -------- ------- ------- ---- --------- --------
</TABLE>
Each of the Subsidiary Banks engages 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 banking activities and
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 established a non-bank subsidiary, LLC in 1998. LLC serves as the
managing member of Eaton Village Associates, Ltd., Co. ("Associates"). FNBF is
the investor member in Associates. Associates owns a 96-unit low-income rental
project in Farmington, New Mexico. The members receive tax credits from this
property.
3
<PAGE>
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 nine branch locations and operates eleven automated teller machines,
seven of which are located on branch premises. A branch office located in the
new Furr's Supermarket at 1700 East 20th Street, Farmington, New Mexico is
scheduled to open in first quarter 1999. In addition, FNBF has developed a
significant correspondent banking business which has extended its lending area
throughout New Mexico and southwest Colorado. Approximately 43% of the
commercial and commercial real estate loans at December 31, 1998 were to
borrowers outside of San Juan County.
FNBF continues to develop a significant check clearing business with
correspondents. 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 and independent banks in southwest Colorado.
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 has branch facilities strategically located throughout the county,
including one branch on the Navajo Nation. All branches accept loan
applications. 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, NationsBank/Bank of America,
and Animas Credit Union. Other local competition includes branches of Vectra
Bank-New Mexico, Bank of the Southwest (Roswell), and Centennial Savings Bank
FSB (Durango, Colorado). Some of these competitors have several branches and
operate automated teller machines in Farmington and San Juan County. At June 30,
1998, FNBF held approximately 56% of the 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; one of which is in Archuleta County and also operates seven
automated teller machines one of which is in neighboring Montezuma County and
one in Archuleta County.
BNBD offers all types of loans but specializes in real estate lending,
particularly interim construction loans. BNBD is the second largest commercial
bank in Durango.
Competition
The primary competitors of BNBD are the First National Bank of Durango, Norwest
Bank of Durango, Vectra Bank-Colorado, Bank of Durango and Bank of the San
Juans. At June 30, 1998, BNBD held approximately 26% of total commercial bank
deposits in La Plata County.
4
<PAGE>
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 commercial banking business from
one location in Gallup, serving the surrounding community of McKinley County,
New Mexico. WBG operates three automated teller machines. A new branch located
in the new Wal-Mart Superstore in Gallup, New Mexico is scheduled to open in
second quarter 1999.
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 66% of WBG's loan
portfolio at December 31, 1998.
Competition
WBG's primary competitors are Gallup Federal Savings and Loan Association;
and branches of Norwest Bank (Albuquerque), NationsBank/Bank of America. At
June 30, 1998, WBG held approximately 24% of commercial bank deposits in
McKinley County.
CAPITAL BANK
CBA is a state bank chartered under the laws of the State of New Mexico. CBA
was incorporated in 1998 and opened for business on October 7, 1998. CBA
conducts commercial banking business from one location in Albuquerque,
serving primarily businesses and professionals throughout Albuquerque.
CBA concentrates its lending in two principal areas: commercial loans and
commercial real estate loans.
Competition
CBA's primary competition are Norwest Bank, NationsBank/Bank of America, First
Security Bank, First State Bank and New Mexico Bank and Trust.
FPFC MANAGEMENT, LLC
LLC, a New Mexico limited liability company, was established in 1998. LLC serves
as the managing member of Associates. LLC owns 5% of Associates. FNBF is the 95%
investor member in Associates. Associates owns a 96-unit low-income rental
property.
EMPLOYEES AND EMPLOYEE BENEFITS
First Place currently employs approximately 366 full-time equivalent employees.
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.
ALLOWANCE FOR LOAN LOSSES
Commercial and commercial real estate loans that are adversely classified are
given specific reserves after an assessment of realizable collateral values is
made. The general reserve allocation for commercial and commercial real estate
loans, including letters of credit and unfunded commitments, that do not have a
specific reserve, is determined by applying percentages, based on the 5-year
moving average of net charge-offs of current and 30 days plus delinquent loans,
to the balance of these pools. Concentrations of credit in the commercial
portfolio are also
5
<PAGE>
reviewed and an allocation is determined by applying a percentage, based on
the 5-year moving average of net charge-offs, to the identified balances. The
general allocation for consumer loans is determined by applying the 3-year
moving average percentage of net charge-offs to current and 30 days plus
delinquent loan balances.
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% of the voting
shares of such bank.
The Bank Holding Company Act requires First Place to file reports with 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 that 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
regulations, supervision, and regular examination by the Office of the
Comptroller of the Currency ("OCC"). The other two subsidiaries, WBG and CBA,
are state chartered banks and are therefore subject to federal and state
statutes applicable to banks chartered under the banking laws of New Mexico. All
of the Company's Subsidiary Banks are insured by and are therefore subject to
regulation by the Federal Deposit Insurance Corporation ("FDIC") and the FDIC is
the primary federal supervisory authority for WBG and CBA.
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 three branch offices and four
stand-alone ATM facilities in Farmington and surrounding communities. The WBG,
CBA and BNBD main office buildings are owned. BNBD owns a motor bank and leases
two in-store branch offices and three stand-alone ATM facilities in Durango and
surrounding communities. WBG owns one stand-alone ATM and leases two stand-alone
ATM facilities.
6
<PAGE>
Item 3. Legal Proceedings
The Company is 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 the Company aware of any such proceedings
threatened against it. The Company believes that the eventual outcome of its
litigation will not have a material impact to the consolidated operations of the
Company.
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 1998.
7
<PAGE>
PART II
Item 5. Market for Registrants' Common Equity and Related Stockholder Matters
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 part of the NASDAQ over-the-counter market. Stockholders can obtain
quotes on the Company's stock by contacting a stockbroker. Since there is not
an active market for First Place stock, the high and low bid quotations shown
in the following table may not necessarily represent actual transactions and
does not include mark-up or commission.
PRICE OF COMMON STOCK
<TABLE>
<CAPTION>
Bid Price Bid Price
High Low High Low
--------- --------- --------- ----------
1998 1997
---------------------- -----------------------
<S> <C> <C> <C> <C>
First Quarter $69.00 $63.00 $60.00 $56.00
Second Quarter $64.00 $60.00 $62.75 $58.00
Third Quarter $63.00 $54.00 $64.50 $62.00
Fourth Quarter $55.00 $54.00 $69.00 $64.00
</TABLE>
NOTE: Range of sales price obtained from an information service.
The holders of common stock of First Place 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 receive 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
Office of the Comptroller of the Currency 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 and CBA, as
state chartered banks, 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 by First Place's Board of
Directors for 1998 and 1997:
DIVIDENDS DECLARED PER SHARE
<TABLE>
<CAPTION>
Increase
1998 1997 (Decrease)
----------- ----------- -------------
<S> <C> <C> <C>
First Quarter $0.37 $0.35 $0.02
Second Quarter 0.37 0.35 0.02
Third Quarter 0.37 0.35 0.02
Fourth Quarter 0.37 0.37 ---
Special Fourth Quarter 0.37 0.37 ---
----- ----- -----
$1.85 $1.79 $0.06
----- ----- -----
----- ----- -----
</TABLE>
The last reported sales price of the Company's Common Stock, as of March 16,
1999, was $52.50 per share. As of March 16, 1999, there were 636 holders of
record of First Place's Common Stock.
Item 6. Selected Financial Data
The selected financial data begins on page 14 in the Appendix.
8
<PAGE>
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 consolidated
financial statements and notes thereto included under Item 8.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
Management's discussion regarding the above is presented on page 31 in the
Appendix.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements of the Company begin on page 33 in the
Appendix. The reports of the Company's independent certified accountants on the
consolidated financial statements are presented on page 60 in the Appendix.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
9
<PAGE>
PART III
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 30, 1999 under the caption "Management of the Company," which is
incorporated herein by this reference.
Item 11. Executive Compensation
See the Company's Proxy Statement for the annual meeting of shareholders to be
held on April 30, 1999 under the caption "Compensation of Management," which is
incorporated herein by this reference.
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 30, 1999 under the caption "Principal Shareholders," which is
incorporated herein by this reference.
Item 13. Certain Relationships and Related Transactions
See the Company's Proxy Statement for the annual meeting of shareholders to be
held on April 30, 1999 under the caption "Certain Transactions By And With
Management and Others," which is incorporated herein by this reference.
10
<PAGE>
PART IV
Item 14. Exhibits, Consolidated 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 Consolidated Financial Statements: A list of the
consolidated financial statements of the Registrant is
incorporated herein at Item 8 of this Report.
(2) Consolidated Financial Statement Schedules: All schedules have
been omitted because they are not required, do not apply, or the
information is set forth in Management's Discussion and Analysis
of Financial Condition and Results of Operations, or are in the
consolidated financial statements or notes thereto.
(b) Reports on Form 8-K
First Place filed the following reports on Form 8-K during the
last quarter of 1998:
(1) Report dated October 26, 1998, regarding the Company's financial
results and quarterly dividend for the third quarter ending
September 30, 1998.
(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 LLP re: incorporation by reference into the
previously filed registration statements on Form S-8 and this
Form 10-K.
23.2 Consent of KPMG LLP re: incorporation by reference into the
previously filed registration statements on Form S-8 on 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.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 26th day of March,
1999.
First Place Financial Corporation
(Registrant)
By: /s/ Richard I. Ledbetter
-----------------------------
Richard I. Ledbetter
Chairman of the Board
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)
Vice Chairman of the Board
-----------------------------
J. Gregory Merrion
/s/ Robert S. Culpepper Director
-----------------------------
Robert S. Culpepper
/s/ Robert M. Goodman Director
-----------------------------
Robert M. Goodman
/s/ Ike Kalangis Director
-----------------------------
Ike Kalangis
/s/ Richard I. Ledbetter Director
-----------------------------
Richard I. Ledbetter
/s/ Jack M. Morgan Director
-----------------------------
Jack M. Morgan
Director
-----------------------------
Roy L. Owen
/s/ James D. Rose Director
-----------------------------
James D. Rose
/s/ Thomas C. Taylor Director
-----------------------------
Thomas C. Taylor
/s/ Marlo L. Webb Director
-----------------------------
Marlo L. Webb
12
<PAGE>
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"); its four subsidiaries (the "Subsidiary Banks"):
First National Bank of Farmington ("FNBF"), Burns National Bank of Durango
("BNBD"), Western Bank, Gallup ("WBG") and Capital Bank, Albuquerque ("CBA")
and its non-bank subsidiary, FPFC Management, LLC ("LLC"). First Place, the
Subsidiary Banks and LLC on a consolidated basis are the "Company." 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.
Words or phrases when used in this Form 10-K or other filings with the
Securities and Exchange Commission, such as "does not expect," "estimate,"
"project" and "are to be expected to," or similar expressions are intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995.
Various factors, such as national and regional economic conditions and, in
particular, the energy sector, changes in market interest rates, credit and
other risks of lending (especially in areas of loan concentrations) and
investment activities, and competitive and regulatory factors, could affect
the Company's financial performance and could cause actual results for future
periods to differ from those indicated by such forward-looking statements.
CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Financial Review .............................................. 13
Financial Statements .......................................... 33
Independent Auditors' Reports ................................. 60
</TABLE>
RESULTS OF OPERATIONS
OVERVIEW
The Company reported net income of $8,161,000 in 1998, a decrease of 10.3%
from earnings of $9,094,000 in 1997. Net income in 1998 included a loss of
$231,000 reported by CBA, which opened in October, 1998. The Company also
expensed approximately $269,000 of pre-opening costs related to CBA. Diluted
earnings per share were $3.73 in 1998, compared to $4.17 in 1997 and $4.59 in
1996. Diluted earnings per share decreased 10.6% from 1997 to 1998 and
decreased 9.2% from 1996 to 1997. Return on average equity was 10.96% in 1998
compared to 13.32% and 15.90% in 1997 and 1996, respectively. The decrease of
$933,000 in net income in 1998 compared to 1997 was made up of the following:
net interest income increased $245,000; provision for loan losses decreased
$200,000; other income decreased $86,000; other expenses increased $1,923,000
and taxes decreased $631,000.
During 1998, assets of the Company grew $4,087,000 to $902,047,000, a slight
increase over the $897,960,000 recorded in 1997. Gross loans decreased
$62,296,000, or 12.7%, in 1998 compared to an increase of $23,773,000, or
5.1%, in 1997.
13
<PAGE>
Table One
Five Year Summary
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996 1995 1994
------------ ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Interest income:
Loans, including fees $44,298 $46,905 $43,450 $36,367 $27,355
Taxable securities 13,642 12,243 10,050 9,849 9,833
Tax-exempt securities 3,198 3,100 2,699 2,828 1,912
Interest-bearing deposits 1,961 584 715 174 671
Federal funds sold 1,036 258 201 385 284
--------- --------- --------- --------- ---------
Total interest income 64,135 63,090 57,115 49,603 40,055
--------- --------- --------- --------- ---------
Interest expense:
Time deposits of $100,000 and over 8,635 9,480 9,649 7,582 4,154
Other deposits 13,708 14,258 12,796 10,253 8,067
Short-term borrowings 6,104 4,772 3,224 4,053 2,117
Other borrowings 5,370 4,507 2,484 2,086 2,062
--------- --------- --------- --------- ---------
Total interest expense 33,817 33,017 28,153 23,974 16,400
--------- --------- --------- --------- ---------
Net interest income 30,318 30,073 28,962 25,629 23,655
Provision for loan losses 2,045 2,245 1,155 837 58
--------- --------- --------- --------- ---------
Net interest income after provision for
loan losses 28,273 27,828 27,807 24,792 23,597
--------- --------- --------- --------- ---------
Other income:
Service charges on deposit accounts 2,825 2,715 2,573 2,594 2,484
Other service charges and fees 1,582 1,340 1,318 1,250 1,097
Investment securities gains (losses) 31 (111) (82) -- (395)
Other operating income 694 1,274 645 862 852
--------- --------- --------- --------- ---------
Total other income 5,132 5,218 4,454 4,706 4,038
--------- --------- --------- --------- ---------
Other expenses:
Salaries and employee benefits 12,272 11,464 10,040 9,114 8,648
Occupancy expenses, net 2,179 2,242 2,145 1,522 1,606
Other operating expenses 8,580 7,402 6,438 6,225 5,545
--------- --------- --------- --------- ---------
Total other expenses 23,031 21,108 18,623 16,861 15,799
--------- --------- --------- --------- ---------
Income before income taxes 10,374 11,938 13,638 12,637 11,836
Income taxes 2,213 2,844 3,828 3,871 3,819
--------- --------- --------- --------- ---------
Net income $ 8,161 $ 9,094 $ 9,810 $ 8,766 $ 8,017
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted earnings per share $ 3.73 $ 4.17 $ 4.59 $ 4.26 $ 3.98
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Dividends declared per share $ 1.85 $ 1.79 $ 1.64 $ 1.43 $ 1.23
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Selected balance sheet information:
Total assets at December 31 $902,047 $897,960 $800,610 $690,795 $616,934
Total deposits at December 31 625,397 608,746 587,893 529,047 438,716
Total equity at December 31 77,046 71,831 64,760 57,756 46,525
Long-term debt at December 31 63,947 49,763 38,492 30,572 29,755
</TABLE>
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.
14
<PAGE>
Net interest income, on a tax-equivalent basis, expressed as a percent of
average earning assets, was 3.99% in 1998, 4.23% in 1997 and 4.52% in 1996.
Tax-equivalent net interest income was $32,302,000 in 1998, or 1.0% greater
than the $31,995,000 recorded in 1997. CBA contributed $135,000 to the 1998
net interest income. Tax-equivalent net interest income in 1997 was 4.4%
greater than the $30,635,000 recorded in 1996. The $307,000 increase in
tax-equivalent net interest income from 1997 to 1998 was attributed to a
$314,000 increase due to volume changes net of a $7,000 decrease due to rate
changes.
INTEREST INCOME
Interest income on earning assets in 1998 was $64,135,000 compared to
$63,090,000 in 1997 and $57,115,000 in 1996. The 1.7% increase from 1997 to
1998 was the result of greater average balances of securities, federal funds
sold, and interest-bearing deposits net of a decrease in loan volumes
recorded in 1998 and average rate decreases for each category of earning
asset. The 10.5% increase from 1996 to 1997 was primarily the result of the
higher loan and taxable securities volume recorded in 1997.
Loans
In 1998, the average balance of loans outstanding was $457,337,000, 4.5% less
than the average of $478,683,000 in 1997. CBA's average loans were $445,000
in 1998. Average loans in 1997 were 9.4% greater than the $437,439,000
average recorded in 1996. Loans, as a percent of average earning assets, were
56.5% in 1998 compared to 63.2% in 1997 and 64.6% in 1996. The lower loan
volumes in 1998 resulted in a $2,073,000 decrease in interest income. The
average yield on loans was 9.69% in 1998 compared to 9.80% in 1997 and 9.93%
in 1996. The decrease in yield on loans in 1998 resulted in a decrease of
$534,000 in interest income from 1997. These two factors netted together
resulted in a decrease in interest income of $2,607,000 in 1998. Loan
interest income was $44,298,000, $46,905,000 and $43,450,000 for 1998, 1997
and 1996, respectively. Interest income on loans increased by $3,455,000, or
8.0%, in 1997 over 1996, due primarily to increased volume of loans, offset
in part by decreased yields.
At December 31, 1998, the Company had $4,336,000 in non-accrual loans
compared to $5,078,000 in 1997 and $1,702,000 in 1996. The $3,376,000
increase in non-accrual loans from year end 1996 to year end 1997 was
primarily in real estate related loans and the $742,000 decrease in
nonaccrual loans from year end 1997 to year end 1998, was also primarily in
real estate related loans.
Investment Portfolio
Interest income on taxable investment securities increased by $1,399,000 in
1998 compared to a $2,193,000 increase in 1997. CBA's average taxable
investment securities were $121,000 in 1998. The increase in the average
volume from 1997 to 1998 accounted for $1,600,000 of the 1998 increase in
taxable securities income from 1997, offset in part by an 11 basis point
decrease in average yield. Interest income on taxable investment securities
in 1997 was $12,243,000, up 21.8% from the 1996 income of $10,050,000. This
increase was primarily due to volume increases.
Average taxable securities comprised 77.1% of the total average investment
portfolio at December 31, 1998. These average securities were 75.9% and
75.2%, respectively, of the total average investment portfolio in 1997 and
1996.
The investment portfolio is held as available-for-sale which provides
flexibility and liquidity; however, management does not anticipate the need
to sell securities for liquidity nor does management foresee selling
securities to recognize the current unrealized gains or losses in the
portfolio.
Average securities exempt from federal income tax comprised 22.9% of the
investment portfolio in 1998 compared to 24.1% in 1997 and 24.8% in 1996.
Tax-equivalent interest income on tax-exempt securities of $5,182,000 in 1998
was an increase of $160,000 from the $5,022,000 reported in 1997, due to
increased volume offset by
15
<PAGE>
decreased yield. Tax-equivalent interest income on tax-exempt securities in
1997 was $650,000 greater than the $4,372,000 recorded in 1996, due primarily
to increased volume.
Interest-bearing Deposits
Average interest-bearing deposits, consisting primarily of funds on deposit
with Federal Home Loan Banks, were $37,401,000, up $26,773,000 from the
$10,628,000 1997 average. CBA reported $519,000 average interest-bearing
deposits in 1998. The greater volume of interest-bearing deposits resulted in
an increase of $1,402,000 in interest income, while lower rates earned in
1998 offset the increase by $25,000. These two factors resulted in a net
increase in interest income of $1,377,000 in 1998 from 1997. Interest income
on interest-bearing deposits for 1998 was $1,961,000, up 235.8% from the 1997
income of $584,000. Interest income for interest-bearing deposits was
$715,000 for 1996. The 1997 average was a decrease of $3,238,000 from the
1996 average of $13,866,000. Interest-bearing deposits are an alternative to
federal funds sold and are a liquid asset that can be easily converted to
cash to accommodate loan demand. The Company will purchase federal funds from
correspondent banks as an accommodation and will then invest these dollars in
interest-bearing deposits. Funds were available to be invested in these
liquid assets due to the decrease in loan outstandings.
Federal Funds Sold
Average federal funds sold increased $16,054,000, or 343.0% in 1998 compared
to 1997. Average federal funds sold in 1997 increased $1,039,000, or 28.5%,
compared to 1996. The average yield decreased to 5.00% in 1998 from the 5.51%
recorded for 1997 and 1996. The increase in average federal funds sold in
1998 resulted in an increase of $800,000 in interest income, offset by the
$22,000 decrease due to a lower yield. Federal funds sold interest income was
$1,036,000, $258,000 and $201,000 for 1998, 1997 and 1996, respectively.
INTEREST EXPENSE
Total interest expense on interest-bearing liabilities was $33,817,000 in
1998, a 2.4% increase over the $33,017,000 recorded in 1997. Total interest
expense in 1997 was 17.3% greater than the $28,153,000 recorded in 1996.
Increased volume of interest-bearing liabilities was responsible for
$1,700,000 of the increased interest expense in 1998 compared to 1997, while
lower rates reduced interest expense by $900,000. CBA had $289,000 average
interest-bearing liabilities in 1998.
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 penalties if withdrawn prematurely.
The average balance of interest-bearing demand deposits was $123,884,000 in
1998, 15.6% greater than the $107,131,000 in 1997. During 1998, FNBF
conducted an advertising campaign targeting retail customers. FNBF's average
interest-bearing demand deposits increased 13.9% during 1998 or $12,000,000
compared to the 1997 average. Non-public deposits accounted for $10,000,000
of this increase at FNBF. Average balances in 1997 were 32.8% greater than
1996, primarily as the result of the introduction of the "All-In-One"
checking account at FNBF in September, 1996. 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. The average rate paid by the Company on these deposits
was 3.11% in 1998 compared to 3.46% in 1997 and 3.09% in 1996. The lower
rates paid on interest-bearing demand deposits in 1998 resulted in a $268,000
decrease in interest expense while the higher volumes of such deposits
increased interest expense by $421,000. Interest expense on interest-bearing
demand deposits was $3,855,000, $3,702,000, and $2,491,000 for 1998, 1997,
and 1996, respectively. The $1,211,000 interest expense increase from 1996 to
1997 was made up of $887,000 due to
16
<PAGE>
increased volume and $324,000 due to increased rates. Average
interest-bearing demand accounts were 20.2% of total average deposits in
1998, 18.1% in 1997 and 14.3% in 1996.
Savings deposits averaged $106,235,000 in 1998, a $3,297,000 decrease from
the $109,532,000 recorded in 1997. Average savings deposits in 1997 were
$922,000 higher than 1996. The average rate paid on savings accounts in 1998
was 3.50% compared to 3.56% and 3.44% in 1997 and 1996, respectively. The
lower rates paid on savings accounts in 1998 resulted in a decrease of
$65,000 in interest expense, while lower volumes resulted in a decrease in
interest expense of $116,000. Interest expense on savings deposits was
$3,715,000, $3,895,000 and $3,740,000 for 1998, 1997 and 1996, respectively.
The $155,000 interest expense increase from 1996 to 1997 was made up of
$32,000 due to increased volume and $123,000 due to higher rates. Savings
deposits averaged 17.3% of total average deposits in 1998 compared to 18.5%
in 1997 and 19.3% in 1996.
Time deposits averaged $258,144,000 in 1998, a decrease of $17,892,000 from
the 1997 average of $276,036,000. This decrease was primarily due to
maturities of FNBF's prime rate certificate of deposits. The $276,036,000
average in 1997 was a decrease of $2,310,000 from the $278,346,000 recorded
in 1996. Interest expense of $14,773,000 was recorded in 1998, a decrease of
$1,368,000 from 1997, due primarily to the decreased volume. Interest expense
for time deposits in 1997 decreased slightly from 1996 primarily as a result
of lower volumes of such deposits. Average time deposits in 1998 comprised
42.0% of total average deposits compared to 46.6% in 1997 and 49.4% in 1996.
Average noninterest-bearing deposits were $126,496,000 in 1998 compared to
$99,332,000 in 1997 and $95,518,000 in 1996 and was 20.6% of average total
deposits in 1998 compared to 16.8% in 1997 and 17.0% in 1996. Correspondent
bank deposits increased in 1998, such average deposits were $32,309,000,
$16,209,000, and $8,991,000 as of December 31, 1998, 1997, and 1996,
respectively.
Short-term Borrowings
Short-term borrowings include federal funds purchased, securities sold under
agreements to repurchase and discount window borrowings which generally
mature one to seven days following the date of sale. Short-term borrowings
averaged $123,163,000 in 1998, a 33.8% increase compared to the $92,046,000
average recorded in 1997. Average short-term borrowings increased $28,087,000
in 1997 compared to 1996. The average rate paid was 4.96% in 1998 compared to
5.18% in 1997 and 5.04% in 1996. Interest expense on short-term borrowings
was $6,104,000, $4,772,000 and $3,224,000 for 1998, 1997 and 1996,
respectively. The higher volume in 1998 accounted for a $1,550,000 increase
in interest expense compared to 1997 and lower rates accounted for a decrease
of $218,000 which netted to $1,332,000 increase in interest expense. The
$1,548,000 interest expense increase from 1996 to 1997 was primarily due to
increased volume.
Federal Home Loan Banks and Other Notes Payable
The Company's Federal Home Loan Banks and other notes payable consist
primarily of advances from the Federal Home Loan Banks (FHLB), a note payable
to Frost National Bank, and treasury tax and loan note balances. At December
31, 1998, the Company had an average of $88,546,000 of such advances compared
to $74,138,000 and $43,130,000 in 1997 and 1996, respectively. The average
rates paid during 1998, 1997, and 1996 were 6.06%, 6.08%, and 5.76%,
respectively. The total amount of interest expense for these advances in 1998
was $5,370,000 compared to $4,507,000 in 1997 and $2,484,000 in 1996. The
higher volume in 1998 resulted in an increase of $874,000 in interest expense
and the decrease in the interest rates resulted in a decrease of $11,000 in
interest expense. These two components resulted in a total increase in
interest expense of $863,000 for 1998 compared to 1997. The $2,023,000
interest expense increase from 1996 to 1997 was primarily due to increased
volume.
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
Expense 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 changes in net interest margin on earning assets setting forth
average assets, liabilities, and stockholders' equity;
17
<PAGE>
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 expense.
<TABLE>
<CAPTION>
Table Two
Average Balance Sheets, Net Interest Income, Yields and Rates
Tax-equivalent basis (dollars in thousands)
--------------------------------- -------------------------------- ------------------------------
1998 1997 1996
--------------------------------- -------------------------------- ------------------------------
Tax Tax Tax
Average Equivalent Average Average Equivalent Average Average Equivalent Average
Balance Interest Yield/Rate Balance Interest Yield/Rate Balance Interest Yield/Rate
-------- ---------- ---------- ------- -------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Loans $457,337 $44,298 9.69% $478,683 $46,905 9.80% $437,439 $43,450 9.93%
Taxable securities 226,447 13,642 6.02 199,847 12,243 6.13 167,005 10,050 6.02
Tax-exempt securities 67,170 5,182 7.71 63,394 5,022 7.92 55,017 4,372 7.95
Interest-bearing deposits 37,401 1,961 5.24 10,628 584 5.50 13,866 715 5.16
Federal funds sold 20,735 1,036 5.00 4,681 258 5.51 3,642 201 5.51
-------- ------- ------- ------- -------- -------
Total interest-earning
assets 809,090 66,119 8.17 757,233 65,012 8.59 676,969 58,788 8.68
------- ------- -------
Cash and due from banks 71,848 49,572 40,120
Premises and equipment 19,366 16,853 13,942
Other assets, net 18,874 20,455 17,892
Allowance for loan losses (9,484) (8,469) (8,782)
-------- ------ ------
Total assets $909,694 $835,644 $740,141
-------- -------- --------
-------- -------- --------
Liabilities and
Stockholders' Equity:
Interest-bearing demand $123,884 3,855 3.11% $107,131 3,702 3.46% $ 80,703 2,491 3.09%
Savings deposit 106,235 3,715 3.50 109,532 3,895 3.56 108,610 3,740 3.44
Time deposits 258,144 14,773 5.72 276,036 16,141 5.85 278,346 16,214 5.83
Federal funds purchased 51,640 2,664 5.16 25,073 1,378 5.49 11,551 612 5.30
Repurchase agreements 71,523 3,440 4.81 66,973 3,394 5.07 52,408 2,612 4.98
FHLB and other notes
payable 88,546 5,370 6.06 74,138 4,507 6.08 43,130 2,484 5.76
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities 699,972 33,817 4.83 658,883 33,017 5.01 574,748 28,153 4.90
------- ------- -------
Noninterest bearing demand 126,496 99,332 95,518
Other liabilities 8,745 9,172 8,158
Stockholders' equity 74,481 68,257 61,717
-------- -------- --------
Total liabilities and $909,694 $835,644 $740,141
stockholders' equity -------- -------- --------
-------- -------- --------
Interest income/earning assets 8.17 8.59 8.68
Interest expense/earning assets 4.18 4.36 4.16
---- ---- ----
Net interest margin 32,302 3.99% 31,995 4.23% 30,635 4.52%
Less FTE adjustment 1,984 ---- 1,922 ---- 1,673 ----
------- ---- ------- ---- ------ ----
Net interest income $30,318 $30,073 $28,962
------- ------- -------
------- ------- -------
</TABLE>
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 $1,346 in
1998; $1,682 in 1997; and $1,556 in 1996.
Interest income is stated on a fully tax-equivalent basis (FTE). The rate
used for this adjustment is approximately 38%.
Net interest margin is computed by dividing net interest income by average
earning assets.
18
<PAGE>
<TABLE>
<CAPTION>
Table Three
Analysis of Volume and Rate Changes on Net Interest Income and Expense
Tax-equivalent basis (dollars in thousands)
1998 over 1997 1997 over 1996
---------------------------------- ----------------------------------
Average Average Net Average Average Net
Volume Rate Change Volume Rate Change
--------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in interest income:
Loans $(2,073) $(534) $(2,607) $4,033 $ (578) $3,455
Taxable securities 1,600 (201) 1,399 2,010 183 2,193
Tax-exempt securities 285 (125) 160 665 (15) 650
Interest-bearing deposits 1,402 (25) 1,377 (183) 52 (131)
Federal funds sold 800 (22) 778 57 --- 57
------ ---- ----- ----- ------ -----
Total 2,014 (907) 1,107 6,582 (358) 6,224
------ ---- ----- ----- ------ -----
Increase (decrease) in interest expense:
Interest-bearing demand 421 (268) 153 887 324 1,211
Savings deposits (116) (65) (180) 32 123 155
Time deposits (1,029) (338) (1,368) (136) 63 (73)
Federal funds purchased 1,365 (79) 1,286 743 23 766
Repurchase agreements 185 (139) 46 737 45 782
FHLB and other notes payable 874 (11) 863 1,870 153 2,023
------ ---- ----- ----- ------ -----
Total 1,700 (900) 800 4,133 731 4,864
------ ---- ----- ----- ------ -----
Increase (decrease) in net interest income $ 314 $ (7) $ 307 $2,449 $(1,089) $1,360
------ ---- ----- ----- ------ -----
------ ---- ----- ----- ------ -----
</TABLE>
Notes:
Non-accrual loans are included in loans.
Interest income on loans includes fees on loans (in thousands) of $1,346 in
1998; $1,682 in 1997; and $1,556 in 1996. Interest income is stated on a
fully tax-equivalent basis. The rate used for this adjustment is
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 1998, the Company provided $2,045,000 for possible loan losses, which was
$200,000 less than was provided in 1997. This decrease was attributable to a
decrease in loans outstanding and improved loan quality. The provision for
loan losses in 1997 was $2,245,000, which was $1,090,000 more than the
$1,155,000 that was provided in 1996. The 1997 increase was primarily related
to certain large commercial loans that were classified by management in 1997
and for which specific reserves had been allocated.
During 1998, the Company had net charge-offs of $960,000 compared to
$2,456,000 in 1997. Gross charge-offs in 1998 were $1,817,000 compared to
$3,542,000 in 1997. The $1,740,000 decrease in commercial, financial and
agricultural gross charge-offs, as well as the increase in 1997 over 1996,
were primarily due to one large commercial loan charged-off in the second
quarter of 1997 by FNBF. Based upon recent experience, management estimates
gross charge-offs for 1999 of $1,900,000, broken down as follows: commercial
- - $225,000; commercial real estate - $475,000, residential real estate -
$250,000 and consumer - $950,000. Actual results may differ from management's
estimates.
19
<PAGE>
OTHER INCOME
Service Charges
Service charges on deposit accounts increased $110,000 in 1998 to $2,825,000,
compared to $2,715,000 in 1997 and $2,573,000 in 1996. The 1998 increase was
primarily related to account analysis fees. Service charges on demand
deposits decreased $229,000 from 1996 to 1997. This decline in service
charges 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. This decrease was offset by
increases in return check fees and service charges received from
correspondent banks due to an increase in the volume of service in this area.
Other Service Charges
Other service charges increased $242,000 in 1998 to $1,582,000 compared to
$1,340,000 in 1997. This increase was primarily related to ATM and secondary
mortgage fee income. Starting mid-year 1998, non-Company customers were
assessed a surcharge for use of the Company's ATMs. ATM fee income increased
$133,000. Fees received for loans sold servicing released increased $155,000
in 1998 as the result of increased volume. Other service charges in 1996 were
$1,318,000.
Gains on Sale of Other Real Estate Owned (OREO)
Gains on sale of OREO during 1998 were $258,000. During 1997, the Company
recorded $1,119,000 in OREO gains primarily due to the sale of one property
held by FNBF. Such gains recorded in 1996 were $270,000.
Securities Transactions
Securities gains during 1998 were $31,000. During 1997 and 1996, the Company
incurred losses of $111,000 and $82,000, respectively, on the sale of
investment securities.
Other Operating Income
Other operating income increased to $436,000 in 1998 compared to $155,000 in
1997 and $375,000 in 1996. The $281,000 increase during 1998 was primarily
due to increased cash value of life insurance and the $220,000 decrease from
1996 to 1997 was primarily due to decreased cash value of life insurance
recorded in 1997.
OTHER EXPENSES
Salaries and Benefits
Salaries and benefits expense of $12,272,000 increased $808,000 in 1998, or
7.0% over the $11,464,000 recorded in 1997. CBA salaries and benefits
included in 1998 were $206,000. CBA had 15 full-time equivalents as of
December, 1998. Pre-opening salaries and benefits related to CBA in 1998 were
$340,000. Full-time equivalents for the Company at December 31, 1998 and 1997
were 366 and 340, respectively. 1996 salaries and benefits expense was
$10,040,000. Normal salary increases and a higher level of full-time
equivalent employees added to support asset growth and to enhance customer
service accounted for $1,040,000 of the 1998 increase which was offset by
decreases in stock appreciation rights expense and executive supplemental
income expenses.
20
<PAGE>
Occupancy Expenses
Occupancy expense was $2,179,000 in 1998 compared to $2,242,000 in 1997 and
$2,145,000 in 1996. Included in 1998 was $46,000 occupancy expense for CBA.
The decrease in 1998 resulted primarily from a decrease in BNBD's occupancy
expense of $145,000 during 1998 compared to 1997. This decrease at BNBD was
primarily due to BNBD's $172,000 increase in rental income as a result of the
increase in tenant occupancy. BNBD repair and maintenance also decreased
$126,000 while property taxes increased $118,000 primarily due to the new
main office building. The $97,000 increase in the Company's occupancy expense
in 1997 was primarily made up of increases in depreciation, due to recording
a full year of depreciation for the new main office building for BNBD, which
was occupied in May 1996, and in utilities, cleaning and tax expense. Those
increases were offset somewhat by decreases in repair and maintenance and
property insurance plus an increase in rental income.
Other Operating Expenses
Other operating expenses were $8,580,000 in 1998, a 15.9% increase over the
$7,402,000 recorded in 1997. This increase was primarily in data processing
expenses, up $574,000; supplies, up $109,000; OREO expenses, up $103,000.
These increases were offset in part by the following decreases: consultants,
down $107,000; credit and collection, down $111,000 and other losses, down
$135,000. 1996 other operating expenses were $6,438,000. The $964,000
increase from 1996 to 1997 was primarily in data processing, consultant fees,
credit and collection expenses, correspondent bank charges and VISA expenses.
Provision for Taxes
The provision for income taxes was $2,213,000 in 1998 compared to $2,844,000
in 1997 and $3,828,000 in 1996. The effective tax rate on income was 21.3% in
1998 compared to 23.8% in 1997 and 28.1% in 1996. The decrease in the
effective tax rate from 1997 to 1998 and from 1996 to 1997 was primarily
attributable to an increase in tax-exempt income as a percent of total income.
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
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- -----------
<S> <C> <C> <C>
Return on assets 0.90% 1.09% 1.33%
Return on stockholders' equity 10.96% 13.32% 15.90%
Stockholders' equity to assets 8.19% 8.17% 8.34%
Stockholders' dividend payout ratio 49.06% 42.26% 35.31%
</TABLE>
Return on average assets (ROA) in 1998 of .90% was down from the 1.09% and
1.33% recorded in 1997 and 1996, respectively. The decrease in ROA from 1.09%
in 1997 to .90% in 1998 was attributable to the decrease in the net interest
margin primarily due to a shift from loans to lower yielding earning assets
and the increase in other expenses. Average assets increased $74,050,000 to
$909,694,000 in 1998 compared to increases of $95,503,000 in 1997 and
$103,402,000 in 1996.
Return on average stockholders' equity declined to 10.96% in 1998 from 13.32%
in 1997, and 1996 return on average stockholders' equity was 15.90%. Average
stockholders' equity as a percent of average total assets was 8.19% in 1998
compared to 8.17% and 8.34% in 1997 and 1996, respectively. The dividend
payout ratio increased to 49.06% in 1998 compared to 42.26% in 1997 and
35.31% in 1996. Dividends declared per share in 1998 increased $.06, or 3.4%,
to $1.85 per share compared to 1997 dividends declared per share of $1.79.
21
<PAGE>
BALANCE SHEET ANALYSIS
Loans
The Company concentrates its lending activities in five principal areas:
commercial, commercial real estate, consumer, residential real estate and
real estate construction loans. At December 31, 1998, these five categories
were 21.6%, 36.1%, 12.5%, 23.5% and 6.3%, respectively, of the Company's loan
portfolio. This compares with 24.4%, 34.0%, 14.3%, 21.3% and 6.0%,
respectively, at December 31, 1997. 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 which
are 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.
Total loans at December 31, 1998 were $429,665,000, a decrease of
$62,296,000, or 12.7%, compared to December 31, 1997. Total loans at December
31, 1997 were $491,961,000, an increase of $23,773,000, as compared to 1996.
The decrease in 1998 was in both the commercial and consumer categories, with
the most significant decrease being in the commercial and commercial real
estate areas. The $62,296,000 decrease was primarily attributable to payoffs
of several large loans due to customers obtaining alternative long-term
financing, early payoffs due to corporate acquisitions and a reduction in
direct and indirect consumer loans which was primarily due to enhanced
underwriting standards. Management is actively working on expanding the
Company's customer base which should provide additional lending
opportunities. The October, 1998 opening of CBA gives the Company access to
the Albuquerque market which has strategic significance as the Albuquerque
metropolitan area economy is the largest and most robust in New Mexico. At
December 31, 1998, CBA had $3,757,000 of loans outstanding. Management
anticipates that the areas of greatest growth potential in 1999 will be
commercial and real estate lending.
Table Five
Loan Portfolio Composite
(dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
December 31:
Commercial, financial and agricultural $92,781 $120,315 $109,697 $96,273 $66,463
Commercial real estate 155,105 167,136 161,959 128,105 111,027
Consumer 53,790 70,232 74,408 67,885 54,802
Real estate residential 100,765 104,816 90,105 87,501 72,033
Real estate construction 27,224 29,462 32,019 24,916 17,335
---------- ---------- ---------- ---------- ----------
Total loans $429,665 $491,961 $468,188 $404,680 $321,660
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
Nonaccrual, Past Due and Restructured Loans
Nonperforming loans as of December 31, 1998, were $8,311,000, or 1.93%, of
total loans compared to $5,334,000, or 1.08%, of total loans at December 31,
1997. The increase in nonperforming loans was $3,053,000 and was primarily
due to one loan for which the loan terms were modified due to the borrower's
financial condition.
Commercial and real estate loans are reviewed on an individual basis for
reclassification to nonaccrual status when any 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 reclassified as doubtful by internal
loan review or bank regulatory agencies, a portion of the principal balance
has been charged-off, or the Company takes possession of the collateral.
22
<PAGE>
The reclassification of loans to nonaccrual status does not necessarily
reflect management's judgment as to whether they are collectible. Consumer
loans generally are not placed on nonaccrual 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)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
December 31:
Nonaccrual loans $4,336 $5,078 $1,702 $3,517 $ 140
Accruing loans past due 90 days or more 893 227 256 308 143
Restructured loans (in compliance with modified terms) 3,082 29 351 --- ---
----- ------ ------ ------ -----
Total nonperforming loans 8,311 5,334 2,309 3,825 283
OREO and other foreclosed assets 898 1,421 1,995 564 737
----- ------ ------ ------ -----
Total nonperforming assets $9,209 $6,755 $4,304 $4,389 $1,020
----- ------ ------ ------ -----
----- ------ ------ ------ -----
Ratios:
Nonperforming loans to total loans 1.93% 1.08% 0.49% 0.95% 0.09%
Allowance for loan losses to nonperforming loans 118.00% 163.53% 386.87% 224.52% 2680.57%
Nonperforming assets to total assets 1.02% 0.75% 0.54% 0.64% 0.17%
Allowance for loan losses to nonperforming assets 106.50% 129.12% 207.55% 195.67% 743.73%
</TABLE>
Management identified $4,250,000 of potential problem loans as of December
31, 1998. This is primarily related to three large customer relationships.
Potential problem loans are performing loans that management has doubts about
the borrower's ability to comply with the present loan repayment terms. These
loans are less than 90 days past due and are accruing interest.
Allowance for Loan Losses
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 requiring specific reserves and to assess probable
losses in the loan portfolio in the aggregate. Commercial and commercial real
estate loans classified substandard or doubtful, according to the Company's
policies and procedures, are given specific reserves after an assessment of
23
<PAGE>
realizable collateral values is made. 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. Percentages, based on the
5-year moving average of net charge-offs of current and 30 days or greater
delinquent loans, are applied to the balance of the pools for which no
specific reserves are allocated to determine the general reserve requirement.
Concentrations of credit in the commercial portfolio are also reviewed and an
allocation is made by applying percentages, based on the 5-year moving
average of net charge-offs, to the identified balances. Percentages based on
a 3-year moving average of net charge-offs are applied to current and 30 days
or greater delinquent consumer loans to determine the required consumer
reserve. Reserve allocations are updated quarterly based on actual portfolio
mix and credit quality. Reserve percentages based on multiple-year moving
averages of net charge-offs during a period reflects the evolving trends in
the portfolio and indicates whether the monthly provision should be adjusted.
Reserves allocated as specific reserves increased during 1998 primarily as
the result of a change in how specific reserves were assigned at BNBD.
Conversely, the amount of reserves allocated to the general pool of adversely
classified loans decreased.
Although nonperforming loans as a percentage of total loans increased at
December 31, 1998 to 1.93% from 1.08% a year ago, asset quality, as measured
by the level of adversely classified commercial and commercial real estate
loans improved during 1998. These adversely classified loans were $44,447,000
and $67,771,000 as of December 31, 1998 and 1997, respectively. Because of
the level of nonperforming loans, management made monthly provisions. As a
result of this and the 12.7% decrease in total loans outstanding, the
allowance as a percentage of total loans outstanding at year end 1997 and
1998, respectively, increased from 1.77% to 2.28%.
Gross charge-offs in 1998 were $1,817,000 down $1,725,000 from 1997 gross
charge-offs of $3,542,000. The 1997 gross charge-offs included a large
commercial loan. This charged-off loan was the primary reason the commercial
loan charge-offs increased to $2,045,000 in 1997 from $378,000 in 1996.
Management believes that the $9,807,000 allowance for loan losses at December
31, 1998 is adequate to absorb known risks in the loan portfolio. No
assurance can be given, however, that adverse economic conditions will not
result in increased losses in the portfolio.
24
<PAGE>
The following table summarizes, for the years indicated, the activity in the
allowance for loan losses:
Table Seven
Allowance for Loan Loss Activity
(dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 8,722 $ 8,933 $ 8,588 $ 7,586 $ 5,956
Provision charged to operations 2,045 2,245 1,155 837 58
Loans charged-off:
Commercial, financial and agricultural (305) (2,045) (378) (60) (68)
Commercial real estate (243) --- --- --- ---
Consumer (1,193) (1,457) (1,255) (705) (688)
Real estate residential (76) (40) (12) (87) ---
Real estate construction --- --- (160) --- ---
-------- -------- --------- -------- --------
Total loans charged-off (1,817) (3,542) (1,805) (852) (756)
-------- -------- --------- -------- --------
Recoveries:
Commercial, financial and agricultural 299 442 403 275 161
Commercial real estate 19 1 11 8 17
Consumer 533 619 499 417 2,133
Real estate residential 6 24 82 15 17
Real estate construction --- --- --- --- ---
-------- -------- --------- -------- --------
Total recoveries 857 1,086 995 715 2,328
-------- -------- --------- -------- --------
Net loans recovered (charged-off) (960) (2,456) (810) (137) 1,572
-------- -------- --------- -------- --------
Acquired in merger with Western Bank Gallup --- --- --- 302 ---
-------- -------- --------- -------- --------
Balance at end of year $ 9,807 $ 8,722 $ 8,933 $ 8,588 $ 7,586
-------- -------- --------- -------- --------
-------- -------- --------- -------- --------
Average total loans $457,337 $478,683 $437,439 $359,502 $285,994
Total loans at December 31 $429,665 $491,961 $468,188 $404,680 $321,660
Ratios:
Net recoveries or (charge-offs) during
period to average loans outstanding during
period (0.21)% (0.51)% (0.19)% (0.04)% 0.55%
Provision for loan loss to average loans
outstanding during period 0.45 % 0.47 % 0.26 % 0.23 % 0.02%
Allowance to loans at year end 2.28 % 1.77 % 1.91 % 2.12 % 2.36%
</TABLE>
Investment Securities
The December 31, 1998 investment securities balance was $320,943,000, up
$41,384,000 from the December 31, 1997 balance of $279,559,000. Of this
increase, $9,612,000 was in tax-exempt securities. The increase of
$31,772,000 in taxable securities was primarily invested in short-term
average life mortgage bank securities. The funds were available to be
invested in taxable securities due to the decrease in loan outstandings.
Interest-Bearing Deposits in Banks
At December 31, 1998 interest-bearing deposits in banks, which were primarily
funds on deposit with Federal Home Loan Banks, were $14,221,000, down
$2,831,000 from the $17,052,000 at December 31, 1997. This category of
short-term asset is an alternative to investing in federal funds sold.
Federal Funds Sold
At December 31, 1998 federal funds sold were $15,700,000, up $15,450,000 from
the December 31, 1997 balance of $250,000. The Company purchases excess
federal funds from downstream correspondent banks and resells these funds as
part of the Company's own federal funds sold.
25
<PAGE>
Bank Premises and Equipment
Bank premises and equipment net of accumulated depreciation as of December
31, 1998, was $20,679,000 compared to $17,510,000 in 1997 which was an
increase of $3,169,000. During 1998, a building was purchased in
Albuquerque, New Mexico which serves as the headquarters for CBA. CBA had
$2,473,000 in building, improvements and various furnishings and equipment
net of accumulated depreciation as of December 31, 1998.
Various new software and hardware systems were put into service during 1998.
The principal purchases were technical enhancements for digital check and
statement imaging, local and wide-area networks and an improved voice
response system. The book value of data processing assets increased from the
December 31, 1997 total of $1,488,000 to $2,658,000 at December 31, 1998.
Other Real Estate Owned
The December 31, 1998 balance of OREO was $811,000 compared to $1,119,000 at
December 31, 1997, a decrease of $308,000. Several properties were sold
during 1998 which accounted for this decrease.
Deposits
Total deposits at December 31, 1998 were $625,397,000 compared to
$608,746,000 at December 31, 1997. This 2.7% increase followed a 3.5%
increase in 1997 compared to 1996.
Noninterest-bearing demand deposits of $144,214,000 and $130,501,000 at
December 31, 1998 and 1997 were 23.1% and 21.4% of total deposits at year-end
1998 and 1997, respectively. This $13,713,000 increase was primarily in
business and correspondent bank balances. During 1998, two new business
demand accounts were introduced which were designed for small businesses.
These products have been well received by companies which write less than 200
checks or have less than 200 deposited items per month. FNBF introduced a
noninterest-bearing free checking account during 1998. Noninterest-bearing
demand deposits increased $35,594,000 from December 31, 1996 to December 31,
1997.
Interest-bearing demand deposits increased slightly from $110,145,000 at
December 31, 1997 to $110,604,000 at December 31, 1998 and represented 17.7%
and 18.1% of total deposits as of year end 1998 and 1997, respectively.
Savings accounts and money market accounts increased from $102,707,000 in
1997 to $109,453,000 in 1998. These deposits represented 17.5% and 16.9% of
total deposits at year end 1998 and 1997, respectively.
Time deposits decreased during 1998. These deposits include time
certificates, $100,000 and over, and other time certificates. Time
certificates, $100,000 and over, were 23.9% of total deposits at December 31,
1998 and 25.3% at December 31, 1997. Although these deposits are generally
more rate sensitive and, therefore, considered 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 17.8% and 18.3% of total
deposits at year end 1998 and 1997, respectively. During 1996, the Company
sold 2-year floating rate certificates. These certificates were made
available, through the first quarter of 1996, to brokers outside the
Company's general market area to help meet 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, 1998, the Company
had $12,508,000 of brokered deposits compared to $24,316,000 at December 31,
1997. 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. The 2-year floating rate certificate
was discontinued in 1998 as the Company no longer needed this higher cost
source of funds.
26
<PAGE>
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. At December 31, 1998, the
Company's federal funds purchased were $44,257,000 compared to $34,845,000 a
year ago.
Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase ("repos") decreased to
$68,629,000 at December 31, 1998. At December 31, 1997, repos were
$82,507,000 compared to $68,739,000 at year end 1996. 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
The Company utilizes Federal Home Loan Bank advances to "match-fund" 15-year
fixed rate residential mortgage loans with long-term fixed rate borrowings.
Federal Home Loan Bank advances are also used for arbitrage opportunities by
investing the funds in taxable securities and for short-term funding. The
Company borrowed $9,037,000 and $50,800,000 during 1998 and 1997,
respectively. The 1998 advances were used to fund 15-year fixed-rate
mortgages and a commercial loan. At December 31, 1998 and 1997, the advances
outstanding from the Federal Home Loan Bank were $66,416,000 and $87,937,000,
respectively.
The Company borrowed $10,000,000 from Frost National Bank in the third
quarter of 1998 to capitalize CBA. This ten-year note was secured by
subsidiary bank stock and has a floating rate with quarterly principal
payments of $250,000 plus accrued interest. As of December 31, 1998, the
principal outstanding was $9,500,000.
Stockholders' Equity and Capital Adequacy
Total stockholders' equity at December 31, 1998 was a record $77,046,000, up
7.3% from $71,831,000 at year-end 1997. The growth was primarily due to
retention of earnings. At December 31, 1998 and 1997, respectively, the ratio
of stockholders' equity to total assets was 8.54% and 8.00%. This increase
was due to the fact that the Company's total assets increased at a slower
rate than the increase in retained earnings.
The Company and its Subsidiary Banks exceeded required regulatory minimums
for "well-capitalized" status throughout 1998, 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, 1998, the
Company and the Subsidiary Banks had to have a regulatory 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
15.33% and 14.09%, respectively, compared to 13.23% and 11.98%, 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 8.17% and 7.92% at December 31, 1998 and
1997, respectively.
27
<PAGE>
The following table indicates the amounts of regulatory capital of the Company:
Table Eight
Regulatory Capital
(dollars in thousands)
<TABLE>
<CAPTION>
Total
Risk-Based Tier 1 Leverage
------------ ------------ -----------
<S> <C> <C> <C>
At December 31,1998:
Company's 15.33% 14.09% 8.17%
Regulatory minimum 8.00% 4.00% 4.00%
Company's capital $80,567 $74,061 $74,061
Regulatory minimum $42,037 $21,018 $36,248
Computed excess $38,530 $53,043 $37,813
</TABLE>
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, the total investment portfolio is
classified 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. As of December 31, 1998, the
Company had $78,000,000 in federal funds credit lines from upstream
correspondents. 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.
Short-term borrowings are made up primarily of federal funds purchased and
securities sold under agreements to repurchase. The securities underlying the
repurchase agreements were under the control of the Subsidiary Banks.
Table Nine
Short-term Borrowings
Original Maturities Less Than One Year
(dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- ----------
<S> <C> <C> <C>
Amount outstanding at year end $112,886 $117,852 $84,524
Average outstanding for the year 123,163 92,046 63,959
Highest month-end balance for the year 140,429 117,852 84,524
Weighted average interest rate 4.96% 5.18% 5.04%
</TABLE>
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,
28
<PAGE>
more likely to be withdrawn to obtain higher yields elsewhere if available,
the Company has found these deposits to be relatively stable.
Table Ten
Certificates of Deposit in Denominations of $100,000 or More
(dollars in thousands)
<TABLE>
<CAPTION>
1998
------------
<S> <C>
At December 31:
Time remaining until maturity:
Less than 3 months $ 25,130
3 months to 6 months 25,835
6 months to 12 months 54,444
More than 12 months 44,091
--------
Total $149,500
--------
--------
</TABLE>
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, 1998
and the investment portfolio distribution for the last three years.
Table Eleven
Securities Maturities and Weighted Average Yields
(dollars in thousands)
<TABLE>
<CAPTION>
Within After One Year After 5 Years
One Year Through 5 Years Through 10 Years After 10 Years Total
----------------- ------------------ ---------------- ------------------ ------------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
--------- ------- ---------- ------- -------- ------- --------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
At December 31, 1998:
Securities available-for-sale
U.S. treasury securities and
obligations of U.S. government
corporations and agencies $51,585 5.81% $121,809 6.02% $46,154 6.34% $12,240 6.19% $231,788 6.04%
Obligations of states and
political subdivisions 6,926 4.68 28,300 4.82 32,453 5.04 6,994 4.46 74,673 4.87
Other securities --- --- --- --- --- --- 14,482 5.95 14,482 5.95
------- ---- -------- ---- ------- ---- ------- ---- -------- ----
Total securities $58,511 5.68% $150,109 5.79% $78,607 5.80% $33,716 5.73% $320,943 5.77%
------- ---- -------- ---- ------- ---- ------- ---- -------- ----
------- ---- -------- ---- ------- ---- ------- ---- -------- ----
</TABLE>
Notes: All securities available-for-sale are shown at market value at year-end.
Yields are calculated based on amortized cost and do not include a
tax-equivalent adjustment. 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 and mortgage-backed
securities, which maturities are based on average life.
Table Twelve
Securities Portfolio Distribution
(dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
At December 31:
U.S. treasury securities and obligations of
U.S. government corporations and agencies $231,788 $198,990 $175,734
Obligations of states and political subdivisions 74,673 65,061 62,372
Other securities 14,482 15,508 6,581
-------- -------- --------
Total securities $320,943 $279,559 $244,687
-------- -------- --------
-------- -------- --------
</TABLE>
29
<PAGE>
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, 1998 and 1997.
<TABLE>
<CAPTION>
Table Thirteen
Loan Maturities
(dollars in thousands)
Within After One But After
One Year Within 5 Years 5 Years Total
------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Loan maturities at December 31, 1998:
Loans with predetermined interest rates:
Commercial, financial and agricultural $ 7,521 $ 13,195 $ 10,207 $30,923
Commercial real estate 16,036 29,538 28,005 73,579
Consumer 8,449 41,567 1,938 51,954
Real estate residential 2,010 4,795 64,821 71,626
Real estate construction 6,800 1,367 2,996 11,163
------- ------- ------- ------
40,816 90,462 107,967 239,245
------- ------- ------- ------
Loans with floating interest rates:
Commercial, financial and agricultural 28,321 20,747 12,790 61,858
Commercial real estate 8,723 17,425 55,378 81,526
Consumer 585 525 726 1,836
Real estate residential 1,874 1,258 26,007 29,139
Real estate construction 7,799 1,740 6,522 16,061
------- ------- ------- ------
47,302 41,695 101,423 190,420
------- ------- ------- ------
Total loans $ 88,118 $132,157 $209,390 $429,665
------- ------- ------- ------
------- ------- ------- ------
Loan maturities at December 31, 1997:
Loans with predetermined interest rates:
Commercial, financial and agricultural $ 16,612 $ 10,392 $ 2,159 $29,163
Commercial real estate 5,296 23,163 22,802 51,261
Consumer 10,201 49,993 2,321 62,515
Real estate residential 14,581 6,748 63,836 85,165
Real estate construction 3,456 2,236 1,544 7,236
------- ------- ------- ------
50,146 92,532 92,662 235,340
------- ------- ------- ------
Loans with floating interest rates:
Commercial, financial and agricultural 35,029 27,697 28,426 91,152
Commercial real estate 13,298 16,906 85,671 115,875
Consumer 908 1,877 4,932 7,717
Real estate residential 2,625 831 16,195 19,651
Real estate construction 10,087 7,335 4,804 22,226
------- ------- ------- ------
61,947 54,646 140,028 256,621
------- ------- ------- ------
Total loans $112,093 $147,178 $232,690 $491,961
------- ------- ------- ------
------- ------- ------- ------
</TABLE>
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 First Place is dividends on common stock
when declared. A second requirement is the repayment of debt, if any. First
Place is dependent upon the payment of cash dividends by the Subsidiary Banks
to service these requirements. First Place expects that the cash dividends
paid by the Subsidiary Banks to First Place will be sufficient to meets its
cash requirements.
30
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk is the broad term related to the risk of economic loss due to
adverse changes in the fair market value of a financial instrument. Interest
rate risk is the risk that relative and absolute changes in interest rates
may adversely affect the Company's financial condition. These economic losses
can be reflected as a loss of future net interest income and/or a loss of
current fair market values. Management's objective is not to eliminate
interest rate risk but to manage it by setting appropriate limits.
The responsibility for managing market risk and interest rate risk rests with
the Asset/Liability Management Committee (ALCO), which operates under policy
guidelines established by the Boards of Directors. ALCO monitors and
coordinates sources, uses and pricing of funds. In adjusting the Company's
asset/liability position, the Subsidiary Banks and the Boards and management
attempt to manage the interest rate risk while enhancing net interest margin.
At times, depending on the level of market interest rates, the relationship
between long and short-term interest rates, market conditions and competitive
factors, the Boards and management may determine to increase the interest
rate risk position somewhat in order to increase the Company's net interest
margin. The Subsidiary Banks' results of operations and net portfolio values
remain vulnerable to increases in interest rates and to fluctuations in the
difference between long-term and short-term interest rates.
The Subsidiary Banks' Asset Liability Management Committees met regularly
during 1998 to review interest rate risk and profitability and recommend
adjustments for consideration by the Boards of Directors. Management reviews
the Subsidiary Banks' security portfolios, formulates investment strategies,
and oversees the timing and implementation of transactions to assure
attainment of the Boards' objectives in the most effective manner.
Notwithstanding interest rate risk management activities, the potential for
changing interest rates is an uncertainty that can have an adverse effect on
net income.
The Subsidiary Banks utilize a simulation model to analyze net interest
income sensitivity to movements in interest rates. The simulation models
project net interest income based on an immediate increase or decrease in
interest rates (rate shock) sustained over a twelve month period. The model
is based on the actual maturity and repricing characteristics of
interest-rate sensitive assets and liabilities, including loans, investment
securities, federal funds sold/purchased, interest-bearing deposits and
borrowings. The model incorporates assumptions regarding the impact of
changing interest rates on the prepayment rates of certain assets and
liabilities. The assumptions are based on historical industry standard
prepayment speeds on like assets and liabilities when interest rates increase
or decrease by 200 basis points (bp). The model factors in projections for
anticipated activity levels by product lines offered by the Subsidiary Banks.
The simulation model also takes into account the Subsidiary Banks' greater
ability to control the rates on deposit products compared to adjustable-rate
loans which are tied to published indices. At December 31, 1998, the model
indicated the following interest rate sensitivity compared to a constant
interest rate scenario:
<TABLE>
<CAPTION>
Table Fourteen
Net Portfolio Value Analysis
(dollars in thousands)
200 bp % Change 200 bp % Change Current
Increase From Current Decrease From Current Market Rates
----------- -------------- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C>
Anticipated impact over the
next twelve months:
Net interest income $26,457 (10.0)% $ 32,858 11.8% $ 29,402
Economic value of equity $95,113 (12.8)% $117,458 7.7% $109,033
</TABLE>
Certain assumptions promulgated by the Federal Deposit Insurance Corporation
Improvement Act and the banking industry in assessing the interest rate risk
of financial institutions were employed in preparing data for the Company
included in the preceding table. These assumptions relate to interest rates,
loan prepayment rates, non-maturity deposit rates and the market values of
certain assets under the various interest rate scenarios. It is also assumed
that
31
<PAGE>
delinquency rates will not change as a result of changes in interest rates,
although there can be no assurance that this will be the case.
The estimated change in net interest income or economic value of equity due
to changes in interest rates is not projected to be significant within the
+/- 200 basis point range assumptions.
The Company does not currently engage in trading activities or use derivative
instruments to control interest rate risk. Even though such activities may be
permitted with the approval of the Board of Directors, the Company does not
intend to engage in such activities in the foreseeable future.
OFF-BALANCE SHEET ITEMS
As of December 31, 1998, the financial instruments with off-balance sheet
risk were commitments to extend credit and standby letters of credit. 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) decreased slightly to $93,294,000 in
1998 as compared to $94,346,000 in 1997. This is an indicator of continued
loan demand and represents 21.7% of total loans outstanding at year end as
compared to 19.2% a year ago.
YEAR 2000 COMPLIANCE PLAN
The Company has been actively engaged in resolving the issues with the Year
2000 challenge. Under the guidance of a full-time Year 2000 compliance
manager, a team has been formed to identify the scope of the project and
address the various issues. At December 31, 1998, the Company had
substantially completed the remediation and testing of its mission critical
systems. Of 16 mission critical systems, 15 have been upgraded for Year 2000
compliance and 14 of these have been successfully tested. The remaining
mission critical system is scheduled to be upgraded and testing of all
systems completed by June 30, 1999. In addition, 100% of non-mission critical
systems have been upgraded and the majority of these have also been
successfully tested.
The Company has assessed the Year 2000 compliance status of its third party
service providers. The Company has also assessed the scope of the Year 2000
issue in regard to major customers and has developed contingency plans which
address the potential credit and liquidity risks involved. As is the case
with all financial institutions, if the Company's customers fail to address
the year 2000 compliance problems within their own industries or lose
confidence in the financial industry as a whole, the Company could be
adversely affected.
In the unforeseeable event that a disruption does occur, the Company has
developed contingency plans for all mission critical applications. Employee
training on these plans began in March 1999 and will continue to be an
important part of the Company's strategy for the remainder of 1999.
Contingency plans are focused on two areas (1) providing uninterrupted
service to customers in the event that a system malfunctions and (2)
restoring or replacing the system.
The estimated costs for the Company's Year 2000 project is not expected to be
material (approximately $200,000 for 1999 and $100,000 for 2000). The
completion dates and costs are based on management's current best estimates.
32
<PAGE>
FIRST PLACE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 1998 and 1997
<TABLE>
<CAPTION>
(in thousands)
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 89,982 $ 79,579
Interest-bearing deposits in banks 14,221 17,052
Federal funds sold 15,700 250
------------- -------------
Total cash and cash equivalents 119,903 96,881
------------- -------------
Investment securities
available-for-sale (at market value) 320,943 279,559
------------- -------------
Loans 429,665 491,961
Allowance for loan losses (9,807) (8,722)
------------- -------------
Total net loans 419,858 483,239
------------- -------------
Bank premises and equipment, net 20,679 17,510
Other real estate owned 811 1,119
Other assets 19,853 19,652
------------- -------------
Total assets $ 902,047 $897,960
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing deposits $144,214 $130,501
Interest-bearing deposits 110,604 110,145
Savings and money market accounts 109,453 102,707
Time certificates, $100,000 and over 149,500 153,774
Other time certificates 111,626 111,619
------------- -------------
Total deposits 625,397 608,746
Securities sold under agreements to repurchase 68,629 82,507
Federal funds purchased 44,257 34,845
Other short-term borrowings - - - 500
Federal Home Loan Banks and other notes payable 76,546 88,416
Other liabilities 10,172 11,115
------------- -------------
Total liabilities 825,001 826,129
------------- -------------
Stockholders' equity:
Common stock, no par value.
Authorized shares 5,000,000;
issued and outstanding shares 2,170,372
and 2,149,497 at December 31, 1998 and 1997 14,837 14,364
Additional paid-in capital 731 406
Accumulated other comprehensive income 2,035 1,775
Retained earnings 59,443 55,286
------------- -------------
Total stockholders' equity 77,046 71,831
------------- -------------
Total liabilities and stockholders' equity $902,047 $897,960
------------- -------------
------------- -------------
</TABLE>
See notes to consolidated financial statements.
33
<PAGE>
FIRST PLACE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
(in thousands, except per share data)
1998 1997 1996
----------- ------------ -----------
<S> <C> <C> <C>
Interest income:
Loans, including fees $ 44,298 $ 46,905 $ 43,450
Investment securities:
Taxable 13,642 12,243 10,050
Tax-exempt 3,198 3,100 2,699
Interest-bearing deposits 1,961 584 715
Federal funds sold 1,036 258 201
----------- ------------ -----------
Total interest income 64,135 63,090 57,115
----------- ------------ -----------
Interest expense:
Time deposits of $100,000 and over 8,635 9,480 9,649
Other deposits 13,708 14,258 12,796
Short-term borrowings 6,104 4,772 3,224
Other borrowings 5,370 4,507 2,484
----------- ------------ -----------
Total interest expense 33,817 33,017 28,153
----------- ------------ -----------
Net interest income 30,318 30,073 28,962
Provision for loan losses 2,045 2,245 1,155
----------- ------------ -----------
Net interest income after provision
for loan losses 28,273 27,828 27,807
----------- ------------ -----------
Other income:
Service charges on deposit accounts 2,825 2,715 2,573
Other service charges and fees 1,582 1,340 1,318
Gains on sale of other real estate owned 258 1,119 270
Investment securities gains (losses) 31 (111) (82)
Other operating income 436 155 375
----------- ------------ -----------
Total other income 5,132 5,218 4,454
----------- ------------ -----------
Other expenses:
Salaries and employee benefits 12,272 11,464 10,040
Occupancy expenses, net 2,179 2,242 2,145
Other operating expenses 8,580 7,402 6,438
----------- ------------ -----------
Total other expenses 23,031 21,108 18,623
----------- ------------ -----------
Income before income taxes 10,374 11,938 13,638
Income taxes 2,213 2,844 3,828
----------- ------------ -----------
Net income $ 8,161 $ 9,094 $ 9,810
----------- ------------ -----------
----------- ------------ -----------
Earnings per common share:
Basic $ 3.78 $ 4.25 $ 4.65
Diluted $ 3.73 $ 4.17 $ 4.59
</TABLE>
See notes to consolidated financial statements.
34
<PAGE>
FIRST PLACE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
(in thousands)
1998 1997 1996
----------------------- ---------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Retained earnings:
Balance at beginning of year $ 55,286 $ 50,035 $ 43,689
Net income 8,161 $ 8,161 9,094 $ 9,094 9,810 $ 9,810
Cash dividends declared (4,004) (3,843) (3,464)
----------- ----------- -----------
Balance at end of period 59,443 55,286 50,035
----------- ----------- -----------
Accumulated other comprehensive income:
Balance at beginning of year 1,775 967 922
Unrealized gains on securities net of
reclassification adjustment (see disclosure) 260 260 808 808 45 45
------------ ----------- ----------
Comprehensive income $ 8,421 $ 9,902 $ 9,855
------------ ----------- ----------
------------ ----------- ----------
----------- ----------- -----------
Balance at end of period 2,035 1,775 967
----------- ----------- -----------
Common stock:
Balance at beginning of year 14,363 13,634 13,609
Issuance of new common stock 662 730 635
Retirement of common stock (188) - - - (610)
----------- ----------- -----------
Balance at end of period 14,837 14,364 13,634
----------- ----------- -----------
Additional paid-in capital:
Balance at beginning of year 406 124 62
Additions related to sale of common stock 325 282 62
----------- ----------- -----------
Balance at end of period 731 406 124
----------- ----------- -----------
Total stockholders' equity $ 77,046 $ 71,831 $ 64,760
----------- ----------- ----------
----------- ----------- ----------
Disclosure of reclassification amount:
Unrealized holding gains arising during period $ 316 $ 748 $ 46
Less: reclassification adjustment for gains
included in net income 56 - - - 1
Plus: reclassification adjustment for losses
included in net income - - - 60 - - -
------------ ----------- ----------
Net unrealized gains on securities $ 260 $ 808 $ 45
------------ ----------- ----------
------------ ----------- ----------
</TABLE>
See notes to consolidated financial statements.
35
<PAGE>
FIRST PLACE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
(in thousands)
1998 1997 1996
------------ ----------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 8,161 $9,094 $9,810
Adjustments to reconcile net income to net cash provided by operations:
Amortization and accretion (359) (469) (154)
Depreciation 1,885 1,526 1,167
Provision for loan losses 2,045 2,245 1,155
Deferred income taxes 111 466 (275)
Increase in other assets (1,424) (1,694) (2,864)
(Decrease) increase in other liabilities 68 (301) 1,954
Gain on sale of bank premises and equipment (3) (7) (12)
Gain on sale of other real estate (258) (1,119) (270)
Writedown of other real estate 80 --- ---
(Gain) loss on sale of available-for-sale securities (31) 111 82
------------ ----------- ----------
Net cash flows from operating activities 10,275 9,852 10,593
------------ ----------- ----------
Cash flows from investing activities:
Proceeds from sale of available-for-sale securities 11,388 14,295 10,464
Proceeds from maturites of available-for-sale securities 97,125 85,852 61,373
Purchases of available-for-sale securities (149,155) (133,402) (98,024)
Net change in loans 60,545 (27,083) (66,493)
Proceeds from sale of bank premises and equipment 40 19 108
Proceeds from sale of other real estate owned 1,277 2,752 2,803
Acquisition of other real estate owned --- (186) (1,505)
Purchase of property and equipment (5,090) (2,825) (6,407)
------------ ----------- ----------
Net cash flows from investing activities 16,130 (60,578) (97,681)
------------ ----------- ----------
</TABLE>
(Continued)
See notes to consolidated financial statements.
36
<PAGE>
FIRST PLACE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
(in thousands)
1998 1997 1996
------------ ----------- ----------
<S> <C> <C> <C>
Cash flows from financing activities:
Net change in deposit accounts $20,918 $39,318 $31,216
Net change in certificates of deposit (4,267) (18,465) 27,630
Net change in securities sold under agreements to repurchase (13,878) 13,768 16,810
Net change in federal funds purchased and other short-term borrowings 8,912 19,560 11,420
Proceeds from Federal Home Loan Bank advances 9,037 50,800 19,972
Payments on Federal Home Loan Bank advances (30,558) (13,885) (6,594)
Net change in other notes payable 9,651 (519) ---
Cash dividends paid (3,997) (3,695) (3,540)
Acquisition of treasury stock --- --- (345)
Proceeds from sale of treasury stock --- --- 871
Proceeds from issuance of common stock net of retirements 799 1,012 87
------------ ----------- ----------
Net cash flows from financing activities (3,383) 87,894 97,527
------------ ----------- ----------
Net increase in cash and cash equivalents 23,022 37,168 10,439
Cash and cash equivalents at beginning of period 96,881 59,713 49,274
------------ ----------- ----------
Cash and cash equivalents at end of period $ 119,903 $96,881 $59,713
------------ ----------- ----------
------------ ----------- ----------
Supplemental disclosure of cash flow information:
Cash paid during period for:
Interest $ 33,928 $33,663 $27,797
Taxes $ 1,740 $ 2,443 $ 4,183
Non-cash assets acquired through foreclosure $ 792 $ 1,000 $ 2,193
</TABLE>
37
<PAGE>
FIRST PLACE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING Policies
This summary of significant accounting policies of First Place Financial
Corporation, the Subsidiary Banks and LLC (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, Western Bank, Gallup,
Capital Bank, Albuquerque and FPFC Management, LLC. All significant
intercompany accounts and transactions have been eliminated.
2. 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.
3. LOANS AND ALLOWANCE FOR LOAN LOSSES
The Company maintains a diversified loan portfolio consisting of
commercial, real estate and consumer loans.
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 is generally 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
38
<PAGE>
FIRST PLACE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
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. Consumer loans generally are not placed on
nonaccrual status; they are classified substandard upon becoming 90
days past due and are charged-off upon becoming 120 days past due.
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.
Commercial and commercial real estate loans that are graded substandard
or doubtful, according to the Company's policies and procedures, are
given specific reserves after an assessment of realizable collateral
values is made. The general reserve allocation for adversely classified
commercial and commercial real estate loans, including letters of
credit and unfunded commitments, that do not have a specific reserve is
determined by applying percentages, based on the 5-year moving average
of net charge-offs of current and 30 days plus delinquent loans, to the
balance of these pools. Concentrations of credit in the commercial
portfolio are also reviewed and an allocation is determined by applying
a percentage, based on the 5-year moving average of net charge-offs, to
the identified balances. The general allocation for consumer loans is
determined by applying the 3-year moving average percentage of net
charge-offs to current and 30 days plus delinquent loan balances.
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.
4. 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 consolidated
statements of income.
39
<PAGE>
FIRST PLACE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
5. OTHER REAL ESTATE OWNED
Delinquent real estate loans are reclassified as OREO when 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.
6. 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.
7. EARNINGS PER SHARE
The Company reports on the face of the income statement basic and
diluted earnings per share (EPS) as required by Statement of Financial
Accounting Standards (SFAS) No. 128, "EARNINGS PER SHARE." A
reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS
computation is provided in Note B.
Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of
common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the
earnings of the Company.
8. CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company includes cash
on hand, cash on deposit at other institutions and federal funds sold
as cash and cash equivalents.
9. STOCK OPTION PLANS
The Company accounts for its stock option plans in accordance with the
provisions of APB Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES," and related interpretations. As such, compensation expense
is recorded on the date of grant only if the current market price of
the underlying stock exceeded the exercise price. The Company provides
the pro forma disclosure under the provisions of SFAS No. 123 in Note
N.
10. IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company reviews for impairment long-lived assets and certain
identifiable intangibles 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.
40
<PAGE>
FIRST PLACE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
11. TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF
LIABILITIES
The Company accounts for transfers and servicing of financial assets
and extinguishments of liabilities based on consistent application of a
financial components approach that focuses on control, which
distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings.
12. REPORTING COMPREHENSIVE INCOME
The Company discloses in the financial statements comprehensive income
that encompasses earnings and those items currently required to be
reported directly in the equity section of the consolidated balance
sheets, such as unrealized gains and losses on available-for-sale
securities.
13. EMPLOYER'S DISCLOSURE ABOUT PENSION AND OTHER POSTRETIREMENT BENEFITS
In February 1998, the FASB issued SFAS No. 132, "EMPLOYER'S DISCLOSURE
ABOUT PENSION AND OTHER POSTRETIREMENT BENEFITS." SFAS No. 132 requires
disclosure of the changes in the benefit obligation and plan assets
during the period. The Company provides this disclosure in Note I.
14. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the FASB issued SFAS No. 133, "ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES." SFAS No. 133 establishes
accounting and reporting standards for derivative instruments. This
Statement is effective for the fiscal year beginning June 15, 1999.
Management does not anticipate that the effect of adoption of this FASB
will be material.
15. CAPITALIZATION OF CERTAIN SOFTWARE COSTS
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1 "CAPITALIZATION OF
CERTAIN SOFTWARE COSTS," which will become effective for financial
statements for calendar year 1999. SOP 98-1 requires the capitalization
of certain costs related to computer software obtained or developed for
internal use. Management does not anticipate that the effect of
adoption of this SOP will be material.
16. RECLASSIFICATIONS
Certain amounts in the 1997 and 1996 financial statements have been
reclassified to conform to the 1998 presentation.
41
<PAGE>
FIRST PLACE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
NOTE B - RECONCILIATION OF EARNINGS PER SHARE
The following is the reconciliation of the numerator and denominator of the
basic and diluted earnings per common share computations:
Basic and Diluted EPS
(in thousands, except shares and per share data)
<TABLE>
<CAPTION>
For the Year Ended 1998 1997 1996
---------------------------------- ---------------------------------- ----------------------------------
Weighted Weighted Weighted
Average Average Average
Income Shares Per-Share Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- -------- ----------- ------------ -------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS:
Income available to
common stockholders $8,161 2,159,724 $3.78 $9,094 2,138,892 $4.25 $9,810 2,107,892 $4.65
==== ==== ====
Effect of dilutive
securities options --- 30,436 --- 42,069 --- 31,655
Diluted EPS:
----- --------- ----- --------- ----- ---------
Income available to
common stockholders $8,161 2,190,160 $3.73 $9,094 2,180,961 $4.17 $9,810 2,139,547 $4.59
===== ========= ==== ===== ========= ==== ===== ========= ====
</TABLE>
NOTE C - RESTRICTED CASH BALANCES
Reserves (in the form of cash on hand and deposits with the Federal Reserve
Bank) of $13,279,000 and $13,415,000 were required to be maintained to
satisfy federal regulatory requirements at December 31, 1998 and 1997.
These reserves are included in Cash and Due from Banks in the accompanying
consolidated balance sheets.
42
<PAGE>
FIRST PLACE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
NOTE D - 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:
<TABLE>
<CAPTION>
Amortized Approximate Unrealized Unrealized
cost fair value gain loss
--------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
December 31, 1998:
U.S. treasury securities $ 34,686 $ 35,237 $ 551 $ ---
U.S. government agency securities 94,504 95,042 760 (222)
Mortgage-backed securities 101,452 101,509 513 (456)
Obligations of states and political
subdivisions 72,483 74,673 2,220 (30)
Other investments and securities 14,517 14,482 --- (35)
-------- -------- ------ ----------
Total $317,642 $320,943 $4,044 (743)
-------- -------- ------ ----------
-------- -------- ------ ----------
December 31, 1997:
U.S. treasury securities $ 45,006 $ 45,442 $ 436 $ ---
U.S. government agency securities 88,597 89,093 560 (64)
Mortgage-backed securities 64,252 64,455 514 (311)
Obligations of states and political
subdivisions 63,458 65,061 1,607 (4)
Other investments and securities 15,514 15,508 --- (6)
-------- -------- ------ ----------
Total $276,827 $279,559 $3,117 $(385)
-------- -------- ------ ----------
-------- -------- ------ ----------
</TABLE>
A summary of amortized cost and approximate fair value of investment
securities by maturity at December 31, 1998 follows (amounts in thousands).
Available-for-sale securities are shown at contractual maturities, except
for securities having no stated maturity, which are shown separately and
mortgage-backed securities which maturities are based on an average life.
<TABLE>
<CAPTION>
Amortized Approximate
cost fair value
--------------- ------------------
<S> <C> <C>
Less than one year $ 58,292 $ 58,511
One to five years 148,810 150,109
Five to ten years 76,862 78,607
Greater than ten years 19,161 19,234
Securities not due at a single date 14,517 14,482
--------- --------
Total $317,642 $320,943
--------- --------
--------- --------
</TABLE>
43
<PAGE>
FIRST PLACE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
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):
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- ---------------
<S> <C> <C> <C>
Proceeds $11,388 $14,295 $10,464
Gross realized gains 77 27 10
Gross realized losses 46 138 92
</TABLE>
At December 31, 1998 and 1997, investment securities with a recorded value of
approximately $198,128,000 and $231,000,000, 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 in an amount
equal to at least 5 percent of Federal Home Loan Bank 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 $5,970,000 at December 31, 1998 of Federal Home
Loan Bank stock. At December 31, 1998 and 1997, $8,595,000 and $9,303,000,
respectively, of Federal Home Loan Bank stock are included in other
securities.
NOTE E - LOANS
A summary of loans at December 31 follows (amounts in thousands):
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Commercial, financial and agriculture $ 92,781 $120,315
Commercial real estate 155,105 167,136
Consumer 53,790 70,232
Real estate residential 100,765 104,816
Real estate construction 27,224 29,462
-------- --------
429,665 491,961
Less allowance for loan losses 9,807 8,722
-------- --------
Total net loans $419,858 $483,239
-------- --------
-------- --------
</TABLE>
Changes in the allowance for loan losses follows (amounts in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Balance at beginning of year $ 8,722 $ 8,933 $ 8,588
Provision charged to operating expense 2,045 2,245 1,155
Recoveries on loans previously charged-off 857 1,086 995
Loans charged-off (1,817) (3,542) (1,805)
-------- -------- --------
Balance at end of year $ 9,807 $ 8,722 $ 8,933
-------- -------- --------
-------- -------- --------
</TABLE>
44
<PAGE>
FIRST PLACE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
Loans for which the accrual of interest has been discontinued amounted to
$4,336,000, $5,078,000, and $1,702,000 at December 31, 1998, 1997, and 1996,
respectively. If interest had been accrued on these loans for 1998, 1997, and
1996, interest income would have been increased by approximately $255,000,
$329,000, and $104,000, 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 1998 (amounts in
thousands):
<TABLE>
<S> <C>
Balance at December 31, 1997 $17,457
Advances/new loans 7,246
Payments and removal due to (10,810)
director resignation -------
Balance at December 31, 1998 $13,893
-------
-------
</TABLE>
NOTE F - BANK PREMISES AND EQUIPMENT
The major components of bank premises and equipment at December 31 follow
(amounts in thousands):
<TABLE>
<CAPTION>
Estimated lives 1998 1997
--------------------- ------------- -------------
<S> <C> <C> <C>
Land --- $ 2,171 $ 1,870
Building 5-40 years 16,658 14,740
Furniture and equipment 3- 7 years 14,431 11,927
Leasehold improvements 5-15 years 1,067 746
------- -------
34,327 29,283
Less accumulated depreciation
and amortization 13,648 11,773
------- -------
Total $20,679 $17,510
------- -------
------- -------
</TABLE>
45
<PAGE>
FIRST PLACE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
NOTE G - 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 and subsidiary bank stock
at December 31 consisted of the following (amounts in thousands):
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Federal Home Loan Bank advances, 5.10% to
7.13% due 1998 through 2013 $66,416 $87,937
Frost National Bank floating rate note, due July 1, 2008 9,500 ---
Other notes payable 630 479
------------ ------------
Total $76,546 $88,416
------------ ------------
------------ ------------
</TABLE>
Maturities of notes payable at December 31, 1998 are as follows (amounts in
thousands):
<TABLE>
<S> <C>
1999 $12,599
2000 8,027
2001 9,194
2002 6,716
2003 5,768
Later years 34,242
------
Total $76,546
------
------
</TABLE>
NOTE H - INCOME TAXES
Income tax expense consists of the following (amounts in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------ -------------
<S> <C> <C> <C>
Current tax expense $2,102 $2,378 $4,103
Deferred tax expense (benefit) 111 466 (275)
------------- ------------ -------------
Total $2,213 $2,844 $3,828
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
46
<PAGE>
FIRST PLACE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
Income tax expense differs from the expected tax expense (computed using
statutory rates) as a result of the following (amounts in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
Computed "expected" tax expense $3,631 $4,179 $4,773
Tax benefit due to tax-exempt interest (990) (968) (799)
State tax, net of federal benefit (36) 62 187
Low income housing credit (383) (381) (161)
Other, net (9) (48) (172)
------------- ------------ ------------
Total $2,213 $2,844 $3,828
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
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):
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
Provision for loan losses $(399) $114 $(368)
Provision for losses on other real estate 148 209 (99)
Pension expense --- 46 101
Depreciation (3) 110 122
Deferred compensation 46 (194) (183)
Deferred loan fees 58 93 58
Stock option expense 137 (144) (181)
FHLB stock dividends 223 199 152
Other, net (99) 33 123
------------- ------------ ------------
Total $111 $466 $(275)
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
47
<PAGE>
FIRST PLACE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
Deferred tax assets and liabilities as of December 31 consisted of the
following (amounts in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
Deferred tax assets:
Allowance for loan losses $2,432 $2,033 $2,147
Deferred compensation 618 664 470
Deferred loan fees 150 208 301
Other real estate owned 48 196 405
Stock option expense 437 574 430
Other 108 63 61
------------- ------------ ------------
3,793 3,738 3,814
------------- ------------ ------------
Deferred tax liabilities:
Unrealized gains on investment securities 1,267 956 521
Bank premises and equipment 491 494 384
Pension plan 531 531 485
FHLB stock dividends 801 578 379
Other 231 285 250
------------- ------------ ------------
3,321 2,844 2,019
------------- ------------ ------------
Net deferred tax asset $ 472 $ 894 $1,795
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
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 $18,000,000 in
the two-year federal carryback period and by expected future taxable income
which will exceed amounts necessary to fully realize remaining deferred tax
assets.
NOTE I - 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.
48
<PAGE>
FIRST PLACE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
The following table sets forth the funded status of the pension plan at
December 31 (amounts in thousands):
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Projected benefit obligation $(5,939) $(5,184)
Plan assets at fair value 6,203 5,543
------------- ------------
Plan assets in excess of projected benefit obligation 264 359
Unrecognized net loss from past experience
different from that assumed and effects of
changes in assumptions 1,357 1,237
Unrecognized prior service cost (82) (100)
Unrecognized net asset (126) (167)
------------- ------------
Prepaid (accrued) pension cost $ 1,413 $ 1,329
------------- ------------
------------- ------------
</TABLE>
Net pension costs for this plan include the following components (amounts
in thousands):
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Service cost of benefits earned $ 198 $ 176
Interest cost on projected benefit obligation 396 346
Return on plan assets (406) (387)
Net amortization and deferral of loss 11 (19)
------------ ------------
Net pension costs $ 199 $ 116
------------ ------------
------------ ------------
Reconciliation of benefit obligations:
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Beginning balance of benefit obligation $(5,184) $(4,855)
Service cost (198) (176)
Interest cost (396) (346)
Actuarial gains and losses (366) (7)
Benefits paid 205 200
------------ ------------
Ending balance of benefit obligation $(5,939) $(5,184)
------------ ------------
------------ ------------
</TABLE>
49
<PAGE>
FIRST PLACE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
Reconciliation of the fair value of plan assets:
<TABLE>
<CAPTION>
1998 1997
-------------- ---------------
<S> <C> <C>
Beginning balance of the fair value of plan assets $5,543 $5,138
Actual return on plan assets 581 374
Contributions by the employer 284 231
Benefits paid (205) (200)
-------------- ---------------
Ending balance of the fair value of plan assets $6,203 $5,543
-------------- ---------------
-------------- ---------------
Major assumptions at year-end follow:
<CAPTION>
1998 1997
-------------- ---------------
<S> <C> <C>
Annual discount rate 7.00% 7.50%
Annual rate of increase in compensation levels 5.00% 5.00%
Annual expected long-term rate of return on assets 7.00% 7.50%
</TABLE>
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
costs for this plan amounted to $254,000 in 1998, $255,000 in 1997, and
$240,000 in 1996.
The Company has two deferred compensation arrangements that defer a
specified portion of the compensation of participating directors and
eligible employees. As of December 31, 1998 and 1997, the Company had
accrued $1,738,000 and $1,491,000, respectively, for its obligations
under these two arrangements. The Company's expense was $247,000,
$371,000, and $296,000 for 1998, 1997 and 1996, respectively.
To assist in the funding of contingent preretirement benefits for
eligible directors and eligible employees, 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 balance sheets was $5,793,000 and $5,536,000 as of December
31, 1998 and 1997, respectively.
NOTE J - 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
50
<PAGE>
FIRST PLACE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
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.
Financial instruments exhibiting credit risk at December 31, 1998 and
1997 are as follows (amounts in thousands):
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Commitments to extend credit $89,371 $89,856
Standby letters of credit 3,923 4,490
------------- -------------
Total $93,294 $94,346
------------- -------------
------------- -------------
</TABLE>
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 K - CONCENTRATIONS
The majority of the Company's loans 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 E. The
commitments to extend credit are primarily in the commercial and commercial
real estate categories. The real estate lending area is the area of
greatest concentration. This area, due to abundance of collateral,
historically has not resulted in significant losses for the Company.
51
<PAGE>
FIRST PLACE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
NOTE L - FAIR VALUE OF FINANCIAL INSTRUMENTS
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 AND DUE FROM BANKS, INTEREST-BEARING DEPOSITS, FEDERAL FUNDS SOLD OR
REPURCHASED, 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 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
are 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
consolidated balance sheets and, therefore, are not included in the
following schedule.
52
<PAGE>
FIRST PLACE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
The estimated fair value of the Company's financial instruments at December
31 are as follows (amounts in thousands):
<TABLE>
<CAPTION>
1998 1997
------------------------------ ----------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
------------ -------------- ----------- --------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $89,982 $89,982 $79,579 $79,579
Interest-bearing deposits 14,221 14,221 17,052 17,052
Federal funds sold 15,700 15,700 250 250
Investment securities
available-for sale 320,943 320,943 279,559 279,559
Net loans 419,858 418,924 483,239 481,245
------- ------- ------- -------
Total financial assets $860,704 $859,770 $859,679 $857,685
------- ------- ------- -------
------- ------- ------- -------
Financial liabilities:
Deposits $625,397 $626,429 $608,746 $607,940
Securities sold under
agreements to repurchase 68,629 68,629 82,507 82,507
Federal funds purchased 44,257 44,257 34,845 34,845
Other short-term borrowings --- --- 500 500
Long-term and other
notes payable 76,546 77,018 88,416 87,040
------- ------- ------- -------
Total financial liabilities $814,829 $816,333 $815,014 $812,832
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
NOTE M - 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, 1998, the Subsidiary Banks had $49,424,000 of retained
earnings, of which, $14,924,000 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, payment of operating
costs of First Place and repayment of debt incurred by First Place. To the
extent that the cash needs exceed cash revenues, First Place would borrow
funds or sell equity securities.
53
<PAGE>
FIRST PLACE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
Condensed financial information of First Place at December 31 follows:
BALANCE SHEETS
<TABLE>
<CAPTION>
(in thousands)
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Cash $ 5,179 $4,555
Investment in subsidiary banks 82,858 69,059
Investment in non-bank subsidiary 300 ---
Other assets 620 504
------ ------
Total assets $88,957 $74,118
------ ------
------ ------
LIABILITIES AND STOCKHOLDERS' EQUITY
Dividends payable $ 1,597 $ 1,591
Note payable 9,500 ---
Other liabilities 814 696
------ -----
Total liabilities 11,911 2,287
------ -----
Stockholders' equity
Common stock, no par value 14,837 14,364
Additional paid-in-capital 731 406
Accumulated other comprehensive income 2,035 1,775
Retained earnings 59,443 55,286
------ ------
Total stockholders' equity 77,046 71,831
------ ------
Total liabilities and stockholders' equity $88,957 $74,118
------ ------
------ ------
</TABLE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(in thousands)
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net interest expense $ 240 $ --- $ ---
Administration expense 537 70 346
------ ------ ------
Loss before equity in net income of
subsidiary banks (777) (70) (346)
Equity in net income of subsidiary banks:
Distributed 5,124 3,830 3,956
Undistributed 3,541 5,329 6,055
Income tax credits 273 5 145
------ ------ ------
Net income $ 8,161 $9,094 $9,810
------ ------ ------
------ ------ ------
</TABLE>
54
<PAGE>
FIRST PLACE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(in thousands)
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 8,161 $ 9,094 $ 9,810
Adjustments to reconcile net income to net
cash flows from operating activities:
Amortization of intangibles 7 7 7
Undistributed equity in subsidiary
earnings (3,541) (5,329) (6,055)
Decrease (increase) in other assets (58) (448) 133
Increase in other liabilities 118 664 19
-------- -------- --------
Net cash flows from operating activities 4,687 3,988 3,914
------ ------ -----
Cash flows from investing activities:
Acquisition of subsidiaries (10,300) --- ---
Purchase of property and equipment (67) (18) ---
-------- -------- --------
Net cash flows from investing activities (10,367) (18) ---
-------- -------- --------
Cash flows from financing activities:
Proceeds from note payable 10,000 --- ---
Payment of note payable (500) --- ---
Cash dividends paid (3,995) (3,695) (3,540)
Acquisition of treasury stock --- --- (345)
Proceeds from sale and retirement of
treasury stock --- --- 871
Repurchase of common stock (188) --- ---
Proceeds from issuance of common stock
987 1,011 87
------ ------ -----
Net cash from financing activities 6,304 (2,684) (2,927)
------ ------ -----
Net increase in cash and cash
equivalents 624 1,286 987
Cash and cash equivalents at beginning
of year 4,555 3,269 2,282
------ ------ -----
Cash and cash equivalents at end of year $ 5,179 $ 4,555 $ 3,269
------ ------ -----
------ ------ -----
</TABLE>
55
<PAGE>
FIRST PLACE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
NOTE N - COMMON STOCK AND STOCK OPTIONS
Shares of common stock at December 31 consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Issued:
Balance at beginning of year 2,149,497 2,123,157 2,104,707
Issuance of new common stock 20,875 26,340 18,450
---------- -------- ---------
Balance at end of year 2,170,372 2,149,497 2,123,157
---------- -------- ---------
---------- -------- ---------
Held as treasury stock:
Balance at beginning of year --- --- 13,371
Shares acquired --- --- 8,527
Shares sold/retired --- --- (21,898)
---------- -------- ---------
Balance at end of year --- --- ---
---------- -------- ---------
---------- -------- ---------
</TABLE>
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 starting on the first anniversary
date of the grant 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 $138,000, $362,000, and
$364,000 during 1998, 1997 and 1996 for these SARs. The SAR liabilities of
$916,000 and $1,189,000 are included in Other Liabilities at December 31,
1998 and 1997. During 1998 and 1997, 14,900 and 10,125 options,
respectively, were exercised which had SARs.
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 the Subsidiary Banks. Those officers who
were granted options under the Plan are 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 specifies the period for which the option is granted and
provides that the option shall expire at the end of such period, not to
exceed five years.
In 1997, First Place adopted the First Place Financial Corporation Third
Nonqualified Stock Option Plan (the "Third Plan") for eligible directors
and officers. The Third Plan will provide a means for First Place, through
the grant of stock options, to attract and retain persons of ability and
motivate these persons to exert their best efforts on behalf of the
Company. Under the Third Plan, 100,000 shares were reserved for issuance.
Each option granted shall vest at the rate of 33.33% per year starting on
the first anniversary date of the grant and unexercised options expire on
the fifth anniversary of the vesting date. 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 eight
years.
56
<PAGE>
FIRST PLACE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
Stock option activity in the plans is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------- ---------------------------
Number of Option Number of Option
shares Price shares Price
------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 142,705 $27-66 93,500 $27-45
Granted 18,466 62-68 76,220 45-66
Exercised/retired (31,325) 27-66 (27,015) 27-45
-------- --------
Outstanding at end of year 129,846 $27-68 142,705 $27-66
-------- --------
-------- --------
Exercisable at end of year 59,050 $27-66 58,560 $27-45
-------- --------
-------- --------
</TABLE>
The weighted-average fair value of stock options granted during 1998, 1997
and 1996 was $158,000 for 1998, $502,000 for 1997 and $16,000 for 1996
using Black Scholes option-pricing model with the following
weighted-average assumptions:
<TABLE>
<CAPTION>
Granted during
----------------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
Expected dividend yield 3% 3% 4%
Risk-free rate of return 4% - 6% 6% 6%
Expected life 5 to 8 years 5 to 8 years 5 years
Expected volatility 13% 10% 9%
</TABLE>
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 consolidated 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):
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C> <C>
Net income As reported $8,161 $9,094
Pro forma $8,096 $9,079
Diluted earnings per share As reported $3.73 $4.17
Pro forma $3.70 $4.16
</TABLE>
Pro forma net income reflects only options granted from 1995 through 1998.
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 because compensation cost is reflected over the options' vesting
period and compensation cost for options granted prior to January 1, 1995
is not considered.
57
<PAGE>
FIRST PLACE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
NOTE O - 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 judgments 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 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, 1998, 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.
58
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
At December 31 the capital ratios were (dollars in thousands):
<TABLE>
<CAPTION>
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
----------------------- ------------------------- -------------------------
1998 Amount Ratio Amount Ratio Amount Ratio
---------- ---------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk weighted assets):
Consolidated $80,567 15.33% > $42,037 > 8.00% > N/A
- - -
FNBF $58,223 15.55% > $29,947 > 8.00% > $37,434 > 10.00%
- - - -
BNBD $13,748 12.90% > $ 8,523 > 8.00% > $10,654 > 10.00%
- - - -
WBG $ 4,659 12.28% > $ 3,036 > 8.00% > $ 3,795 > 10.00%
- - - -
CBA $ 9,790 115.83% > $ 676 > 8.00% > $ 845 > 10.00%
- - - -
Tier 1 capital (to risk weighted assets):
Consolidated $74,061 14.09% > $21,018 > 4.00% > N/A
- - -
FNBF $53,523 14.30% > $14,974 > 4.00% > $22,460 > 6.00%
- - - -
BNBD $12,407 11.65% > $ 4,262 > 4.00% > $ 6,392 > 6.00%
- - - -
WBG $ 4,188 11.04% > $ 1,518 > 4.00% > $ 2,277 > 6.00%
- - - -
CBA $ 9,770 115.59% > $ 338 > 4.00% > $ 507 > 6.00%
- - - -
Leverage ratio (Tier 1 capital to adjusted assets):
Consolidated $74,061 8.17% > $36,248 > 4.00% > N/A
- - -
FNBF $53,523 7.73% > $27,693 > 4.00% > $34,616 > 5.00%
- - - -
BNBD $12,407 8.33% > $ 5,960 > 4.00% > $ 7,450 > 5.00%
- - - -
WBG $ 4,188 6.66% > $ 2,514 > 4.00% > $ 3,143 > 5.00%
- - - -
CBA $ 9,770 86.79% > $ 450 > 4.00% > $ 562 > 5.00%
- - - -
</TABLE>
<TABLE>
<CAPTION>
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
----------------------- ------------------------ -------------------------
1997 Amount Ratio Amount Ratio Amount Ratio
---------- ---------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk weighted assets):
Consolidated $76,189 13.23% > $46,072 > 8.0% > N/A
- - -
FNBF $55,997 13.25% > $33,810 > 8.0% > $42,263 > 10.0%
- - - -
BNBD $13,225 11.19% > $ 9,452 > 8.0% > $11,815 > 10.0%
- - - -
WBG $ 4,208 12.14% > $ 2,772 > 8.0% > $ 3,465 > 10.0%
- - - -
Tier 1 capital (to risk weighted assets):
Consolidated $68,977 11.98% > $23,036 > 4.0% > N/A
- - -
FNBF $50,703 12.00% > $16,905 > 4.0% > $25,358 > 6.0%
- - - -
BNBD $11,742 9.94% > $ 4,726 > 4.0% > $ 7,089 > 6.0%
- - - -
WBG $ 3,773 10.89% > $ 1,386 > 4.0% > $ 2,079 > 6.0%
- - - -
Leverage ratio (Tier 1 capital to adjusted assets):
Consolidated $68,977 7.92% > $34,862 > 4.0% > N/A
- - -
FNBF $50,703 7.57% > $26,798 > 4.0% > $33,498 > 5.0%
- - - -
BNBD $11,742 7.48% > $ 6,281 > 4.0% > $ 7,852 > 5.0%
- - - -
WBG $ 3,773 7.32% > $ 2,061 > 4.0% > $ 2,576 > 5.0%
- - - -
</TABLE>
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 fourth
quarter average assets.
59
<PAGE>
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 (the Corporation) as of December 31,
1998 and 1997, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1998. These consolidated financial statements are
the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Place Financial Corporation and subsidiaries as of December 31, 1998 and
1997, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 1998 in conformity with
generally accepted accounting principles.
(signed) KPMG LLP
Albuquerque, New Mexico
January 22, 1999
60
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ----------- --------
<C> <S> <C>
3(1) Articles of Incorporation of Registrant *
3(ii) Bylaws of Registrant *
21 Subsidiaries of First Place **
23.1 Consent of KPMG LLP 62
23.2 Consent of KPMG LLP 63
27 Financial Data Schedule 64
</TABLE>
- -------------
* Incorporated by reference from 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.
61
<PAGE>
The Board of Directors
First Place Financial Corporation:
We consent to incorporation by reference in the registration statement (No.
333-12837) on Form S-8 of First Place Financial Corporation of our report
dated January 22, 1999, relating to the consolidated balance sheets of First
Place Financial Corporation and subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1998, which report appears in the December 31, 1998
annual report on Form 10-K of First Place Financial Corporation.
(signed) KPMG LLP
Albuquerque, New Mexico
March 26, 1999
62
<PAGE>
The Board of Directors
First Place Financial Corporation:
We consent to incorporation by reference in the registration statement (No.
333-46871) on Form S-8 of First Place Financial Corporation of our report
dated January 22, 1999, relating to the consolidated balance sheets of First
Place Financial Corporation and subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1998, which report appears in the December 31, 1998
annual report on Form 10-K of First Place Financial Corporation.
(signed) KPMG LLP
Albuquerque, New Mexico
March 26, 1999
63
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 89,982
<INT-BEARING-DEPOSITS> 14,221
<FED-FUNDS-SOLD> 15,700
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 320,943
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 429,665
<ALLOWANCE> 9,807
<TOTAL-ASSETS> 902,047
<DEPOSITS> 625,397
<SHORT-TERM> 112,886
<LIABILITIES-OTHER> 10,172
<LONG-TERM> 76,546<F1>
0
0
<COMMON> 14,837
<OTHER-SE> 62,209
<TOTAL-LIABILITIES-AND-EQUITY> 902,047
<INTEREST-LOAN> 44,298
<INTEREST-INVEST> 16,840
<INTEREST-OTHER> 2,997
<INTEREST-TOTAL> 64,135
<INTEREST-DEPOSIT> 22,343
<INTEREST-EXPENSE> 33,817
<INTEREST-INCOME-NET> 30,318
<LOAN-LOSSES> 2,045
<SECURITIES-GAINS> 31
<EXPENSE-OTHER> 23,031
<INCOME-PRETAX> 10,374
<INCOME-PRE-EXTRAORDINARY> 8,161
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,161
<EPS-PRIMARY> 3.78<F2>
<EPS-DILUTED> 3.73
<YIELD-ACTUAL> 3.99
<LOANS-NON> 4,336
<LOANS-PAST> 893
<LOANS-TROUBLED> 3,082
<LOANS-PROBLEM> 4,250
<ALLOWANCE-OPEN> 8,722
<CHARGE-OFFS> 1,817
<RECOVERIES> 857
<ALLOWANCE-CLOSE> 9,807
<ALLOWANCE-DOMESTIC> 9,807
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>Federal home loan banks and other notes payable
<F2>Basic EPS
</FN>
</TABLE>
