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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, 1993.
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[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from to
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Commission file number 0-13166.
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COBANCORP INC.
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(Exact name of registrant as specified in its charter)
Ohio 34-1465382
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
124 Middle Avenue
Elyria, Ohio 44035 44035
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 216-329-8000
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
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(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 periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
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 Ill of this Form 10-K or any amendment to
this Form 10-K. [ ]
COVER PAGE CONTINUED
page 1 of 91
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The aggregate market value, computed using the closing bid quotation as
reported by the Nasdaq National Market System, of the voting stock held by
nonaffiliates of the registrant (exclusive of 283,968 shares held by the
CoBancorp Inc. Employee Stock Ownership Plan and 185,046 shares held by
directors and executive officers of the Corporation) as of February 28,
1994:
Common Stock, no par value--$81,248,952
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The number of shares outstanding of the issuer's classes of common stock
as of February 28, 1994:
Common Stock, no par value--3,270,702 shares
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 1993 Annual Report to Shareholders are
incorporated by reference in Parts II and IV of this report. Portions
of the Registrant's Proxy Statement for the annual shareholders'
meeting to be held April 20 1994, are incorporated by reference into
Part III.
The index to exhibits in this filing begins on page 29. Number of pages
included in this filing is 91.
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COBANCORP INC.
FORM 10-K REPORT
TABLE OF CONTENTS
Item Page
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PART I
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1. BUSINESS................................................... 4
Description of Business.................................. 4
Competition.............................................. 5
Regulation............................................... 5
Examination and Supervision.............................. 6
Federal Reserve System................................... 8
Insurance of Deposits.................................... 8
Community Reinvestment Act............................... 8
Executive Officers of the Registrant..................... 9
Supplemental Financial Data.............................. 10
2. PROPERTIES................................................. 11
3. LEGAL PROCEEDINGS.......................................... 12
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........ 13
PART II
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5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS...................................... 13
6. SELECTED FINANCIAL DATA.................................... 13
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...................... 13
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................ 28
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE................... 28
PART III
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10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......... 28
11. EXECUTIVE COMPENSATION..................................... 28
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT........................................... 28
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............. 28
PART IV
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14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K.............................................. 29
SIGNATURES
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SIGNATURES................................................. 31
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PART I
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ITEM 1. BUSINESS
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Description of Business
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CoBancorp Inc. (the "Corporation"), headquartered in Elyria, Ohio, is a
one-bank holding company registered with the Federal Reserve System whose
principal asset is the common stock of its wholly owned commercial bank
subsidiary, PremierBank & Trust (the "Bank").
The Corporation was organized under Ohio law in November 1983 and
remained inactive until September 8, 1984. On that date, the Bank's
shareholders became Corporation shareholders in a tax-free and regulatory
reorganization. This transaction was accounted for as a pooling of interests.
As a bank holding company, the Corporation is exclusively engaged and
intends to continue to engage in the management of the Bank. The Bank was
chartered by the State of Ohio in 1926 and is a member bank of the Federal
Reserve System. The Bank operates twenty-three (23) banking offices throughout
its market area of Lorain County and portions of Cuyahoga, Erie, Richland,
Huron, Delaware and Crawford Counties. The Bank also operates a consumer loan
office in Elyria and a loan production office in Franklin County. The Bank has
27 automated teller machines ("ATMs") and is a member of the MAC, Money Station
and Plus ATM networks. As a member bank of the Federal Reserve System, the
Bank's deposits are insured by the Federal Deposit Insurance Corporation (the
"FDIC") to the extent permitted by law. The Bank is subject to primary
regulation by the Federal Reserve and the Ohio Department of Commerce, Division
of Banking. The Bank is also subject to regulation by the FDIC. The
Corporation's activities as a bank holding company are regulated by the Federal
Reserve, and the Corporation's corporate governance is determined by Ohio law.
The Bank provides commercial and retail banking services to individual,
business, institutional and governmental customers. These services include
personal and commercial checking accounts, savings and time deposit accounts,
personal and business loans, a credit card system and safe deposit facilities.
The Trust Department of the Bank performs complete trust administrative
functions and offers agency and trust services to individuals, partnerships,
corporations, institutions and municipalities.
As of December 31, 1993, in the opinion of management, the Corporation
did not have any concentration of loans to similarly situated borrowers
exceeding 10% of total loans. There were no foreseeable losses relating to
other interest-earning nonloan assets.
The Bank is not significantly affected by seasonal activity or large
deposits of individual customers. The Bank is not engaged in operations in any
foreign country.
On December 31, 1993, the Corporation and its subsidiary employed
approximately 277 full-time and 92 part-time employees. None of the employees
is represented by a union or collective bargaining group. Management considers
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its relations with employees to be satisfactory. Employee benefit programs are
considered by management to be competitive with benefits provided by other
financial institutions and major employers within the normal operating area.
Competition
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The Bank actively competes with other financial institutions in its market
area. Competition for savings comes principally from other commercial banks,
savings and loan associations, credit unions and brokerage house "money market
funds" located in its primary market area. The primary factors in competing
for savings are interest rates paid on deposits and convenience of office hours
and locations. During periods when money market rates are relatively high,
obligations offered by governments, government agencies and other entities
seeking funds add significantly to competition for savings.
The Bank's principal competition for loans is provided by other commercial
banks, savings and loan associations, mortgage companies and credit unions.
The primary factors in loan competition are interest rates, extent and time
interval of interest rate adjustments, origination charges and convenience of
office location for applications, closing and servicing.
Regulation
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The Corporation is subject to regulation under the Bank Holding Company
Act of 1956, as amended (the "Act"). The Act requires the prior approval of
the Federal Reserve Board for a bank holding company to acquire or hold more
than a 5 percent voting interest in any bank, and restricts interstate
banking activities.
The Act restricts the Corporation's non-banking activities to those which
are closely related to banking. The Federal Reserve Board has determined by
regulation that the following activities are permissible for bank holding
companies and their subsidiaries. Some of these activities include the
following: making, acquiring or servicing loans or other extensions of credit;
trust company functions; leasing personal or real property; courier services;
management and consulting for other depository institutions; and real estate
appraising. The Corporation presently has no non-banking activities, but may
in the future engage in one or more of the non-banking activities identified
above.
The Corporation's cash revenues are derived from dividends paid by the
Bank, its subsidiary. These dividends are subject to various legal and
regulatory restrictions as summarized in Note I on page 18 of the Registrant's
1993 Annual Report to Shareholders, which is incorporated herein by reference.
Under the Act and regulations of the Federal Reserve Board pursuant
thereto, a bank holding company and its subsidiaries are prohibited from
engaging in certain tie-in arrangements in connection with the extension of
credit.
The Bank is a stock-form commercial bank organized under the laws of the
State of Ohio, and its deposits are insured by the FDIC. The Bank derives its
lending, investment and other powers from the applicable provisions of Ohio law
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and the regulations of the Ohio Department of Banking (the "Banking
Department"), subject to limitation or other modification under applicable
federal laws and regulations of such agencies as the FDIC and the Federal
Reserve Board. The Bank is subject to periodic examination and supervision by
the Federal Reserve Board and the Banking Department.
The Banking Department regulates the Bank's internal organization as well
as its deposit, lending and investment activities. The Superintendent of the
Banking Department must approve changes to the Bank's Certificate of
Incorporation, establishing or relocating branch offices, mergers and the
issuance of additional stock. Many of the areas regulated by the Banking
Department are subject to similar regulation by the Federal Reserve Board.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (the
"FDIC Improvement Act") covers a wide expanse of banking regulatory issues.
The FDIC Improvement Act deals with the recapitalization of the Bank Insurance
Fund, with deposit insurance reform, including requiring the FDIC to establish
a risk-based premium assessment system, and with a number of other regulatory
and supervisory matters. The effective dates for the provisions of the FDIC
Improvement Act are staggered, some having already taken effect and others
taking effect at various times in the future. Regulations have been proposed
to implement this Act, but the full effects of the FDIC Improvement Act
generally on the financial services industry, and specifically on the
Corporation, cannot now be measured.
Examination and Supervision
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Both the Banking Department and the Federal Reserve Board issue regulations
and require the filing of reports describing the activities and financial
condition of banks under their jurisdiction. Each regulatory body conducts
periodic examinations to test compliance with various regulatory requirements
and generally supervises the operations of such banks. This supervision and
regulation is intended primarily for the protection of depositors.
The Federal Reserve Board may sanction any insured bank that does not
operate in accordance with Federal Reserve Board regulations, policies and
directives. Proceedings may be instituted against any insured bank, or any
trustee, director, officer or employee of the bank, that engages in unsafe and
unsound practices, including the violation of applicable laws and regulations.
The Federal Reserve Board may revalue assets of an institution, based upon
appraisals, and may require the establishment of specific reserves in amounts
equal to the difference between such revaluation and the book value of the
assets. In addition, the FDIC has the authority to terminate insurance of
accounts, after notice and hearing, upon a finding by the FDIC that the insured
institution is or has engaged in any unsafe or unsound practice that has not
been corrected, or is in an unsafe or unsound condition to continue operations,
or has violated any applicable law, regulation, rule or order of or condition
imposed by the FDIC.
Under Ohio law, the Superintendent of the Banking Department may also issue
an order to an Ohio-chartered banking institution to appear and explain an
apparent violation of law, to discontinue unsound or unsafe practices, and to
keep books and accounts as prescribed. Upon a finding by the Banking
Department that any director, trustee or officer of any banking organization
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has violated any law or duly enacted regulation, or has continued unauthorized
or unsafe practices in conducting the business of the banking organization
after having been notified by the Superintendent to discontinue such practices,
such director, trustee or officer may be removed from office after notice and
an opportunity to be heard.
Effective January 1, 1991, the Federal Reserve Board adopted core capital
requirements to be applicable to state member banks and bank holding companies,
which require a 3 percent core capital requirement for any institution in the
highest regulatory rating ("CAMEL rating") category. All other banking
organizations would be required to maintain levels 100 to 200 basis points
higher, based on their particular circumstances. As of December 31, 1993, the
Corporation and the Bank, respectively, had tier one leverage ratios of 7.90%
and 8.10%, which placed each in compliance with applicable core capital
requirements.
Failure to meet the capital requirements would mean that the insured
member bank would be treated as having inadequate capital, and such an insured
member bank would have to develop and file a plan with the Federal Reserve
Board describing the means and a schedule for achieving the minimum capital
requirements. In addition, such an insured member bank would not receive the
Federal Reserve Board's approval of any application that required the
consideration of capital adequacy, for instance, a branch application, unless
the Federal Reserve Board found that the bank had a reasonable plan to meet the
capital requirement within a reasonable period of time.
In March 1989, the Federal Reserve Board adopted a risk-based capital rule
which will apply to all BIF-insured state-chartered banks that are members of
the Federal Reserve System ("state member banks"), such as the Bank. The rule
requires state member banks to maintain minimum capital levels based upon a
weighting of the assets according to risk. Under the new rule, qualifying
total risk-based capital equals the sum of Tier I and Tier II capital. Among
other items, Tier I capital is generally comprised of common stockholders'
equity, non-cumulative perpetual preferred stock and minority interests in the
equity account of consolidated subsidiaries, while Tier II capital generally
consists of allowances for loan and lease losses (limited to a percentage of
risk-weighted assets) and maturing capital instruments such as cumulative
perpetual preferred stock, convertible debt securities and subordinated debt.
At least 50 percent of the qualifying total risk-based capital must consist of
Tier I capital. Tier I capital is defined as the sum of Tier I capital
elements minus all intangible assets other than mortgage servicing rights.
Once risk-based capital is calculated, the rule then assigns each balance
sheet asset held by state member banks to one of four risk categories (0%, 20%,
50% and 100%) based on the amount of credit risk associated with that
particular class of assets. For example, cash and U.S. Government securities
backed by the full faith and credit of the U.S. Government are assigned a 0%
risk weight while qualifying first mortgages on one- to four-family residential
loans are assigned a 50% risk weight. Assets not within a specific risk-based
category are assigned to the 100% risk-weight category. Indirect holding of
pools of assets, for example mutual funds, are assigned the highest risk
category appropriate to the highest risk-weighted asset that the fund is
permitted to hold. Off-balance sheet items are included in risk-weighted
assets pursuant to a conversion formula. Assets not included for purposes of
calculating capital are not included in calculating risk-weighted assets. The
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book value of assets in each category is multiplied by the weighing factor
(from 0% to 100%) assigned to that category. The resulting weighted value from
each of the four risk categories are added together and this sum is the
risk-weighted assets total that, as adjusted, comprises the denominator of the
risk-based capital ratio. The state member bank's risk-based capital ratio is
then calculated by dividing its qualifying total risk-based capital base by its
risk-weighted assets.
The rule for calculating risk-based capital ratios took effect in 1989. At
the end of 1992, state member banks are required to maintain qualifying total
capital equal to 8 percent of their risk-weighted assets and off-balance sheet
items. Banks that fail to meet the risk-based capital requirements are
required to file a capital plan with the Federal Reserve Board describing the
means and a schedule for achieving the minimum capital requirements. In
addition, any application that requires the consideration of capital adequacy,
such as a branch application, may not be approved by the Federal Reserve Board
unless the Federal Reserve Board finds that the bank has a plan to meet the
capital requirements within a reasonable period of time. At December 31, 1993,
the Bank's total capital-to-risk weighted assets ratio calculated under the
risk-based capital requirement was 14.93 percent, while the Bank's actual
risk-based capital was in excess of that required by $20,132,000.
Federal Reserve System
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Under Federal Reserve Board regulations, the Bank is required to maintain
reserves against its transaction accounts (primarily checking and NOW
accounts), non-personal money market deposit accounts, and non-personal time
deposits. Effective April 2, 1992, the Federal Reserve Board cut the reserve
requirement on transaction accounts from 12 percent to 10 percent. Effective
December 31, 1990, in addition, no reserves (subject to adjustment by the
Federal Reserve Board up to 9 percent) must be maintained on time deposits,
which include borrowings with original maturities of less than one and one-half
years. These amounts and percentages are subject to adjustment by the Federal
Reserve Board. Money market deposit accounts are subject to the reserve
requirement applicable to time deposits when held by an entity other than a
natural person.
Insurance of Deposits
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Deposits in the Bank are insured by the Federal Deposit Insurance
Corporation (the "FDIC"), to the legal maximum. Under FIRREA, the deposits of
commercial banks continue to be insured to a maximum of $100,000 for each
insured depositor.
Community Reinvestment Act
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Ratings of depository institutions under the Community Reinvestment Act of
1977 ("CRA") must be disclosed. The disclosure will include both a four-unit
descriptive rating for all CRA examinations at banks and thrifts after July 1,
1990, using terms such as satisfactory and unsatisfactory, and a written
evaluation of each institution's performance. At its most recent CRA
performance evaluation, the Bank received a satisfactory evaluation of its CRA
performance.
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Executive Officers of the Registrant
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(as of March 1, 1994)
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Executive
Officer
Name Age Position Since
---- --- -------- ----------
John S. Kreighbaum 47 President and Chief Executive
Officer 1991
Timothy W. Esson 44 Executive Vice President
and Treasurer 1980
James R. Bryden 51 Regional President/
North Central District 1987
Mary A. Barnes 49 Senior Vice President/
Branch Administration 1993
Dennis K. Miller 46 Senior Vice President/
Operations 1993
Kenneth E. Reiber 64 Senior Vice President/
Senior Trust Officer 1985
Robert J. Scott 45 Senior Vice President/
Chief Trust Operations Officer 1993
J. Sue Snyder 61 Senior Vice President/
Human Resources 1980
Bruce E. Stevens 45 Vice President/
Director, Commercial Lending 1993
Lois E. Gunning 65 Corporate Secretary 1987
Each of the above executive officers of the Corporation has been an officer
of the Registrant or its subsidiary, PremierBank & Trust, during the past
five years, except as follows. Mr. Kreighbaum joined the Corporation and the
Bank as President in January 1991. Mr. Kreighbaum most recently was the
President and Chief Executive Officer of The Delaware County Bank, Delaware,
Ohio, from 1986 through 1990. Mrs. Barnes joined the Corporation and the Bank
as Vice President in August 1991, and became Senior Vice President/Branch
Administration in June 1993. Prior to that, Mrs. Barnes was Vice President at
Delaware County Bank from 1987 to July 1991. Mr. Miller joined the Corporation
and the Bank in October 1992 as Vice President. In June 1993 he was made
Senior Vice President/Operations. Prior to joining CoBancorp Inc. and
PremierBank & Trust, Mr. Miller was Senior Vice President/Chief Auditor at
First Security Corporation of Kentucky from 1988 to October 1992. Mr. Scott
joined the Corporation and the Bank in March 1993. Prior to that, he was at
Mid-State Bank and Trust Company, Altoona, Pennsylvania since 1983. Mr.
Stevens joined the Corporation and the Bank in June 1992 as Vice
President/Commercial Loan Officer, and became Vice President/Director,
Commercial Lending in May 1993. Prior to joining CoBancorp Inc. and
PremierBank & Trust, Mr. Stevens was Senior Vice President, Loan
Administration at a local commercial bank from 1974 to 1992.
There are no family relationships between any of the above executive
officers of the Corporation.
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Supplemental Financial Data
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Numeric disclosure regarding the Corporation's business and supplemental
financial data concerning the Corporation and the Bank as described below is
incorporated herein by reference to the pages of this report set forth opposite
each specific caption:
Caption Page
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Average Consolidated Balance Sheets, Net Interest
Income and Rates 15
Summary of Changes in Net Interest Income 16
Investment Securities Carrying Value and Yield by Maturity Date 20
Loan Portfolio 18
Loan Maturities and Sensitivity to Changes in Interest Rates 19
Credit Quality and Experience 23
Deposits 21
Return on Equity and Assets 14
Securities Sold Under Agreements to Repurchase 22
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ITEM 2. PROPERTIES
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The principal office of CoBancorp Inc. and PremierBank & Trust is located
at 124 Middle Avenue, Elyria, Ohio. At December 31, 1993, the Bank owned 19 of
its banking facilities and leased the other 12 facilities. All but seven of
the offices are located in Lorain County, Ohio.
Through the Bank, the Corporation owns and operates 27 ATMs at various
branch offices and at six remote locations and is a member of the MAC and Money
Station ATM Networks, which provide their members with regional ATM access, and
the Plus System ATM network, which provides its members with international
access.
The following table sets forth certain information regarding the
properties of the Corporation and the Bank.
Owned or Mortgage Lease
Office Location Leased Indebtedness Expiration
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Elyria
248 North Abbe Road Leased n/a March 2008
230 East Broad Street Owned 0
124 Middle Avenue Owned 0
1550 West River Road North Owned 0
*8703 West Ridge Road Leased n/a June 1994
*38505 Chestnut Ridge Road Leased n/a May 1994
1000 North Abbe Road Owned 0
*Elyria Memorial Hospital
630 East River Street Leased n/a July 1996
Elyria United Methodist Home
807 West Avenue Leased n/a December 1994
*400 Clark Street ** 0
1407 East Avenue*** Leased n/a September 1994
Amherst
160 Cleveland Avenue Owned 0
938 North Leavitt Road Owned 0
Avon
36000 Detroit Road Leased n/a May 2011
Avon Lake
33388 Walker Road Leased n/a March 1997
Columbia Station
26700 Royalton Road Owned 0
Crestline
350 North Seltzer Street Owned 0
Delaware
95 East William Street Owned 0
Continued
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Owned or Mortgage Lease
Office Location Leased Indebtedness Expiration
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Grafton
432 North Main Street Owned 0
Greenwich
13 Main Street Owned 0
Huron
410 Cleveland Road East Leased n/a May 1997
Lorain
3903 Pearl Avenue Leased n/a November 2000
North Ridgeville
38659 Center Ridge Road Owned 0
34210 Center Ridge Road Owned 0
Oberlin
49 South Main Street Owned 0
*Oberlin College (Wilder Hall) Leased n/a monthly
Shiloh
23 West Main Street Owned 0
Sunbury
*7735 State Route 37 and I-71 **** 0
Vermilion
4530 Liberty Avenue Owned 0
Westlake
801 Crocker Road Owned 0
Worthington***
100 East Campus View Blvd. Leased n/a October 1996
<FN>
* Remote ATM only
**Remote ATM located on premises of local manufacturing company
***Loan Production Office only
****Remote ATM located on premises of the Flying J Travel Plaza
ITEM 3. LEGAL PROCEEDINGS
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There is no pending litigation of a material nature in which the
Corporation or the Bank is involved and no such legal proceeding was terminated
during the fourth quarter of 1993. Furthermore, there is no material
proceeding in which any director, officer, or affiliate of the Registrant, or
any associate of any such director or officer, is a party, or has a material
interest, adverse to the Corporation or the Bank.
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As a part of its ordinary course of business, the Corporation and the Bank
are each a party to lawsuits (such as garnishment proceedings) involving claims
to the ownership of funds in particular accounts and involving the collection
of delinquent accounts. All such litigation is incidental to the business of
the Bank and the Corporation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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None.
PART II
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
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MATTERS
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Reference is made to the "Market and Dividend Information" on page 25 of
the Registrant's 1993 Annual Report to Shareholders, which is incorporated
herein by reference, for information concerning the principal market for
Registrant's Common Stock, market prices, number of shareholders and dividends,
which is incorporated herein by reference. The high and low bid prices quoted
from the newspaper (prior to the Corporation's listing on the Nasdaq National
Market System in August 1993) reflect inter-dealer prices without adjustments
for retail markups, markdowns or commissions and may not represent actual
transactions. Reference is made to Note I to the Consolidated Financial
Statements on page 18 of the Registrant's 1993 Annual Report to Shareholders
for information concerning dividend restrictions, which is incorporated herein
by reference.
ITEM 6. SELECTED FINANCIAL DATA
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Reference is made to the table entitled "Five Year Financial Summary" on
page 25 of the Registrant's 1993 Annual Report to Shareholders, which is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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RESULTS OF OPERATIONS
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CoBancorp Inc. is a one-bank holding company with total consolidated assets
at year-end 1993 of $492 million. Its subsidiary, PremierBank & Trust,
maintains offices in Lorain County, as well as Cuyahoga, Erie, Huron, Richland,
Delaware, Crawford and Franklin Counties.
This section of the report provides a narrative discussion and analysis of
the consolidated financial condition and results of operations of CoBancorp
Inc. and PremierBank & Trust for the past three years. The supplemental
financial data included in this section should be read in conjunction with the
consolidated financial statements and related disclosures presented on pages 8
through 24 of the Registrant's 1993 Annual Report to Shareholders, which are
incorporated herein by reference. All shares outstanding and per share data
have been adjusted for a four-for-three stock split in February 1994, a
four-for-three stock split in July 1993, a four percent stock dividend in 1992,
a three percent stock dividend in 1991 and a five percent stock dividend in
1989.
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Consolidated Selected Financial Data
------------------------------------
Reference is made to the table entitled "Five Year Financial Summary" on
page 25 of the Registrant's 1993 Annual Report to Shareholders, which is
incorporated herein by reference.
Performance Overview
--------------------
Net income for 1993 was $5,281,000, or $1.61 per share, compared to
$4,378,000, or $1.35 per share in 1992, and $3,254,000, or $1.01 per share in
1991. Two key measures of performance in the banking industry are return on
average equity (ROE) and return on average assets (ROA). ROE is the ratio of
income earned to average shareholders' equity. ROE for 1993 was 14.6 percent,
compared to 13.8 percent in 1992 and 11.3 percent in 1991. ROA measures how
effectively a corporation uses its assets to produce earnings. For 1993, return
on average assets was 1.10 percent. ROA was 1.01 percent in 1992 and .81 percent
in 1991. ROE and ROA have been positively impacted by an upward trend in the
net interest margin.
The following table sets forth operating and capital ratios of the
Corporation.
Return on Equity and Assets
December 31
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1993 1992 1991
---- ---- ----
Return on average assets 1.10% 1.01% .81%
Return on average equity 14.60 13.76 11.30
Dividend payout ratio 25.52 25.58 25.41
Ratio of average equity to average assets 7.53 7.34 7.17
Results of Operations
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Net Interest Income
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The Corporation's primary source of earnings is net interest income, which
is the difference between revenue generated from earning assets and the
interest cost of funding those assets. For discussion, net interest income is
adjusted to reflect the effect of the tax benefits of certain tax-exempt
investments and loans to compare with other sources of interest income. Net
interest income on a fully taxable-equivalent basis grew to $23,713,000 in
1993, from $21,828,000 in 1992 and $18,968,000 in 1991. Reference is made to
the "Summary of Changes in Net Interest Income" on page 16 of this report for a
detailed analysis of factors affecting this trend in net interest income. Net
interest margin, which is net interest income divided by average earning
assets, was 5.39 percent in 1993 compared with 5.43 percent in 1992 and 5.13
percent for 1991.
Average earning assets, as a percentage of total assets, decreased
slightly to 91.7 percent this year compared to 92.0 percent in 1992 and 92.1
percent in 1991.
The trends in various components of the balance sheet and their respective
yields and rates which affect interest income and expense are shown in the
following table.
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AVERAGE CONSOLIDATED BALANCE SHEETS, NET INTEREST INCOME AND RATES
Fully taxable equivalent (in thousands of dollars)
1993 1992
-------------------------------------- --------------------------------------
Average Average
Daily Yield/ Daily Yield/
Balance Interest Rate Balance Interest Rate
--------- ----------- ----------- --------- ----------- -----------
Assets
Interest-earning assets:
Loans (including fees)
Taxable $255,726 $23,383 9.14% $228,739 $22,610 9.88%
Tax-exempt 4,280 265 6.19 4,766 351 7.36
Investment securities
Taxable 123,028 8,099 6.58 128,156 10,067 7.86
Tax-exempt 51,630 4,420 8.56 28,999 2,800 9.66
Federal funds sold 5,297 155 2.93 8,200 278 3.39
---------- ---------- --------- ---------
Total interest-earning assets 439,961 36,322 8.26 398,860 36,106 9.05
Noninterest-earning assets:
Cash and due from banks 23,596 19,611
Bank premises and equipment 9,270 8,438
Other assets 12,557 11,529
Less allowance for loan losses (5,481) (5,088)
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Total assets $479,903 $433,350
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Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing transaction accounts $ 55,606 1,337 2.40% $ 41,883 1,323 3.16%
Savings 164,593 4,570 2.78 139,862 4,970 3.55
Time deposits 141,872 6,064 4.27 147,106 7,571 5.15
Short-term funds 24,721 638 2.58 18,154 585 3.22
---------- ---------- --------- ---------
Total interest-bearing liabilities 386,792 12,609 3.26 347,005 14,449 4.16
---------- ---------
Noninterest-bearing liabilities:
Demand deposits 51,983 49,187
Other liabilities 4,971 5,339
Shareholders' equity 36,157 31,819
---------- ---------
Total liabilities and
shareholders' equity $479,903 $433,350
========== =========
Net interest income $ 23,713 $21,657
========== =========
Net yield/rate on interest-earning
assets 5.39% 5.43%
========== ==========
AVERAGE CONSOLIDATED BALANCE SHEETS, NET INTEREST INCOME AND RATES
Fully taxable equivalent (in thousands of dollars)
1991
--------------------------------------
Average
Daily Yield/
Balance Interest Rate
--------- ----------- -----------
Assets
Interest-earning assets:
Loans (including fees)
Taxable $224,698 $24,568 10.93%
Tax-exempt 5,211 562 10.78
Investment securities
Taxable 102,039 9,008 8.83
Tax-exempt 21,785 2,221 10.20
Federal funds sold 16,357 906 5.54
---------- ----------
Total interest-earning assets 370,090 37,265 10.07
Noninterest-earning assets:
Cash and due from banks 17,606
Bank premises and equipment 8,829
Other assets 9,563
Less allowance for loan losses (4,281)
----------
Total assets $401,807
==========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing transaction accounts $ 32,126 1,496 4.66%
Savings 110,227 5,261 4.77
Time deposits 152,855 9,983 6.53
Short-term funds 28,840 1,557 5.40
---------- ----------
Total interest-bearing liabilities 324,048 18,297 5.65
----------
Noninterest-bearing liabilities:
Demand deposits 43,839
Other liabilities 5,118
Shareholders' equity 28,802
----------
Total liabilities and
shareholders' equity $401,807
==========
Net interest income $ 18,968
==========
Net yield/rate on interest-earning
assets 5.13%
==========
<FN>
Notes: Nonaccrual loans are included in average loan balances. Interest income and yields/rates are presented on a fully
taxable-equivalent basis using a tax rate of 34% in 1993, 1992 and 1991.
15
16
The following table sets forth for the periods indicated a summary of the
changes in interest income and interest expense on a fully taxable-equivalent
basis resulting from changes in volume and changes in rates for the major
components of interest-earning assets and interest-bearing liabilities:
Summary of Changes in Net Interest Income
1993 vs. 1992 1992 vs. 1991
Increase (Decrease) Due to (1) Increase (Decrease) Due to (1)
------------------------------ ------------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(In thousands of dollars)
Interest income:
Loans, net of unearned
income (2) $ 2,127 $(1,440) $ 687 $ (24) $(1,982) $(2,006)
Taxable investment
securities (403) (1,565) (1,968) 2,306 (1,246) 1,060
Nontaxable investment
securities 2,185 (566) 1,619 735 (156) 579
Federal funds sold (98) (25) (123) (452) (177) (629)
------- ------- ------- ------- ------- -------
Total interest-earning
assets 3,811 (3,596) 215 2,565 (3,561) (996)
Interest expense:
Interest-bearing
transaction
accounts 436 (422) 14 455 (629) (174)
Savings 923 (1,322) (399) 1,407 (1,698) (291)
Time deposits (123) (1,383) (1,506) (338) (2,074) (2,412)
Short-term funds 179 (126) 53 (591) (382) (973)
------- ------- ------- ------- ------- -------
Total interest-bearing
liabilities 1,415 (3,253) (1,838) 933 (4,783) (3,850)
------- ------- ------- ------- ------- -------
Change in net
interest income $ 2,396 $ (343) $ 2,053 $ 1,632 $ 1,222 $ 2,854
======= ======= ======= ======= ======= =======
<FN>
(1) Changes in interest income not arising solely from rate or volume variances are
included in rate variances.
(2) Nonaccrual loans are included in average loan balances.
PROVISION FOR LOAN LOSSES
The total provision for loan and real estate losses was $920,000 in 1993,
$2,800,000 in 1992 and $2,500,000 in 1991. Additional discussion regarding the
provision for loan losses and the allowance for loan losses is contained in
this report in the section entitled "Credit Quality and Experience" on page 23.
16
17
NONINTEREST INCOME
Total noninterest income of $4.5 million for 1993 increased $500,000, or
10.5 percent, when compared to 1992. This follows increases of 30.1 percent
during 1992 and 6.6 percent during 1991. Service charges on deposit accounts
represented $178,000 of the growth in 1992 due principally to growth in
transaction and savings deposit accounts coupled with price increases. Income
from trust activities increased in 1993, 1992 and 1991 primarily due to the
growth in assets under management. Total assets managed by the Trust
Department aggregated $220.0 million, $173.0 million and $151.5 million at
December 31, 1993, 1992 and 1991, respectively. Gains and losses on the sale
of investment securities also impact comparisons. Security transactions
resulted in gains of $665,000, $566,000 and $142,000 in 1993, 1992 and 1991,
respectively.
NONINTEREST EXPENSES
Noninterest expenses increased 18.2 percent in 1993, 12.9 percent in 1992
and 2.5 percent in 1991. The increase in 1993 can be attributed to higher
levels of expense relative to salaries, advertising, supplies and insurance.
Salaries, wages and benefits account for 43.6 percent of total noninterest
expense in 1993, compared to 43.2 percent in 1992 and 47.7 percent in 1991.
These increases are primarily attributable to increases in the number of
employees, the increased cost of benefits and merit raises. Also affecting the
increase in 1991 was a one-time cost of the finalization of the outsourcing
process of the electronic data processing activities of the Bank. In December
1993 there were 317 full-time equivalent employees, an increase of 12.8 percent
from the 281 full-time equivalent employees at December 1992, which was an
increase of 12.9 percent from the level of 249 full-time equivalent at December
1991.
INCOME TAXES
One element of the Corporation's tax planning is the implementation of
various investment and loan strategies to maximize after-tax profits. This
planning is an ongoing process which considers the levels of tax-exempt
securities and loans, investment securities gains or losses and allowable loan
loss deductions. The Corporation's effective income tax rate (income tax
expense divided by income before income taxes) is less than the statutory rate
primarily due to income on tax-exempt securities and loans. It should be
recognized that the yield on these types of assets is considerably less than on
other investments of the same maturity and risk.
The income tax provision was $1,100,000 in 1993, compared with $1,130,000
in 1992 and $761,000 in 1991. The Corporation's effective tax rate was 20.8
percent in 1993, 20.5 percent in 1992 and 19.0 percent in 1991.
It has been determined that for the year ended December 31, 1993, a
valuation allowance is not required on any of the deferred tax assets recorded
due primarily to the earnings history of the Corporation and the significant
amount of federal income taxes paid in prior years.
17
18
FINANCIAL CONDITION
The consolidated financial condition of the Corporation and the Bank as of
December 31, 1993 and 1992 is presented in the comparative balance sheets on
page 8 of the Registrant's 1993 Annual Report to Shareholders, which is
incorporated herein by reference. The following discussions address key
elements of financial condition, including earning assets, the sources of funds
supporting earnings assets, credit quality and experience, asset and liability
management and capital adequacy.
EARNING ASSETS
LOANS
Loans comprise the majority of the Corporation's earning assets,
representing 59.1 percent of average earning assets in 1993, and 58.5 percent
in 1992. Average loans outstanding increased 11.3 percent in 1993 and 1.6
percent in 1992.
The largest asset category in the loan portfolio was real estate mortgage
loans, which comprised 45.8 percent of total loans at the end of 1993.
Commercial and collateral loans totaled 42.4 percent of the portfolio and
installment loans comprised 10.8 percent of the portfolio. All other loans
were 1.0 percent of the portfolio. In 1992, commercial and collateral loans
were 44.3 percent of the loan portfolio, real estate mortgages were 40.5
percent, installment loans were 13.9 percent and other loans were 1.3 percent.
The mix within the commercial loan portfolio is diverse and represents
loans to a broad range of business interests, located primarily within the
Bank's defined market area, with no significant industry concentration. The
installment loan portfolio is composed principally of financing to individuals
for vehicles and consumer assets. The real estate portfolio is primarily
residential mortgages that can qualify for sale into the secondary market.
Loans by major category at the end of the last five years were as follows:
Loan Portfolio
December 31
----------------------------------------------------------
1993 1992 1991 1990 1989
-------- -------- -------- -------- --------
(In thousands of dollars)
Real estate $132,589 $ 99,761 $ 81,368 $ 77,420 $ 68,371
Installment 31,229 34,145 44,465 56,010 51,367
Commercial and collateral 122,699 109,169 93,694 101,751 94,955
All other 2,932 3,330 3,768 4,066 4,394
-------- -------- -------- -------- --------
Total (net of unearned
income) $289,449 $246,405 $223,295 $239,247 $219,087
======== ======== ======== ======== ========
18
19
The maturity distribution and sensitivity to interest rates of the loan
portfolio are two factors in management's evaluation of the risk
characteristics of the portfolio and the future profitability of the portfolio.
Loans at December 31, 1993, reported at the earliest of maturity or repayment
for fixed rate loans, and earliest repricing opportunity for variable rate
loans, with nonaccrual loans included in the "after 5 years" category, are as
follows (in thousands of dollars):
Loan Maturities and Sensitivity to Changes in Interest Rates
Within 1-5 After
1 year years 5 years Total
-------- -------- -------- --------
Real estate $ 38,589 $ 37,602 $ 56,398 $132,589
Installment 13,053 15,906 2,270 31,229
Commercial and collateral 80,904 36,075 5,720 122,699
All other 0 0 2,932 2,932
-------- -------- -------- --------
$132,546 $ 89,583 $ 67,320 $289,449
======== ======== ======== ========
Fixed rate loans maturing within one year and loans with adjustable rates
that reprice annually or more frequently (exclusive of scheduled repayments)
totaled $118,336,000 or 40.9 percent of the loan portfolio at December 31,
1993.
INVESTMENT SECURITIES
The investment portfolio is comprised of U. S. Treasury and other U. S.
Government agency-backed securities, collateralized mortgage-backed securities,
tax-exempt obligations of states and political subdivisions, and certain other
investments. The quality of obligations of states and political subdivisions
will be A, AA, or AAA, the majority of which will be AA or AAA, as rated by a
nationally recognized service. As a matter of policy, in support of our service
area, we may purchase certain unrated bonds of local schools, townships and
municipalities, provided they are of reasonable credit risk.
On December 31, 1993, the Corporation adoped FASB Statement No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
Accordingly, securities available-for-sale are recorded at market value and the
unrecognized gain of $982,000 (net of tax) is included in shareholders'
equity. The adoption did not have a material effect on results of operations
and prior years' financial statements were not restated. In anticipation of the
adoption of FASB Statement No. 115, securities netting to $87,275,000 (adjusted
cost basis) were reclassified between the held-to-maturity and available-for-
sale portfolios.
The portfolio accounting designations were made in order to attain the
objectives of the Corporation's investment portfolio, which are to generate
interest income, serve as a liquidity source and play an important role in the
management of the interest rate sensitivity of the Corporation. Accordingly,
securities purchased for the available-for-sale category are those which may be
sold prior to their maturity for purposes of bank asset allocations, rate
sensitivity or liquidity and, hence, tend to be more liquid. Securities in the
held-to-maturity category are purchased with the intent and ability to hold
them to maturity and are, therefore, carried at amortized cost.
19
20
The investment portfolio represented 39.7 percent of average earning assets
in 1993 and 39.4 percent in 1992. Average investment securities held increased
11.1 percent in 1993 compared to 1992. The tax-equivalent yield on the entire
portfolio was 7.17, 8.19 and 9.07 percent in 1993, 1992 and 1991,
respectively. These investments provide a stable yet diversified income stream
and serve useful roles in liquidity and interest rate sensitivity management.
In addition, they serve as a source of collateral for low-cost funding. The
market value of investment securities was higher than book value at December
31, 1993 and 1992. The decision to purchase securities is based upon the
assessment of current economic and financial trends. At December 31, 1993, the
investment portfolio had a total book value of $152.9 million compared with
$172.8 million at the previous year-end.
Summary information with respect to the securities portfolio at December
31 follows (in thousands of dollars):
1993 Carrying Value
---------------------- 1992 1991
Held to Available 1993 Carrying Carrying
Maturity for Sale Yield Value Value
-------- -------- ----- -------- --------
U.S. Treasury and other
U.S. Government agencies
Under 1 year $ 4,134 7.34%
1 to 5 years 17,943 6.58
------- -------- --------
Total 22,077 6.71 $ 52,778 $ 41,298
States of the U.S. and
political subdivisions
Under 1 year $ 3,006 6.02
1 to 5 years 23,219 5.58
5 to 10 years 35,780 6.14
Over 10 years 1,727 5.80
------- -------- --------
Total 63,732 5.92 37,508 23,876
Collateralized mortgage-
backed securities
Under 1 year 35,062 6.13
1 to 5 years 31,118 6.93
5 to 10 years
Over 10 years 506 9.20
------- -------- --------
Total 66,686 6.53 82,042 78,747
Other
Over 10 years 439 6.00 439 439
------- ------- -------- --------
Total $64,171 $88,763 $172,767 $144,360
======= ======= ======== ========
The yield at December 31, 1993, was the combined rate for the
held-to-maturity and available-for-sale securities portfolios.
Mortgage-backed securities and other securities which may have prepayment
provisions are assigned to a maturity category based on estimated average
life. Securities with a call provision are assigned to a maturity category
based on call date. Yield represents the weighted average yield to maturity.
The yield on obligations of states and political subdivisions has been
calculated on a fully taxable equivalent basis, assuming a 34% tax rate.
20
21
FEDERAL FUNDS SOLD
Short-term federal funds sold are used to manage interest rate sensitivity
and to meet liquidity needs. During 1993, 1992 and 1991, these funds
represented approximately 1.2 percent, 2.1 percent and 4.4 percent,
respectively, of average earning assets.
SOURCES OF FUNDS
DEPOSITS
The Corporation's major source of investable funds is core deposits from
retail and business customers. These core deposits consist of interest-bearing
and noninterest-bearing deposits, excluding certificates of deposit over
$100,000. Average interest-bearing core deposits, comprised of
interest-bearing checking accounts, savings, money market and other time
accounts, grew 13.4 percent in 1993, compared to 14.3 percent in 1992 and 5.2
percent in 1991. Average demand deposits (noninterest-bearing core deposits)
increased 5.7 percent in 1993 and 12.2 percent in 1992, following a decrease of
1.3 percent in 1991. These deposits represent approximately 13.1 and 13.9
percent of average core deposits in the last two years, respectively.
The Corporation's core deposit fund position has allowed management to
place less emphasis on purchased funds to support loans and investments.
Purchased funds include certificates of deposit over $100,000. These funds are
used to balance rate sensitivity and as a supplement to core deposits. Average
certificates of deposit over $100,000 decreased 30.1 percent in 1993 from 1992
levels, to 3.5 percent of average assets. This followed a decrease of 15.5
percent in 1992 from 1991 levels, to 5.7 percent of average assets in 1992.
The following table presents the average amount of and the average rate
paid on each of the following deposit categories (dollar amounts in thousands).
Average Deposits
Years ended December 31
------------------------------------
1993 1992 1991
---- ---- ----
AMOUNT
Noninterest bearing demand deposits $ 51,983 $ 49,187 $ 43,839
Interest bearing transaction accounts 55,607 41,883 32,126
Savings deposits 164,593 139,862 110,227
Time deposits 141,872 147,106 152,855
-------- -------- --------
$414,055 $378,038 $339,047
======== ======== ========
AVERAGE RATE FOR THE YEAR
Interest bearing transaction accounts 2.40% 3.16% 4.70%
Savings deposits 2.78 3.55 4.77
Time deposits 3.31 5.15 6.53
21
22
The maturity distribution of certificates of deposit of $100,000 or
more at December 31, 1993, was (in thousands of dollars):
Certificates of Deposit Over $100,000
Three months or less $10,357
Over three through six months 1,383
Over six through twelve months 735
Over twelve months 1,300
-------
$13,775
=======
There were three other time deposits of $100,000 or more at December 31,
1993, which will mature in 1994 through 1995.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWINGS
Other interest-bearing liabilities include securities sold under agreements
to repurchase, sweep accounts, federal funds purchased and notes payable TT&L.
In 1993, these short-term funds increased slightly to 5.2 percent of average
assets compared to 4.2 percent in 1992.
The Corporation enters into sales of securities under agreements to
repurchase for periods up to 29 days, which are treated as financings and
reflected in the consolidated balance sheet as a liability.
The following table presents information related to securities sold under
agreements to repurchase (repurchase agreements).
Securities Sold Under Agreements to Repurchase
December 31
---------------------------------
1993 1992 1991
---- ---- ----
(in thousands of dollars)
Amount outstanding at December 31 $ 4,453 $11,622 $ 8,583
Weighted average interest rate
at December 31 2.18% 2.75% 3.73%
Maximum amount outstanding at any
month's end during the year $19,462 $12,013 $24,049
Average amounts outstanding during year $11,416 $ 8,903 $20,086
Weighted average interest rate during year 2.59% 3.11% 5.42%
22
23
CREDIT QUALITY AND EXPERIENCE
NONPERFORMING LOANS
Inherent in the business of providing financial services is the risk
involved in extending credit. Management believes the objective of a sound
credit policy is to extend quality loans to customers while reducing risk
affecting shareholders' and depositors' investments. Risk reduction is
achieved through diversity of the loan portfolio as to type, borrower and
industry concentration as well as sound credit policy guidelines and
procedures.
Except for installment and credit cards, loans on which interest and/or
principal is 90 days or more past due are placed on nonaccrual status and any
previously accrued but uncollected interest is reversed. Such loans remain on
a cash basis for recognition of income until both interest and principal are
current. Installment and credit cards loans past due greater than 120 days are
charged off and previously accrued but uncollected interest is reversed.
Nonperforming loans include loans accounted for on a nonaccrual basis,
accruing loans which are contractually past due 90 days or more as to principal
or interest payments and loans which have been renegotiated. Total
nonperforming loans at December 31, 1993, were $1,459,000, compared to
$2,540,000 at December 31, 1992 and $4,712,000 at December 31, 1991. The ratio
of the allowance for loan losses to nonperforming loans at December 31, 1993,
was 358.2 percent compared to 205.3 percent and 87.0 percent at December 31,
1992 and 1991, respectively. Total nonperforming loans as a percentage of
total loans decreased to 0.5 percent at December 31, 1993, compared to 1.0
percent at December 31, 1992 and 2.1 percent at December 31, 1991.
The following table summarizes nonaccrual, past due and restructured loans.
December 31
-------------------------------------------------------------
1993 1992 1991 1990 1989
----- ---- ---- ---- ----
(in thousands of dollars)
Accruing loans past due
90 days or more as to
principal or interest:
Loans secured by real estate $ 58 $ 0 $ 214 $ 371 $ 423
Loans to individuals 57 108 81 255 222
Commercial and industrial loans 26 0 0 12 4
All other 0 0 730 0 0
------ ------ ------ ------ ------
$ 141 $ 108 $1,025 $ 638 $ 649
====== ====== ====== ====== ======
Nonaccrual loans:
Loans secured by real estate $ 518 $ 866 $2,371 $3,441 $1,158
Commercial and collateral 77 761 1,196 2,426 2,623
All other 723 805 120 326 0
------ ------ ------ ------ ------
$1,318 $2,432 $3,687 $6,193 $3,781
====== ====== ====== ====== ======
Restructured loans past due
30 days or more as to
principal or interest: $ 0 $ 0 $ 0 $ 0 $ 0
====== ====== ====== ====== ======
23
24
The effect of the nonaccrual loans, on a fully taxable-equivalent basis,
for the year ended December 31 was as follows:
Year Ended
December 31, 1993
---------------------
(in thousands of dollars)
Interest income that would have been recorded
under original terms $ 50
Interest income recorded during the
period 38
---
Net reduction in interest income $ 12
====
ALLOWANCE FOR LOAN LOSSES AND LOAN CHARGE-OFFS
The allowance for loan losses is the reserve maintained to cover losses
that may be incurred in the normal course of lending. The allowance for loan
losses is increased by provisions charged against income and recoveries of
loans previously charged off. The allowance is decreased by loans that are
determined uncollectible by management and charged against the allowance.
In determining the adequacy of the allowance for loan losses, management
on a regular basis evaluates and gives consideration to the following factors:
estimated future losses of significant loans including identified problem
credits; historical loss experience based on volume and types of loans; trends
in portfolio volume, maturity and composition; off-balance sheet credit risk;
volume and trends in delinquencies and nonaccruals; economic conditions in the
market area; and any other relevant factors that may be pertinent.
Potential problem loans are those loans which are on the Corporation's
"watch list." These loans exhibit characteristics that could cause the loans to
become nonperforming or require restructuring in the future. Periodically, and
at a minimum monthly, this "watch list" is reviewed and adjusted for changing
conditions.
24
25
The following table contains information relative to loan loss experience for
each of the five years in the period ended December 31, 1993.
1993 1992 1991 1990 1989
------ ------ ------ ------ ------
(In thousands of dollars)
Allowance for loan losses at
beginning of year $5,215 $4,099 $4,644 $2,544 $2,230
Loans charged off:
Real estate 198 17 35 17
Installment 471 866 1,300 1,286 749
Credit card 91 128 71 88 69
Other 2 1 42 7
Commercial and collateral 1,384 1,838 2,839 1,039 855
------ ------ ------ ------ ------
2,146 2,850 4,287 2,420 1,690
Recoveries on loans charged off:
Real estate 51 2 1 3
Installment 330 555 795 477 331
Credit card 16 12 9 9 9
Other 12 24
Commercial and collateral 928 597 414 683 261
------ ------ ------ ------ ------
1,337 1,166 1,242 1,170 604
------ ------ ------ ------ ------
Net loans charged-off 809 1,684 3,045 1,250 1,086
Provision for loan losses 820 2,800 2,500 3,350 1,400
------ ------ ------ ------ ------
Allowance for loan losses at
end of year $5,226 $5,215 $4,099 $4,644 $2,544
====== ====== ====== ====== ======
Ratio of net charge-offs during
the year to average loans
outstanding during the year .31% .72% 1.32% .54% .52%
====== ====== ====== ====== ======
Ratio of allowance for loan
losses to total loans
at December 31 1.81% 2.12% 1.84% 1.94% 1.16%
====== ====== ====== ====== ======
25
26
The following table shows an allocation of the allowance for loan losses
for each of the past five years (dollar amounts in thousands).
Percent of Loans in Each
Amount Category to Total Loans
December 31 December 31
---------------------------------------------------- --------------------------------------------
1993 1992 1991 1990 1989 1993 1992 1991 1990 1989
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Real estate $ 406 $ 205 $ 166 $ 35 $ 74 46% 41% 36% 32% 31%
Installment 732 511 503 503 878 11 14 20 23 24
Commercial and
collateral 2,270 2,761 3,210 3,249 1,460 42 44 42 43 43
All other 124 180 86 58 93 1 1 2 2 2
Unallocated 1,694 1,558 134 799 39 n/a n/a n/a n/a n/a
------ ------ ------ ------ ------ ---- ---- ---- ---- ----
$5,226 $5,215 $4,099 $4,644 $2,544 100% 100% 100% 100% 100%
====== ====== ====== ====== ====== ==== ==== ==== ==== ====
ASSET AND LIABILITY MANAGEMENT AND CAPITAL ADEQUACY
INTEREST RATE SENSITIVITY
Balance sheet structure and interest rate changes play important roles in
the growth of net interest income. PremierBank & Trust's Asset/Liability
Committee manages the overall rate sensitivity and mix of the balance sheet to
anticipate and minimize the effects of interest rate fluctuations and maintain
a consistent net interest margin. Refer to the following tables for additional
information regarding interest rate sensitivity:
CAPTION PAGE
Loan Maturities and Sensitivity to Changes in Interest Rates 19
Investment Securities Yield by Maturity Date 20
Certificates of Deposit Over $100,000 22
LIQUIDITY
Liquidity is the ability to raise cash quickly and economically when funds
are needed. The need for funds primarily arises from deposit withdrawals and
demand for new loans. Stable core deposits and other interest-bearing funds are
all important components of liquidity. PremierBank & Trust's long-term
liquidity sources are a large core deposit base and a strong capital position.
Core deposits are the most stable source of liquidity a bank can have due to
the long-term relationship with deposit customers. Core deposits averaged 82.7
percent of total average assets during 1993, and 81.6 percent during 1992.
Readily marketable assets, particularly short-term investments, provide
another source of liquidity. These funds can be quickly converted into cash to
meet short-term liquidity demands at minimal cost.
26
27
CAPITAL ADEQUACY
Shareholders' equity is a stable, noninterest-bearing source of funds which
provides support for asset growth and is the primary component of capital.
Capital adequacy refers to the level of capital required to sustain capital
growth over time and to absorb losses on risk assets. It is management's
intent to maintain a level of capitalization that allows the flexibility to
take advantage of opportunities that may arise. Shareholders' equity at
December 31, 1993, was $39.7 million, or $12.16 per share, compared with $34.2
million or $10.53 per share at December 31, 1992 and $30.4 million or $9.42 per
share at December 31, 1991. At December 31, 1993, the Corporation's leverage
ratio was 7.90 percent. The Corporation's risk-based capital ratios based on
Federal Reserve Board guidelines were 13.34 percent for Tier 1, or "core"
capital, and 14.60 percent for total qualifying capital. These ratios
substantially exceed the minimums that are currently in effect for bank holding
companies during 1993. These minimums are 4.00 percent and 8.00 percent for
Tier I and total qualifying capital, respectively. It is management's intent
to maintain a level of capitalization that allows the flexibility to take
advantage of opportunities that may arise in the future.
For additional discussion, see "Examination and Supervision," on pages 6
through 8 of this report.
COMMON STOCK AND RELATED MARKET DATA
COMMON STOCK
Reference is made to the "Market and Dividend Information" on page 25 of
the Registrant's 1993 Annual Report to Shareholders, which is incorporated
herein by reference.
DIVIDENDS
CoBancorp Inc.'s dividend policy balances shareholders' return with the
need to retain an adequate capital level to support future growth
opportunities. Dividend payout has ranged from 25.4 to 49.5 percent of
earnings over the last five years. Dividends declared in 1993 were $0.41 per
share, compared to the $0.34 of dividends declared in 1992. Dividends for 1991
were $0.25 per share.
FINANCIAL REPORTING AND CHANGING PRICES
Although inflation can have a significant effect on the financial condition
and operating results of banks, it is difficult to measure the impact as
neither the timing nor the magnitude of interest rate changes necessarily
coincide with changes in the consumer price index or any other index of
inflation.
Inflation can impact the growth of total assets and result in a need to
increase capital at a faster than normal rate in order to maintain an
appropriate equity to assets ratio. This can result in a smaller proportion of
earnings paid out in the form of dividends.
27
28
The results of operations can also be affected by the impact of inflation
on current interest rates. Intermediate to long-term interest rates tend to
increase in an inflationary environment, thereby affecting the market value of
long-term fixed rate assets. Higher short-term rates tend to increase funding
costs. In addition, noninterest expenses are more directly impacted by current
inflation rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------
Reference is made to pages 8 through 24 of the Registrant's 1993 Annual
Report to Shareholders, which is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -----------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -----------------------------------------------------------
ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
Reference is made to the Corporation's Proxy Statement dated March 21,
1994, and to information on page 9 of Part I of this report, for the
information required by Items 10 through 13, and which information is
incorporated herein by reference.
28
29
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- ------------------------------------------------------------------------
(a) (1) and (2) Financial Statements and Schedules
The following consolidated financial statements appear on pages 8 through
24 of the Registrant's 1993 Annual Report to Shareholders, which are
incorporated herein by reference:
Consolidated Balance Sheets at December 31, 1993 and 1992
Consolidated Statements of Income for the Years Ended December 31,
1993, 1992 and 1991
Consolidated Statements of Cash Flows for the Years Ended December 31,
1993, 1992 and 1991
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1993, 1992 and 1991
Notes to Consolidated Financial Statements
Report of Independent Auditors
Schedules I and II are not required under the related instructions or are
inapplicable and, therefore, have been omitted.
(3) Listing of Exhibits
Reg. S-K
Exhibit Page
Number Exhibit Hereof
-------- ------- ------
(3) Articles of Incorporation and Bylaws N/A
(filed as Exhibit (3) to the Form 10-K of the
Registrant for the year ended December 31, 1984,
incorporated herein by reference)
(10a) Executive Supplemental Income Agreement N/A
(filed as Exhibit (10) to the Form 10-K of the
Registrant for the year ended December 31, 1985,
incorporated herein by reference)
(10b) Directors Deferred Income Plan (filed as Exhibit (10b) N/A
to the Form 10-K of the Registrant for the year
ended December 31, 1986, incorporated herein by
reference)
(10d) Employment Agreement Among LCB Bancorp, Inc., N/A
Lorain County Bank and John S. Kreighbaum
(filed as Exhibit (10d) to the Form 10-K of the
Registrant for the year ended December 31, 1990,
incorporated herein by reference)
29
30
(10e) Consulting Agreement Among LCB Bancorp, Inc., N/A
Lorain County Bank and Robert T. Bowman (filed as
Exhibit (10e) to the Form 10-K of the Registrant
for the year ended December 31, 1991, and
incorporated herein by reference)
(10g) Agreement for Information Technology Services N/A
Between Electronic Data Systems Corporation and
LCB Bancorp, Inc. with Addenda (filed as Exhibit (10g)
to the Form 10-K of the Registrant for the year
ended December 31, 1991, and incorporated herein
by reference)
(10h) Lease Agreement Between Lorain County Bank and N/A
Electronic Data Systems Corporation (filed as
Exhibit (10h) to the Form 10-K of the Registrant
for the year ended December 31, 1991, and incor-
porated herein by reference)
(10i) Amendment Dated February 1, 1992, to the Consulting N/A
Agreement Among LCB Bancorp, Inc., Lorain County Bank
and Robert T. Bowman (filed as Exhibit (10i) to the
Form 10-K of the Registrant for the year ended
December 31, 1992, and incorporated herein by
reference)
(10j) Amendment Dated December 3, 1992, to the Consulting N/A
Agreement Among CoBancorp Inc., Lorain County Bank
and Robert T. Bowman (filed as Exhibit (10j) to the
Form 10-K of the Registrant for the year ended
December 31, 1992, and incorporated herein by
reference)
(10k) LCB Bancorp, Inc. 1992 Long-Term Incentive Plan N/A
(filed as Exhibit (10k) to the Form 10-K of the
Registrant for the year ended December 31, 1992,
and incorporated herein by reference)
(10l) Employment Agreement Dated December 31, 1993, 34
Among CoBancorp Inc., PremierBank & Trust and
Timothy W. Esson
(10m) Amendment Dated February 1, 1994, to the Consulting 54
Agreement Among CoBancorp Inc., PremierBank & Trust
and Robert T. Bowman
(13) CoBancorp Inc. 1993 Annual Report to Shareholders 57
(except for those portions of such Annual Report
to Shareholders expressly incorporated by
reference into this Report, such Annual Report to
Shareholders is furnished solely for the information
of the Securities and Exchange Commission and shall
not be deemed a "filed" document)
(22) Subsidiaries of the Registrant 90
(23) Consent of Independent Auditors 91
(b) Reports on Form 8-K
No reports on Form 8-K were filed in the last quarter of the Registrant's
latest fiscal year.
30
31
[ERNST & YOUNG LETTERHEAD]
REPORT OF INDEPENDENT AUDITORS
Board of Directors
CoBancorp Inc.
We have audited the consolidated financial statements of CoBancorp Inc. and
subsidiary listed in the accompanying index to financial statements (Item
14(a)). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these 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. As audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assesssing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
CoBancorp Inc. and subsidiary at December 31, 1993 and 1992, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1993 in conformity with generally
accepted accounting principles.
As discussed in Note A and R to the consolidated financial statements, in 1993
the corporation changed its methods of accounting for income taxes and
accounting for certain investments in debt and equity securities, respectively.
/s/ ERNST & YOUNG
ERNST & YOUNG
January 21, 1994
31
32
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.
CoBancorp Inc.
Date: March 29, 1994 By: /s/
------------------------------------
Timothy W. Esson
Executive Vice President
(Principal Financial Officer and
Principal Accounting Officer)
32
33
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report on Form 10-K has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the date indicated.
Signature Capacity With Registrant Date
--------- ------------------------ ----
/s/ President and Chief
- ------------------------ Executive Officer, Director March 29, 1994
John S. Kreighbaum
/s/ Chairman, Director March 29, 1994
- ------------------------
Robert T. Bowman
/s/ Director March 29, 1994
- ------------------------
Theodore S. Altfeld
/s/ Director March 29, 1994
- ------------------------
Thomas E. Haywood
/s/ Director March 29, 1994
- ------------------------
Richard J. Stewart
/s/ Director March 29, 1994
- ------------------------
Larry D. Jones
/s/ Director March 29, 1994
- ------------------------
James N. Johnson
33