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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, 1995.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM _______________TO _______________.
COMMISSION FILE NUMBER 0-13166.
COBANCORP INC.
____________________________________________________________________________
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO 34-1465382
___________________________________ ____________________________________
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION IDENTIFICATION NO.)
124 MIDDLE AVENUE
ELYRIA, OHIO 44035
_______________________________________ __________________________________
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: 216-329-8000
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
--------------------------
(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 III of this Form 10-K or any amendment to
this Form 10-K. [ ]
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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 245,061 shares held by the
CoBancorp Inc. Employee Stock Ownership Plan and 256,743 shares held by
directors and executive officers of the Corporation) as of January 31, 1996:
Common Stock, no par value--$59,643,459
The number of shares outstanding of the issuer's classes of common stock as of
January 31, 1996:
Common Stock, no par value--3,447,160 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the year ended
December 31, 1995, are incorporated by reference into Parts I and II.
Portions of the Registrant's Proxy Statement for the annual shareholders'
meeting to be held May 8, 1996, are incorporated by reference into Part III.
The index to exhibits in this filing begins on page 27.
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COBANCORP INC.
FORM 10-K REPORT
TABLE OF CONTENTS
ITEM PAGE
---- ----
PART I
1. BUSINESS ................................................................. 4
Description of Business .................................................. 4
Competition .............................................................. 5
Regulation ............................................................... 5
Examination and Supervision .............................................. 6
Federal Reserve System ................................................... 7
Insurance of Deposits .................................................... 7
Community Reinvestment Act ............................................... 7
Executive Officers of the Registrant ..................................... 8
Supplemental Financial Data .............................................. 8
2. PROPERTIES ............................................................... 9
3. LEGAL PROCEEDINGS ........................................................ 10
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ...................... 11
PART II
5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 11
6. SELECTED FINANCIAL DATA .................................................. 11
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS ............................................................... 11
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA .............................. 26
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE ............................................................... 26
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ....................... 27
11. EXECUTIVE COMPENSATION ................................................... 27
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ........... 27
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ........................... 27
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K .......... 27
SIGNATURES
SIGNATURES ............................................................... 29
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PART I
ITEM 1. BUSINESS
DESCRIPTION OF BUSINESS
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 is 1926 and is a member bank of the Federal Reserve System.
As of December 31, 1995, the Bank operates twenty-seven (27) banking offices
throughout its market area of Lorain County and portions of Cuyahoga, Erie,
Richland, Huron, Delaware, Franklin and Crawford Counties. The Bank also
operates a loan production office in Franklin County. The Bank has 32
automated teller machines ("ATMs") and is a member of the MAC 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.
Consistent with formally approved Loan Policy, the Bank offers a variety of
commercial loans involving differing characteristics depending on purpose,
intent, maturity and collateral; REAL ESTATE LOANS structured to include
traditional and nonresidential lending activities; and CONSUMER LOANS designed
to meet a multitude of credit needs on both a secured and unsecured basis. As
guidance in underwriting criteria for each category of loan referenced above,
(commercial, real estate and consumer loans) loan-to-value ratios and lien
positions are considered as components to structures and designs. They will
vary based on characteristics contained in the respective loan category.
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, 1995, in the opinion of management, the Corporation did not
have any concentration of loans to similarly situated borrowers. 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, 1995, the Corporation and its subsidiary employed
approximately 276 full-time and 73 part-time employees. None of the employees
is represented by a union or collective bargaining group. Management considers
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.
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COMPETITION
The Bank actively competes with other financial institutions in its market
area. Competition for deposits 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 deposits 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 deposits.
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
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. Reference is made to Note H of the Registrant's 1995 Annual
Report to Shareholders, which is contained in Exhibit 13 of this filing.
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
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 (the
"BIF"), with deposit insurance reform, including requiring the FDIC to
establish a risk-based premium assessment system, and with a number of other
regulatory and supervisory matters.
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EXAMINATION AND SUPERVISION
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
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, 1995, the
Corporation and the Bank, respectively, had tier one leverage ratios of 9.05%
and 9.02%, 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 applies 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 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.
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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 holdings 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
book value of assets in each category is multiplied by the weighting 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 1995, 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, 1995,
the Bank's total capital-to-risk weighted assets ratio calculated under the
risk-based capital requirement was 16.12 percent.
FEDERAL RESERVE SYSTEM
Under Federal Reserve Board regulations, the Bank is required to maintain
reserves against its transaction accounts (primarily checking and NOW
accounts), and non-personal time deposits. The current reserve requirement for
transaction accounts is 3 percent for the first $52 million, and 10 percent of
any additional deposits in transaction accounts. Effective December 31, 1990,
no reserves 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
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
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 an outstanding evaluation of its CRA
performance.
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EXECUTIVE OFFICERS OF THE REGISTRANT
(AS OF MARCH 1, 1996)
Executive
Officer
Name Age Position Since
---- --- -------- -----
John S. Kreighbaum 49 Chairman, President and Chief Executive Officer 1991
Timothy W. Esson 46 Executive Vice President and Treasurer 1980
James R. Bryden 53 Regional President/North Central District 1987
Robert J. Scott 47 Senior Vice President/Director of Investment Management
and Trust Services 1993
Bruce E. Stevens 47 Senior Vice President/Director of Lending 1993
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. Scott joined the Corporation and the Bank in
March 1993. From 1983 until 1993, he was at Mid-State Bank and Trust Company,
Altoona, Pennsylvania. 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.
SUPPLEMENTAL FINANCIAL DATA
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
------- ----
Return on Equity and Assets 12
Average Consolidated Balance Sheets, Net Interest Income and Rates 13
Summary of Changes in Net Interest Income 16
Loan Portfolio 18
Loan Maturities and Sensitivity to Changes in Interest Rates 18
Investment Securities Carrying Value and Yield by Maturity Date 20
Deposits 20
Short-Term Funds 21
Credit Quality and Experience 22
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ITEM 2. PROPERTIES
The principal office of CoBancorp Inc. and PREMIERBank & Trust is located at
124 Middle Avenue, Elyria, Ohio. At December 31, 1995, the Bank owned 16 of
its banking and ATM facilities and leased the other 20 facilities.
Through the Bank, the Corporation owns and operates a total of 32 ATMs at
various branch offices and at eight remote locations and is a member of the MAC
Network, which provides its 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
--------------- ------ ------------ ----------
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 1999
38473 Chestnut Ridge Road Leased n/a November 1997
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 1999
**400 Clark Street Leased 0
AMHERST
160 Cleveland Avenue Owned 0
938 North Leavitt Road Owned 0
AVON
36000 Detroit Road Leased n/a May 2011
36815 Detroit Road Leased n/a November 1997
AVON LAKE
*33388 Walker Road Leased n/a March 1997
CRESTLINE
350 North Seltzer Street Owned 0
DELAWARE
95 East William Street Owned 0
*1760 Columbus Pike (Wal-Mart) Leased n/a March 1999
*561 W. Central Drive (Grady Memorial
Hospital) Leased n/a May 1998
GRAFTON
432 North Main Street Owned 0
GREENWICH
13 Main Street Owned 0
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OWNED OR MORTGAGE LEASE
OFFICE LOCATION LEASED INDEBTEDNESS EXPIRATION
--------------- ------ ------------ ----------
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
NORTH OLMSTED
4700 Great Northern Boulevard Leased n/a June 2001
OBERLIN
49 South Main Street Owned 0
*Oberlin College (Wilder Hall) Leased n/a monthly
*291 South Main Street (Station Square) Leased n/a March 1999
15181 State Route 58 (Lorain Co. JVS) Leased n/a December 1999
SHEFFIELD LAKE
4100 Ivanhoe Drive Leased n/a monthly
SHILOH
23 West Main Street Owned 0
VERMILION
4530 Liberty Avenue Owned 0
WESTLAKE
801 Crocker Road Owned 0
WORTHINGTON
100 East Campus View Boulevard*** Leased n/a October 1996
2182 West Dublin-Granville Road Leased n/a April 1997
<FN>
* Remote ATM only
** Remote ATM located on premises of local manufacturing company
*** Loan Production Office only
ITEM 3. LEGAL PROCEEDINGS
There is no pending litigation of a material nature in which the
Corporation or the Bank is involved at December 31, 1995, and no such legal
proceeding was terminated during the fourth quarter of 1995. 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.
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.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Reference is made to the table "Market and Dividend Information" which is
contained in the Registrant's 1995 Annual Report to Shareholders, included in
this filing in Exhibit 13 and incorporated herein by reference, for information
concerning the principal market for Registrant's Common Stock, market prices,
number of shareholders and dividends. Reference is made to Note H to the
Consolidated Financial Statements which is contained in the Registrant's 1995
Annual Report to Shareholders, for information concerning dividend
restrictions, which is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
Reference is made to the table entitled "Consolidated Financial
Highlights," contained in the Registrant's 1995 Annual Report to Shareholders,
which is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CoBancorp Inc. is a one-bank holding company with total consolidated assets
at year-end 1995 of $530 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 included in the
Registrant's 1995 Annual Report to Shareholders, presented as Exhibit 13 of
this filing, which are incorporated herein by reference. All shares
outstanding and per share data have been adjusted for a three percent stock
dividend in 1995, four-for-three stock splits in 1994 and 1993, a four percent
stock dividend in 1992 and a three percent stock dividend in 1991.
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PERFORMANCE OVERVIEW
Net income for 1995 was $6,402,000, or $1.86 per share, compared to
$5,686,000, or $1.68 per share in 1994, and $5,281,000, or $1.56 per share in
1993. 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 1995 was 14.0 percent,
compared to 14.3 percent in 1994 and 14.6 percent in 1993. ROA measures how
effectively a corporation uses its assets to produce earnings. For 1995,
return on average assets was 1.20 percent. ROA was 1.15 percent in 1994 and
1.10 percent in 1993. 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
-----------
1995 1994 1993
---- ---- ----
Return on average assets 1.20% 1.15% 1.10%
Return on average equity 13.98 14.28 14.60
Dividend payout ratio 31.28 30.70 25.52
Ratio of average equity to average assets 8.56 8.06 7.53
RESULTS OF OPERATIONS
NET INTEREST INCOME
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 $26,199,000 in
1995, from $25,756,000 in 1994 and $23,713,000 in 1993. 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 5.31 percent in 1995 compared with 5.70 percent in 1994 and 5.39
percent for 1993.
Average earning assets, as a percentage of total average assets, increased
to 91.8 percent this year compared to 91.4 percent in 1994 and 91.7 percent in
1993.
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 tables.
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AVERAGE CONSOLIDATED BALANCE SHEETS, NET INTEREST INCOME AND RATES
FULLY TAXABLE EQUIVALENT (IN THOUSANDS OF DOLLARS)
1995
AVERAGE
DAILY YIELD/
BALANCE INTEREST RATE
------- -------- ----
Assets
Interest-earning assets:
Loans (including fees)
Taxable $325,524 $29,670 9.11%
Tax-exempt 2,756 289 10.49%
Investment securities
Taxable 85,486 5,789 6.77%
Tax-exempt 75,338 6,080 8.07%
Federal funds sold and other
short-term funds 2,837 166 5.93%
------- ------
Total interest-earning 491,941 41,994 8.54%
assets
Noninterest-earning assets:
Cash and due from banks 23,808
Bank premises and equipment 11,013
Other assets 14,601
Less allowance for loan losses (5,756)
---------
43,666
---------
Total assets $535,607
=========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing transaction
accounts $51,056 1,044 2.05%
Savings 153,721 3,529 2.30%
Time deposits 193,854 10,390 5.36%
Short-term borrowings 23,144 832 3.59%
------- ------
Total interest-bearing
liabilities 421,775 15,795 3.75%
------
Noninterest-bearing liabilities:
Demand deposits 63,613
Other liabilities 4,419
Shareholders' equity 45,800
-------
Total liabilities and
shareholders' equity $535,607
========
Net interest income $26,199
=======
Net yield/rate on interest-earning 5.31%
assets =====
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 1995, 1994
and 1993.
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AVERAGE CONSOLIDATED BALANCE SHEETS, NET INTEREST INCOME AND RATES
FULLY TAXABLE EQUIVALENT (IN THOUSANDS OF DOLLARS)
1994
AVERAGE
DAILY YIELD/
BALANCE INTEREST RATE
------- -------- ----
Assets
Interest-earning assets:
Loans (including fees)
Taxable $308,853 $27,108 8.78%
Tax-exempt 3,768 244 6.48%
Investment securities
Taxable 69,585 4,406 6.33%
Tax-exempt 67,368 5,425 8.05%
Federal funds sold and other
short-term funds 2,439 101 4.14%
------- ------
Total interest-earning 452,013 37,284 8.25%
assets
Noninterest-earning assets:
Cash and due from banks 23,706
Bank premises and equipment 10,676
Other assets 13,422
Less allowance for loan losses (5,481)
---------
42,323
=========
Total assets $494,336
=========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing transaction
accounts $53,760 1,104 2.05%
Savings 174,097 4,044 2.32%
Time deposits 140,050 5,743 4.10%
Short-term borrowings 22,350 637 2.85%
------- ------
Total interest-bearing
liabilities 390,257 11,528 2.95%
------
Noninterest-bearing liabilities:
Demand deposits 59,674
Other liabilities 4,586
Shareholders' equity 39,819
--------
Total liabilities and
shareholders' equity $494,336
Net interest income ======== $25,756
=======
Net yield/rate on interest-earning 5.70%
assets =====
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 1995, 1994
and 1993.
14
15
AVERAGE CONSOLIDATED BALANCE SHEETS, NET INTEREST INCOME AND RATES
FULLY TAXABLE EQUIVALENT (IN THOUSANDS OF DOLLARS)
1993
AVERAGE
DAILY YIELD/
BALANCE INTEREST RATE
------- -------- ----
Assets
Interest-earning assets
Loans (including fees)
Taxable $255,726 $23,383 9.14%
Tax-exempt 4,280 265 6.19%
Investment securities
Taxable 123,028 8,099 6.58%
Tax-exempt 51,630 4,420 8.56%
Federal funds sold and 5,297 155 2.93%
other short-term funds -------- -------
Total interest-earning 439,961 36,322 8.26%
assets
Noninterest-earning assets:
Cash and due from banks 23,596
Bank premises and equipment 9,270
Other assets 12,557
Less allowance for loan losses (5,481)
---------
Total assets $479,903
=========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing transaction $55,606 1,337 2.40%
accounts
Savings 164,593 4,570 2.78%
Time deposits 141,872 6,064 4.27%
Short-term funds 24,721 638 2.58%
------- ------
Total interest-bearing
liabilities 386,792 12,609 3.26%
------
Noninterest-bearing liabilities:
Demand deposits 51,983
Other liabilities 4,971
Shareholders' equity 36,157
--------
Total liabilities and
shareholders' equity $479,903
========
Net interest income $23,713
Net yield/rate on interest-earning ======= 5.39%
assets =====
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 1995, 1994
and 1993.
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
1995 VS. 1994 1994 VS. 1993
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) $1,492 $1,116 $2,608 $4,652 $(946) $3,706
Taxable investment
securities 1,098 285 1,383 (3,518) (175) (3,693)
Nontaxable investment
securities 642 13 655 1,347 (342) 1,005
Federal funds sold 17 47 64 (84) 30 (54)
------ ------- ------ ------ ----- ------
Total interest-earning
assets 3,249 1,461 4,710 2,397 (1,433) 964
Interest expense:
Interest-bearing transaction
accounts 56 4 60 47 186 233
Savings 470 45 515 (281) 807 526
Time deposits (2,207) (2,440) (4,647) 121 200 321
Short-term funds (43) (152) (195) 64 (63) 1
------ ------- ------ ------ ----- ------
Total interest-bearing
liabilities (1,724) (2,543) (4,267) (49) 1,130 1,081
------ ------- ------ ------ ----- ------
Change in net interest income $1,525 $(1,082) $443 $2,348 $(303) $2,045
====== ======= ====== ====== ===== ======
<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.
16
17
PROVISION FOR LOAN LOSSES
The total provision for loan and real estate losses was $180,000 in 1995,
$208,000 in 1994 and $920,000 in 1993. 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 22.
NONINTEREST INCOME
Total noninterest income of $4,720,000 for 1995 increased $309,000, or 7.0
percent, when compared to 1994. This follows a decrease of 1.3 percent during
1994 and an increase of 10.5 during 1993. Service charges on deposit accounts
represented $174,000 of the growth in 1995. This was the direct result of a
comprehensive review of service charges completed in early 1995. Income from
trust activities has continued to increase each year. Total assets managed by
the Trust Department aggregated $204.0 million, $181.3 million and $220.0
million at December 31, 1995, 1994 and 1993, respectively. Gains and losses on
the sale of investment securities also impact comparisons. Security
transactions resulted in gains of $284,000, $454,000 and $665,000 in 1995, 1994
and 1993, respectively.
NONINTEREST EXPENSES
The Corporation and the Bank have focused efforts on cost efficiency during
the last three years. In early 1995, a comprehensive program was begun to
review and challenge staffing levels in the organization, with the objective of
ensuring optimal levels of customer service by staffing based on customers'
banking patterns. Full-time equivalent staff was 313 at December 31, 1995,
compared to 328 and 319 at the same dates in 1994 and 1993. Total salaries and
wages were level in 1995 compared with 1994. However, the cost of employee
benefits increased $229,000 in 1995, due primarily to pension and Employee
Stock Ownership Plan costs. The increase in salaries, wages and benefits in
1994 when compared to 1993 was due primarily to wage and benefit cost increases
and increases in the number of employees due to branch acquisitions. FDIC
insurance expense decreased significantly in 1995, to $560,000 from $966,000 in
1994. In September 1995, the Federal Deposit Insurance Corporation (FDIC)
reduced the annual premium from $0.23 per $100 of insured deposits to
approximately $0.04 per $100 deposits insured in the Bank Insurance Fund (BIF).
In December 1995, the FDIC lowered the rate for BIF insured deposits to zero.
The Bank also has approximately $37 million of deposits acquired from Savings
and Loan institutions which are insured by the FDIC in the Savings Association
Insurance Fund (SAIF). These deposits continue to be assessed at $0.23 per
$100 per year. Additionally, Congress is considering a special one-time
assessment on SAIF deposits.
INCOME TAXES
The Corporation employs various strategies in investments and loans to
maximize after-tax profits. This ongoing process 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) was 14.8% in 1995,
compared to 18.1% in 1994 and 17.2% in 1993. The effective tax rate is lower
than the statutory rate primarily due to the effect of income on tax-exempt
securities and loans. The income tax provision was $1,112,000 in 1995,
compared with $1,256,000 in 1994 and $1,100,000 in 1993. For the year ended
December 31, 1995, no valuation allowance is 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.
FINANCIAL CONDITION
The consolidated financial condition of the Corporation and the Bank as of
December 31, 1995 and 1994 is presented in the comparative balance sheets
contained in Exhibit 13 of this filing and is incorporated herein by reference.
The following discussions address key elements of financial condition,
including earning assets, the source of funds supporting earnings assets,
credit quality and experience, asset and liability management and capital
adequacy.
17
18
EARNING ASSETS
LOANS
Loans comprise the majority of the Corporation's earning assets,
representing 66.8 percent of average earning assets in 1995, and 69.2 percent
in 1994. At year-end 1995, total loans were $320,509,000 which was a decrease
of $9,624,000 or 2.9% from $330,133,000 at year-end 1994.
The largest asset category in the loan portfolio was real estate mortgage
loans, which comprised 43.3 percent of total loans at the end of 1995.
Commercial and collateral loans totaled 43.0 percent of the portfolio and
installment loans comprised 12.8 percent of the portfolio. All other loans
were 0.9 percent of the portfolio. In 1994, real estate mortgages were 46.2
percent of the loan portfolio, commercial and collateral loans were 41.3
percent, installment loans were 11.6 percent and other loans were 0.9 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
(in thousands of dollars):
LOAN PORTFOLIO
DECEMBER 31
-----------
1995 1994 1993 1992 1991
--------- --------- --------- ---------- -----------
Real estate $138,664 $152,695 $132,589 $99,761 $81,368
Installment 41,155 38,364 31,229 34,145 44,465
Commercial and collateral 137,702 136,187 122,699 109,169 93,694
All other 2,988 2,887 2,932 3,330 3,768
--------- --------- --------- ---------- -----------
Total (net of unearned income) $320,509 $330,133 $289,449 $246,405 $223,295
========= ========= ========= ========== ===========
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, 1995, reported at maturity for fixed rate loans, and
earliest repricing opportunity for variable rate loans, 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 $28,331 $39,599 $70,734 $138,664
Installment 2,239 31,968 6,948 41,155
Commercial and collateral 127,624 7,474 2,604 137,702
All other 0 2,988 0 2,988
--------- -------- ---------- ---------
$158,194 $82,029 $80,286 $320,509
========= ======== ========= =========
Of the loans due after one year, approximately $38,474,000 have variable
interest rates, and $123,841,000 have fixed interest rates.
18
19
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.
The investment portfolio represented 32.7 percent of average earning assets
in 1995 and 30.3 percent in 1994. The tax-equivalent yield on the entire
portfolio was 7.17, 7.18 and 7.17 percent in 1995, 1994 and 1993, respectively.
These investments provide a stable yet diversified income stream and serve
useful roles in liquidity and interest rate sensitivity management. In
addition, the investment portfolio serves as a source of collateral for
low-cost funding. The decision to purchase securities is based upon the
assessment of current economic and financial trends.
On December 31, 1993, the Corporation adopted FASB Statement No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." 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 in 1993. In accordance with Statement No. 115, securities
available-for-sale are recorded at market value and at December 31, 1995 and
1994, respectively, the unrealized gain (loss) of $1,315,000 and $(2,913,000)
(net of tax) is included in shareholders' equity.
As discussed in Note C of the Registrant's 1995 Annual Report to
Shareholders, in accordance with the Financial Accounting Standards Board's
special report issued on November 15, 1995, the Corporation reclassified
$48,706,000 of securities from the held-to-maturity to the available-for-sale
category in a single transaction in December 1995. This reclassification will
permit added flexibility in the management of interest rate sensitivity,
investment returns, asset allocation and liquidity.
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
Summary information with respect to the securities portfolio at December 31
follows (in thousands of dollars):
1995 1994 1993
Held to Available 1995 Carrying Carrying
Maturity for Sale Yield Value Value
----------- ------------ ----------- ------------ ------------
U.S. Treasury and other
U.S. Government agencies
Under 1 year $0 $18,937 6.97% $14,193 $4,134
1 to 5 years 0 11,705 6.44% 18,539 17,943
5 to 10 years 0 1,009 7.43% 0 0
----------- ------------ ------------ ------------
Total 0 31,651 6.79% 32,732 22,077
States of the U.S. and political
subdivisions
Under 1 year 2,927 0 5.62% 3,803 3,006
1 to 5 years 24,292 9,824 5.44% 26,701 23,219
5 to 10 years 2,729 38,970 5.21% 42,469 35,780
Over 10 years 0 1,133 5.77% 823 1,727
----------- ------------ ------------ ------------
Total 29,948 49,927 5.33% 73,796 63,732
Collateralized mortgage-backed
securities
Under 1 year 0 10,883 6.96% 9,225 35,062
1 to 5 years 0 16,857 6.24% 10,980 31,118
5 to 10 years 0 16,826 5.48% 19,897 0
Over 10 years 0 1,010 8.38% 1,918 506
----------- ------------ ------------ ------------
Total 0 45,576 6.18% 42,020 66,686
Other
Over 10 years 0 0 1,260 439
Total $29,948 $127,154 $149,808 $152,934
=========== ============ ============ ============
The yield at December 31, 1995, 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.
FEDERAL FUNDS SOLD
Short-term federal funds sold are used to manage interest rate sensitivity
and to meet liquidity needs. During 1995, 1994 and 1993, these funds
represented approximately 0.4 percent, 0.5 percent and 1.2 percent,
respectively, of average earnings 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 core 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
deposit accounts, decreased by 7.7 percent in 1995 to 87.8 percent of average
deposits as compared to an increase of 1.0 percent in 1994 and 13.4 percent in
1993.
20
21
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
-----------------------
1995 1994 1993
---------- --------- ---------
AMOUNT
------
Noninterest-bearing demand deposits $ 63,613 $ 59,674 $ 51,983
Interest bearing transaction accounts 51,056 53,760 55,606
Savings deposits 153,721 174,097 164,593
Time deposits 193,854 140,050 141,872
-------- -------- --------
$462,244 $427,581 $414,054
======== ======== ========
AVERAGE RATE FOR THE YEAR
- -------------------------
Interest bearing transaction accounts 2.05% 2.05% 2.40%
Savings deposits 2.30% 2.32% 2.78%
Time deposits 5.36% 4.10% 4.27%
The maturity distribution of certificates of deposit of $100,000 or more at
December 31, 1995, was (in thousands of dollars):
CERTIFICATES OF DEPOSIT OVER $100,000
Three months or less $32,123
Over three through six months 5,709
Over six through twelve months 2,608
Over twelve months 2,402
-------
$42,842
=======
There were four other time deposits of $100,000 or more at December 31,
1995, which will mature in 1996 through 1997.
SHORT-TERM FUNDS
Other interest-bearing liabilities include securities sold under agreements
to repurchase, sweep accounts, federal funds purchased and notes payable TT&L.
During 1995, these funds represented 4.7 percent of average earning assets,
compared to 4.5 percent in 1994 and 5.0 percent in 1993.
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.
21
22
The following table presents information related to short-term funds (in
thousands of dollars).
SHORT-TERM FUNDS
DECEMBER 31
-----------
1995 1994 1993
---- ---- ----
Balance at December 31 $22,454 $21,357 $20,245
Maximum outstanding at any month-end 30,013 33,049 32,322
Average amount outstanding 23,144 22,350 24,721
Weighted average interest rate 3.59% 2.85% 2.58%
Weighted rate at December 31 2.80% 2.18% 2.75%
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.
Nonperforming loans include loans accounted for on a nonaccrual basis, as
well as accruing loans which are contractually past due 90 days or more as to
principal or interest payments. Total nonperforming assets (including other
real estate owned) at December 31, 1995, were $965,000, compared to $458,000 at
December 31, 1994 and $2,090,000 at December 31, 1993. Total nonperforming
loans as a percentage of total loans were 0.30 percent at December 31, 1995,
compared to 0.14 percent at December 31, 1994 and 0.72 percent at December 31,
1993.
The following table summarizes nonaccrual, past due and restructured loans
(in thousands of dollars).
DECEMBER 31
-----------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Accruing loans past due
90 days or more as to principal or interest:
Loans secured by real estate $ 35 $ 3 $ 58 $ 0 $214
Loans to individuals 71 48 57 108 81
Commercial and industrial loans 0 0 26 0 0
All other 0 0 0 0 730
----- ----- ----- -------- ------
$106 $ 51 $ 141 $ 108 $1,025
=== ==== ====== ====== =====
Nonaccrual loans:
Loans secured by real estate $783 $358 $ 518 $ 866 $2,371
Commercial and collateral 76 0 77 761 1,196
All other 0 0 723 805 120
----- ----- ------ ------ ------
$859 $358 $1,318 $2,432 $3,687
=== === ===== ===== =====
22
23
The effect of nonaccrual loans, on a fully taxable-equivalent basis, for
the year ended December 31 was as follows (in thousands of dollars):
YEAR ENDED
DECEMBER 31, 1995
-----------------
Interest income that would have been recorded under original terms $ 77
Interest income recorded during the period 51
----
Net reduction in interest income $ 26
===
Except for installment and credit card loans, 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 card loans past due greater than
120 days will be charged off and previously accrued but uncollected interest is
reversed.
As discussed in Note D in the Registrant's 1995 Annual Report to
Shareholders, the Corporation adopted Statement of Financial Accounting
Standards (SFAS) No. 114 and 118 effective January 1, 1995. As of December 31,
1995, there were no loans outstanding which met the Standards' definition of an
impaired loan.
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. As of December 31, 1995, there were loans with principal
balances of approximately $2.8 million on the watch list, none of which were
classified as "doubtful" or "loss."
23
24
The following table contains information relative to loan loss experience
for each of the five years in the period ended December 31, 1995 (in thousands
of dollars).
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Allowance for loan losses at beginning
of year $5,617 $5,226 $5,215 $4,099 $4,644
Loans charged off:
Real estate 2 31 198 17 35
Installment 510 297 471 866 1,300
Credit card 85 61 91 128 71
Other 4 5 2 1 42
Commercial and collateral 27 38 1,384 1,838 2,839
----- ----- ----- ------ ------
628 432 2,146 2,850 4,287
Recoveries on loans charged off:
Real estate 3 33 51 2
Installment 318 246 330 555 795
Credit card 16 32 16 12 9
Other 2 1 12 24
Commercial and collateral 342 303 928 597 414
----- ----- ----- ------ ------
681 615 1,337 1,166 1,242
----- ----- ----- ------ ------
Net (recoveries) charge-offs (53) (183) 809 1,684 3,045
Provision for loan losses 180 208 820 2,800 2,500
----- ----- ----- ------ ------
Allowance for loan losses at end of year $5,850 $5,617 $5,226 $5,215 $4,099
Ratio of net (recoveries) charge-offs
during the year to average loans
outstanding during the year (.02)% (.06)% .31% .72% 1.32%
====== ====== ===== ====== ======
Ratio of allowance for loan losses to
total loans at December 31 1.82% 1.70% 1.81% 2.12% 1.84%
====== ====== ===== ====== ======
Additionally, $100,000 was provided in 1993 for possible losses on other real
estate owned.
24
25
The following table shows an allocation of the allowance for loan losses at
December 31 for each of the loan categories (dollar amounts in thousands).
PERCENT OF LOANS IN EACH
AMOUNT CATEGORY TO TOTAL LOANS
------------------------------------------ ------------------------------------------
1995 1994 1993 1992 1991 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Real estate $337 $400 $406 $205 $166 43% 46% 46% 41% 36%
Installment 1,480 1,204 732 511 503 13% 12% 11% 14% 20%
Commercial and
collateral 2,741 2,749 2,270 2,761 3,210 43% 41% 42% 44% 42%
All other 327 190 124 180 86 1% 1% 1% 1% 2%
Unallocated 965 1,074 1,694 1,558 134 n/a n/a n/a n/a n/a
------ ----- ----- ----- ------ --- --- --- --- ---
$5,850 $5,617 $5,226 $5,215 $4,099 100% 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 interest 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 18
Investment Securities Yield by Maturity Date 20
Certificates of Deposit Over $100,000 21
LIQUIDITY
Liquidity management ensures that funds are available to meet the cash flow
needs of borrowers, depositors and the Corporation. Funds for short-term
liquidity are provided through maturing securities, the Bank's extensive core
deposit base, repayments received on loans and the acquisition of new deposits.
The Bank also has access to short-term borrowings, if needed, through
arrangements with several of its correspondent banks. Additionally, long-term
funding needs can be met, if required, through the issuance of common stock.
The Corporation's liquidity is considered by management to be adequate to meet
current and projected levels of need.
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, 1995, was $50.7 million, or $14.70 per share, compared with $41.0
million or $12.02 per share at December 31, 1994 and $39.7 million or $11.80
per share at December 31, 1993. At December 31, 1995, the Corporation's
leverage ratio was 9.05 percent. The Corporation's risk-based capital ratios
based on Federal Reserve Board guidelines were 14.87 percent for Tier 1, or
"core" capital, and 16.12 percent for total qualifying capital.
25
26
These ratios substantially exceed the Federal Reserve Board's capital
guidelines for well-capitalized institutions, which are 6.00 percent for Tier 1
capital, 10.00 percent for total qualifying capital, and 5.00 percent for
leverage ratio. 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.
The Corporation in not aware of any recommendations by the regulatory
authorities which, if implemented, would have a material effect on the
Corporation's liquidity, capital, resources or results of operation.
For additional discussion, see "Examination and Supervision," on pages 6
through 7 of this report.
COMMON STOCK AND RELATED MARKET DATA
COMMON STOCK
Reference is made to the table "Market and Dividend Information" which is
included in the Registrant's 1995 Annual Report to Shareholders, contained in
this filing as Exhibit 13, 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 31.3 percent of
earnings over the last five years. Dividends declared in 1995 were $0.58 per
share, compared to the $0.51 of dividends declared in 1994. Dividends for 1993
were $0.40 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.
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 the consolidated financial statements and related
notes in the Registrant's 1995 Annual Report to Shareholders, included in this
filing as Exhibit 13, and incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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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 April 8, 1996,
and to information on page 8 of Part I of this report, for the information
required by Items 10 through 13, and which information is incorporated herein
by reference.
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 in the Registrant's 1995
Annual Report to Shareholders, which financial statements are included in this
filing as Exhibit 13, and are incorporated herein by reference:
Consolidated Balance Sheets at December 31, 1995 and 1994
Consolidated Statements of Income for the Years Ended December 31, 1995,
1994 and 1993
Consolidated Statements of Cash Flows for the Years Ended December 31,
1995, 1994 and 1993
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
Report of Independent Auditors
Quarterly Financial Information
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 Second Amended and Restated Articles of Incorporation and Code of Regulations
of CoBancorp Inc., (filed as Exhibit 3 to the Form 10-Q of the Registrant N/A
for the Quarter ended June 30, 1995, and incorporated herein by reference)
10a Executive Supplemental Income Agreement (filed as Exhibit 10 to the Form 10-K of N/A
the Registrant for the year ended December 31, 1985, incorporated herein by
reference)
10b Directors Deferred Income Plan (filed as Exhibit 10b to the Form 10-K of the N/A
Registrant for the year ended December 31, 1986, incorporated herein by reference)
10d Employment Agreement Among LCB Bancorp, Inc., Lorain County Bank and N/A
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)
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28
REG. S-K
EXHIBIT PAGE
NUMBER EXHIBIT HEREOF
------ ------- ------
10e Consulting Agreement Among LCB Bancorp, Inc., Lorain County Bank and N/A
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)
10i Amendment Dated February 1, 1992, to the Consulting Agreement Among LCB Bancorp, N/A
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 Agreement Among N/A
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 (filed as Exhibit 10k to the Form N/A
10-K of the Registrant for the year ended December 31, 1992, and incorporated
herein by reference)
10l Employment Agreement Dated December 31, 1993, Among CoBancorp Inc., PREMIERBank & N/A
Trust and Timothy W. Esson (filed as Exhibit 10l to the Form 10-K of the Registrant
for the year ended December 31, 1993, and incorporated herein by reference)
10m Amendment Dated February 1, 1994, to the Consulting Agreement Among CoBancorp Inc., N/A
PREMIERBank & Trust and Robert T. Bowman (filed as Exhibit 10m to the Form 10-K of
the Registrant for the year ended December 31, 1993, and incorporated herein by
reference)
10n Amendment Dated December 15, 1994, to the Consulting Agreement Among CoBancorp N/A
Inc., PREMIERBank & Trust and Robert T. Bowman (filed as Exhibit 10n to the Form
10-K of the Registrant for the year ended December 31, 1994, and incorporated
herein by reference)
10o Agreement for Information Technology Services Between Electronic Data Systems
Corporation and CoBancorp, Inc., dated February 15, 1995, with Addenda
13 1995 Annual Report to Shareholders
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule
(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.
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29
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, 1996 By: Timothy W. Esson
Executive Vice President & Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
Pursuant to the requirements of the Securities and 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
--------- ------------------------ ----
John S. Kreighbaum Chairman, President and Chief March 29, 1996
Executive Officer, Director
Timothy W. Esson Executive Vice President March 29, 1996
and Treasurer, Director
Theodore S. Altfeld Director March 29, 1996
Robert T. Bowman Chairman Emeritus March 29, 1996
Robert S. Cook Director March 29, 1996
Maureen M. Cromling Director March 29, 1996
Garis F. Distelhorst Director March 29, 1996
Michael B. Duffin Director March 29, 1996
Thomas E. Haywood Director March 29, 1996
Larry D. Jones Director March 29, 1996
Thomas R. Miklich Director March 29, 1996
Richard J. Stewart Director March 29, 1996
A. E. Szambecki Director March 29, 1996
Richard A. Van Auken Director March 29, 1996
29