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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, 1996.
[ ] 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.)
1530 WEST RIVER ROAD, NORTH
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 226,144 shares held by the CoBancorp Inc.
Employee Stock Ownership Plan and 259,482 non-ESOP shares held by directors and
executive officers of the Corporation) as of January 31, 1997:
Common Stock, no par value--$63,816,257
The number of shares outstanding of the issuer's classes of common stock as of
January 31, 1997:
Common Stock, no par value--3,453,824 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the year
ended December 31, 1996, are incorporated by reference into Parts I and II.
Portions of the Registrant's Proxy Statement for the annual
shareholders' meeting to be held April 16, 1997, 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
Acquisitions ........................................................................... 5
Competition ............................................................................ 6
Regulation ............................................................................. 6
Examination and Supervision ............................................................ 7
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 ...................................................................... 11
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
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. As of December 31, 1996, the Bank operates thirty-six (36)
banking offices throughout its market area of Lorain County and portions of
Cuyahoga, Erie, Richland, Huron, Delaware, Franklin and Crawford Counties. The
Bank has 41 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.
CoBancorp, Inc. operates in markets that are diverse in their economic base,
ranging from service, governmental and educational orientation in the Columbus,
Ohio MSA, to heavy and light industrial activity in the Cleveland/Elyria markets
and agricultural orientation in the geographical area between Lorain and
Columbus.
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 an unsecured basis. As
guidance in underwriting criteria for each category of loans referenced above,
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, 1996, 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.
Growth of the Bank's commercial loan portfolio has originated in the
nontraditional part of its operating franchise, i.e. Columbus MSA and Cleveland,
thus permitting geographical diversification in its lending processes. This is
perceived by management as being an appropriate risk diversification strategy
attempting to balance its portfolio and guard against cyclical cycles of certain
industry classifications.
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, 1996, the Corporation and its subsidiary employed
approximately 339 full-time and 75 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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ACQUISITIONS
On February 16, 1996, the Registrant and its banking subsidiary,
PremierBank & Trust completed the acquisition of eleven branches of Bank One,
Cleveland, N.A. ("Bank One") located in Lorain County, Ohio. The branches
acquired by Premier had total deposits of approximately $111 million. The
branches were acquired by the Bank for total consideration of $5,526,681,
representing a premium of 5% on core deposits.
Under the terms of the transaction, the Bank acquired the branches and
associated assets such as furniture, fixtures and equipment and approximately
$283,000 of certain deposit account-related loans, and the Bank assumed the
deposit account liabilities of Bank One associated with these branches. Eight of
the branches are situated on real estate acquiried by the Bank, and the other
three are leased. During 1996, three of the branches acquired from Bank One were
consolidated into existing PremierBank branch locations.
On February 27, 1997 CoBancorp acquired Jefferson Savings Bank, an
Ohio-chartered savings association with assets of approximately $62 million, by
means of a merger of an interim subsidiary of CoBancorp with and into Jefferson.
Cash in the amount of $6,733,000 was paid to Jefferson's shareholders. They also
received additional consideration of $649,498 attributable to certain favorable
tax benefits (confirmed by an IRS Private Letter Ruling dated May 31, 1996) in
exchange for Jefferson's 3,535 issued and outstanding shares. The transaction
was accounted for under the purchase method. Jefferson remains a separate
savings association subsidiary of CoBancorp.
The terms of the sale, including the purchase price and form of
consideration were the result of arms'-length negotiations between the parties.
Prior to this transaction, there has been no material relationship between
Jefferson and CoBancorp, its affiliates, any officer or director of CoBancorp or
any of their affiliates.
In connection with the acquisition, CoBancorp acquired all of the
equipment and other physical property used in Jefferson's banking business.
CoBancorp intends to continue to use the assets acquired in this transaction in
the manner utilized by Jefferson prior to the acquisition.
Jefferson conducts its operations in three branch locations in Madison
County, Ohio, all of which will continue in operation for the immediate future
following the acquisition.
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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 primarily 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
1996 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 Corporation and the Bank are subject to various regulatory capital
requirements. Further discussion is included in Note Q to the Notes to the
Registrant's Annual Report to Shareholders, which is incorporated herein by
reference.
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. Since 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 JANUARY 31, 1997)
Executive
Officer
Name Age Position Since
---- --- -------- -----
John S. Kreighbaum 50 Chairman, President and Chief Executive Officer 1991
Timothy W. Esson 47 Executive Vice President and Treasurer 1980
James R. Bryden 54 Regional President/North Central District 1987
Robert J. Scott 48 Senior Vice President/Director of Investment
Management and Trust Services 1993
Bruce E. Stevens 48 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 19
Loan Maturities and Sensitivity to Changes in Interest Rates 19
Investment Securities Carrying Value and Yield by Maturity Date 20
Deposits 21
Short-Term Funds 22
Credit Quality and Experience 22
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ITEM 2. PROPERTIES
The principal office of CoBancorp Inc. and PREMIERBank & Trust is
located at 1530 West River Road North, Elyria, Ohio. At December 31, 1996, the
Bank owned 23 of its banking and ATM facilities and leased the other 20
facilities. Currently, two of its full-service branches are located in
supermarkets.
Through the Bank, the Corporation owns and operates a total of 42 ATMs
at various branch offices and at seven 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. Neither the Corporation nor the Bank
has any mortgage indebtness on any of its properties.
OWNED OR LEASE
OFFICE LOCATION LEASED EXPIRATION
--------------- ------ ----------
ELYRIA
1530 West River Road North Owned
124 Middle Avenue Owned
230 East Broad Street Owned
248 North Abbe Road Leased March 2008
1000 North Abbe Road Owned
38473 Chestnut Ridge Road Leased November 1997
Elyria United Methodist Home
807 West Avenue Leased December 1999
672 Oberlin Road Owned
*8703 West Ridge Road Leased June 1999
*Elyria Memorial Hospital
630 East Rive Street Leased July 2001
AMHERST
160 Cleveland Avenue Owned
938 North Leavitt Road Owned
AVON
36000 Detroit Road Leased May 2011
AVON LAKE
*33388 Walker Road Leased March 1997
CLEVELAND
200 Public Square Leased November 2000
CRESTLINE
350 North Seltzer Street Owned
DELAWARE
95 East William Street Owned
*1760 Columbus Pike (Wal-Mart) Leased March 1999
*561 W. Central Drive (Grady Memorial
Hospital) Leased May 1998
GRAFTON
432 North Main Street Owned
GREENWICH
13 Main Street Owned
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OWNED OR LEASE
OFFICE LOCATION LEASED EXPIRATION
--------------- ------ ----------
HURON
410 Cleveland Road East Leased May 1997
KIPTON
299 State Street Owned
LORAIN
3903 Pearl Avenue Leased November 2000
1619 Kansas Avenue Owned
1139 Tower Boulevard Leased February 1999
301 West Erie Avenue Owned
2808 W. 21st Street Owned
NORTH RIDGEVILLE
38659 Center Ridge Road Owned
34210 Center Ridge Road Owned
NORTH OLMSTED
**4700 Great Northern Boulevard Leased June 2001
OBERLIN
49 South Main Street Owned
*Oberlin College (Wilder Hall) Leased monthly
*291 South Main Street (Station Square) Leased March 1999
15181 State Route 58 (Lorain Co. JVS) Leased December 1999
POWELL
9494 Wedgewood Boulevard Leased September 2016
SHEFFIELD LAKE
**4100 Ivanhoe Drive Leased monthly
SHILOH
23 West Main Street Owned
SOUTH AMHERST
107 N. Lake Street Owned
VERMILION
4530 Liberty Avenue Owned
WELLINGTON
216 N. Main Street Owned
WESTLAKE
801 Crocker Road Owned
WORTHINGTON
2182 West Dublin-Granville Road Leased April 1997
* Remote ATM only
** Full-service branch located on premises of a supermarket.
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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, 1996, and no such legal
proceeding was terminated during the fourth quarter of 1996. 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.
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 1996 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 1996
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 1996 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 bank holding company with total consolidated assets
at year-end 1996 of $599 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 1996 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
and a four-for-three stock splits in 1994 and 1993.
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PERFORMANCE OVERVIEW
Net income for 1996 was $7,132,000, or $2.07 per share, compared to
$6,402,000, or $1.86 per share in 1995, and $5,686,000 or $1.68 per share in
1994. 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 1996 was 13.8 percent,
compared to 14.0 percent in 1995 and 14.3 percent in 1994. ROA measures how
effectively a corporation uses its assets to produce earnings. For 1996, return
on average assets was 1.20 percent. ROA was 1.20 percent in 1995 and 1.15
percent in 1994.
The following table sets forth operating and capital ratios of the
Corporation.
RETURN ON EQUITY AND ASSETS
DECEMBER 31
--------------------------
1996 1995 1994
---- ---- ----
Return on average assets 1.20% 1.20% 1.15%
Return on average equity 13.81 13.98 14.28
Dividend payout ratio 30.47 31.28 30.70
Ratio of average equity to average assets 8.67 8.56 8.06
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 $28,276,000 in 1996,
from $26,199,000 in 1995 and $24,756,000 in 1994. 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 5.24 percent in 1996 compared with 5.31 percent in 1995 and 5.70 percent for
1994.
Average earning assets, as a percentage of total average assets,
increased to 90.5 percent this year compared to 92.7 percent in 1995 and 91.4
percent in 1994.
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)
1996
AVERAGE
DAILY YIELD/
BALANCE INTEREST RATE
------- -------- ----
Assets
Interest-earning assets
Loans (including fees)
Taxable $ 327,872 $30,286 9.24%
Tax-exempt 2,432 189 7.77%
Investment securities
Taxable 134,024 8,830 6.59%
Tax-exempt 68,541 5,382 7.85%
Federal funds sold and
other short-term funds 6,602 388 5.88%
--------- -------
Total interest-earning assets 539,471 45,075 8.35%
Noninterest-earning assets:
Cash and due from banks 27,501
Bank premises and equipment 14,760
Other assets 20,255
Less allowance for loan losses (5,988)
---------
Total assets $ 595,999
=========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing transaction
accounts $ 63,051 $ 1,142 1.81%
Savings 176,077 4,235 2.40%
Time deposits 201,112 10,789 5.36%
Short-term funds 21,549 633 2.94%
--------- -------
Total interest-bearing
liabilities 461,789 16,799 3.64%
-------
Noninterest-bearing liabilities:
Demand deposits 77,597
Other liabilities 4,953
Shareholders' equity 51,660
---------
Total liabilities and
shareholders' equity $ 595,999
=========
Net interest income $28,276
=======
Net yield/rate on interest-earning assets 5.24%
====
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 1996, 1995 and 1994.
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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 assets 491,941 41,994 8.54%
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 assets 5.31%
====
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 1996, 1995 and 1994.
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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 assets 452,013 37,284 8.25%
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 assets 5.70%
====
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 1996, 1995 and 1994.
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 (in thousands of dollars):
SUMMARY OF CHANGES IN NET INTEREST INCOME
1996 VS. 1995 1995 VS. 1994
INCREASE (DECREASE) DUE TO (1) INCREASE (DECREASE) DUE TO (1)
--------------------------------- -----------------------------------
VOLUME RATE NET VOLUME RATE NET
------- ----- ------- ------- ------- -------
Interest income:
Loans, net of unearned
income (2) $ 306 $ 207 $ 513 $ 1,492 $ 1,116 $ 2,608
Securities 2,741 (398) 2,343 1,740 298 2,038
Federal funds sold 221 3 224 17 47 64
------- ----- ------- ------- ------- -------
Total interest-earning
assets 3,268 (188) 3,080 3,249 1,461 4,710
Interest expense:
Interest-bearing transaction
accounts (249) 152 (97) 56 4 60
Savings (852) 145 (707) 470 45 515
Time deposits (179) (218) (397) (2,207) (2,440) (4,647)
Short-term funds 144 54 198 (43) (152) (195)
------- ----- ------- ------- ------- -------
Total interest-bearing
liabilities (1,136) 133 (1,003) (1,724) (2,543) (4,267)
------- ----- ------- ------- ------- -------
Change in net interest income $ 2,132 $ (55) $ 2,077 $ 1,525 $(1,082) $ 443
======= ===== ======= ======= ======= =======
(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
During 1996, $1,775,000 of the allowance for loan losses was returned to
income. The expense related to the total provision for loan and real estate
losses was $180,000 in 1995 and $208,000 in 1994. 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 24.
NONINTEREST INCOME
Total noninterest income, exculsive of securities gains, increased
$1,586,000, or 35.8% in 1996 when compared to 1995. 1995 represented an increase
of $479,000, or 12.1% over 1994. In 1996, service charges on deposit accounts
increased $944,000. This increase was primarily a result of the acquisition of
eleven branches from Bank One, as well as ongoing evvaluation of service
charges. In 1995, the Corporation completed a comprehensive internal and
competitive review of service charges. As a result, service charges on deposits
increased $174,000 that year. In 1994, the increase in service charges of
$235,000 was due primarily to growth in transaction and savings account
deposits, as well as pricing adjustments. Income from trust activities has
increased each year, to $1,424,000 in 1996. Total assets managed by the Trust
Department aggregated $218,600,000, $204,000,000 and $181,300,000 at December
31, 1996, 1995 and 1994, respectively. Gains and losses on the sale of
investment securities also impact comparisons. Security transaction resulted in
gains of $409,000, $284,000 and $454,000 in 1996, 1995 and 1994 respectively.
NONINTEREST EXPENSES
The Corporation and the Bank have continued to focus 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. In 1996, this program was enhanced by the
implementation of neighborhood banking hours. Full-time equivalent staff was 373
at December 31, 1996, compared to 313 and 328 at the same dates in 1995 and
1994. During 1996, approximately 45 full-time equivalent employees were added as
a result of the Bank One branch acquisitions. As a result of increased staff,
plus normal salary growth, total salaries and wages increased approximately
$1,521,000 in 1996, to $9,089,000. For the same period, however, the cost of
employee benefits increased just $144,000, due primarily to increased employment
taxes associated with the increased number of employees. Total salaries and
wages were level in 1995 compared with 1994. 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 both 1996 and 1995, to
$254,000 and $560,000 respectively, 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 $27
million of deposits acquired from Savings and Loan institutions which are
insured by the FDIC in the Savings Association Insurance Fund (SAIF). These
deposits were assessed at $0.23 per $100 per year through September 30, 1996. On
September 30, 1996, the FDIC imposed a one-time assessment of approximately
$0.657 per $100 of SAIF insured deposits, which resulted in a one-time cost of
$190,000 in the third quarter of 1996. Going forward, BIF deposits will be
assessed at $0.013 per $100, and SAIF deposits will be assessed at $0.0648 per
$100.
17
18
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 18.9% in 1996,
compared to 14.8% in 1995 and 18.1% in 1994. 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 $1,663,000 in 1996, compared
with $1,112,000 in 1995 and $1,256,000 in 1994. For the year ended December 31,
1996, 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, 1996 and 1995 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.
EARNING ASSETS
LOANS
Loans comprise the majority of the Corporation's earning assets,
representing 61.2 percent of average earning assets in 1996, and 66.5 percent in
1995. At year-end 1996, total loans were $340,454,000 which was an increase of
$19,945,000 or 6.2% from $320,509,000 at year-end 1995.
The largest categories in the loan portfolio are residential real estate
mortgage loans, which comprised 42.7 percent of total loans at the end of 1996
and commercial and collateral loans which totaled 42.9 percent of the portfolio.
Installment loans comprised 13.4 percent of the portfolio. All other loans were
1.0 percent of the portfolio. In 1995, real estate mortgages were 43.3 percent
of the loan portfolio, commercial and collateral loans were 43.0 percent,
installment loans were 12.8 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, as well as other personal purposes. The real
estate portfolio is primarily residential first mortgages that can qualify for
sale into the secondary market. At December 31, 1996, and 1995, there were
approximately $20,172,000 and $17,942,000, respectively, in home equity loans.
During 1996, approximately $8,220,000 of residential real estate mortgage loans
were sold in the secondary market, which provided a source of fee income and
additional funds for new lending.
18
19
Loans by major category at the end of the last five years were as
follows (in thousands of dollars):
LOAN PORTFOLIO
DECEMBER 31
----------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
Real estate $145,467 $138,664 $152,695 $132,589 $ 99,761
Installment 45,600 41,155 38,364 31,229 34,145
Commercial and collateral 146,167 137,702 136,187 122,699 109,169
All other 3,220 2,988 2,887 2,932 3,330
-------- -------- -------- -------- --------
Total (net of unearned income) $340,454 $320,509 $330,133 $289,449 $246,405
======== ======== ======== ======== ========
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, 1996, reported at maturity for fixed rate loans, repricing
interval 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 $ 29,217 $35,913 $80,337 $145,467
Installment 3,239 33,173 9,188 45,600
Commercial and collateral 134,490 8,692 2,985 146,167
All other 0 3,220 0 3,220
-------- ------- ------- --------
$166,946 $80,998 $92,510 $340,454
======== ======= ======= ========
Of the loans due or repricing after one year, approximately $33,945,000
have variable interest rates, and $136,343,000 have fixed interest rates.
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
areas, we may purchase certain unrated bank-qualified bonds of local schools,
townships and municipalities, provided they are a sound credit risk.
The investment portfolio represented 37.5 percent of average earning
assets in 1996 and 32.9 percent in 1995. The tax-equivalent yield on the entire
portfolio was 7.01, 7.32 and 7.18 percent in 1996, 1995 and 1994, 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.
As discussed in Note C of the Registrant's 1996 Annual Report to
Shareholders, which is incorporated herein by reference, in accordance with the
Financial Accounting Standards Board's special report issued on November 15,
1995, the Corporation reclassified approximately $48,706,000 of securities from
the held-to-maturity to the available-for-sale category in a single transaction
in December 1995.
19
20
The portfolio accounting designations are 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.
Summary information with respect to the securities portfolio at December
31 follows (in thousands of dollars):
1996 1995 1994
Held to Available 1996 Carrying Carrying
Maturity for Sale Yield Value Value
-------- -------- ----- ----- -----
U.S. Treasury and other
U.S. Government agencies
Under 1 year $ 0 $ 37,932 7.00% $ 18,937 $14,193
1 to 5 years 0 14,770 6.73% 11,705 18,539
5 to 10 years 0 1,146 6.12% 1,009 0
Over 10 years 0 2,986 7.87%
-------- -------- -------- --------
Total 0 56,834 6.96% 31,651 32,732
States of the U.S. and political
subdivisions
Under 1 year 0 30,943 6.49% 2,927 3,803
1 to 5 years 0 21,962 6.47% 34,116 26,701
5 to 10 years 0 7,190 7.14% 41,699 42,469
Over 10 years 0 6,750 7.48% 1,133 823
-------- -------- -------- --------
Total 0 66,845 6.64% 79,875 73,796
Collateralized mortgage-backed
securities
Under 1 year 7,171 20 5.79% 10,883 9,225
1 to 5 years 17,966 15,413 5.24% 16,857 10,980
5 to 10 years 1,188 19,773 5.34% 16,826 19,897
Over 10 years 0 889 5.72% 1,010 1,918
-------- -------- -------- --------
Total 26,325 36,095 5.34% 45,576 42,020
Other
Under 1 year 0 2,687 6.21% 0 1,260
Total $ 26,325 $162,461 $157,102 $149,808
======== ======== ======== ========
The yield at December 31, 1996, 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 1996, 1995 and 1994, these funds
represented approximately 1.0 percent, 0.4 percent and 0.5 percent,
respectively, of average earnings assets.
20
21
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 demand deposits, savings and other time 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, increased by 5.8 percent in 1996 to 93.6
percent of average deposits as compared to 87.8 percent in 1995 and 95.5 percent
in 1994.
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
--------------------------------------
1996 1995 1994
-------- -------- --------
AMOUNT
Noninterest-bearing demand deposits $ 77,597 $ 63,613 $ 59,674
Interest bearing transaction accounts 63,051 51,056 53,760
Savings deposits 176,077 153,721 174,097
Time deposits 201,112 193,854 140,050
-------- -------- --------
$517,837 $462,244 $427,581
======== ======== ========
AVERAGE RATE FOR THE YEAR
Interest bearing transaction accounts 1.81% 2.05% 2.05%
Savings deposits 2.40% 2.30% 2.32%
Time deposits 5.36% 5.36% 4.10%
The maturity distribution of certificates of deposit of $100,000 or more
at December 31, 1996, was (in thousands of dollars):
CERTIFICATES OF DEPOSIT OVER $100,000
Three months or less $14,283
Over three through six months 7,530
Over six through twelve months 4,037
Over twelve months 1,439
-------
$27,289
=======
There were seven other time deposits of $100,000 or more at December 31,
1996, 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, treasury tax and loan. During 1996, these funds represented 4.0 percent
of average earning assets, compared to 4.7 percent in 1995 and 4.5 percent in
1994.
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
-----------------------------------
1996 1995 1994
---- ---- ----
Balance at December 31 $25,521 $22,454 $21,357
Maximum outstanding at any month-end 27,527 30,013 33,049
Average amount outstanding 21,549 23,144 22,350
Weighted average interest rate 2.94% 3.59% 2.85%
Weighted rate at December 31 2.72% 2.80% 2.18%
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, 1996, were $1,792,000, compared to $965,000 at
December 31, 1995 and $458,000 at December 31, 1994. Total nonperforming loans
as a percentage of total loans were 0.53 percent at December 31, 1996, compared
to 0.30 percent at December 31, 1995 and 0.14 percent at December 31, 1994.
The following table summarizes nonaccrual and past due loans (in
thousands of dollars).
DECEMBER 31
---------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Accruing loans past due
90 days or more as to principal or interest:
Loans secured by real estate $ 0 $ 35 $ 3 $ 58 $ 0
Loans to individuals 85 71 48 57 108
Commercial and industrial loans 0 0 0 26 0
All other 0 0 0 0 0
------ ---- ------ ------ ------
$ 85 $106 $ 51 $ 141 $ 108
====== ==== ====== ====== ======
Nonaccrual loans:
Loans secured by real estate $1,529 $783 $ 358 $ 518 $ 866
Commercial and collateral 178 76 0 77 761
All other 0 0 0 723 805
------ ---- ------ ------ ------
$1,707 $859 $ 358 $1,318 $2,432
====== ==== ====== ====== ======
As of December 31, 1996, there were no past-due restructured loans.
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, 1996
-----------------
Interest income that would have been recorded under original terms 91
Interest income recorded during the period 21
----
Net reduction in interest income $70
====
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 1996 Annual Report to
Shareholders, the Corporation adopted Statement of Financial Accounting
Standards (SFAS) No. 114 and 118 effective January 1, 1995. The adoption did
not have a material impact on the allowance for loan losses. As of December 31,
1996 and 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.
During the fourth quarter of 1996, the Allowance for Loan Losses was
reduced by $1,775,000. This reversal of the provision was deemed appropriate in
light of management's extensive review of the following factors: historical loss
experience, including a three year pattern of net recoveries, current watch list
loans, estimated future losses, geographic diversification and industry mix of
the portfolio and current economic conditions.
23
24
The Allowance for Loan Losses had been supplemented by $2,000,000 for
1990 as a result of a regularly-scheduled regulatory exam. After the additional
provision, the alloance stood at $4,644,000, or 1.94% of outstanding loans.
Since that time, the Bank's charge-off and recovery history would suggest that
the additional provision was not necessary.
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, 1996, there were loans with principal balances
of approximately $8.0 million on the watch list, none of which were classified
as "doubtful" or "loss."
The following table contains information relative to loan loss
experience for each of the five years in the period ended December 31, 1996 (in
thousands of dollars).
1996 1995 1994 1993 1992
------- ------- ------- ------ ------
Allowance for loan losses at beginning
of year $ 5,850 $ 5,617 $ 5,226 $5,215 $4,099
Loans charged off:
Real estate 21 2 31 198 17
Installment 446 510 297 471 866
Credit card 82 85 61 91 128
Other 4 4 5 2 1
Commercial and collateral 163 27 38 1,384 1,838
------- ------- ------- ------ ------
716 628 432 2,146 2,850
Recoveries on loans charged off:
Real estate 5 3 33 51 2
Installment 311 318 246 330 555
Credit card 22 16 32 16 12
Other 1 2 1 12
Commercial and collateral 395 342 303 928 597
------- ------- ------- ------ ------
733 681 615 1,337 1,166
------- ------- ------- ------ ------
Net (recoveries) charge-offs (17) (53) (183) 809 1,684
Provision (credit) for loan losses (1,775) 180 208 820 2,800
------- ------- ------- ------ ------
Allowance for loan losses at end of year $ 4,092 $ 5,850 $ 5,617 $5,226 $5,215
======= ======= ======= ====== ======
Ratio of net (recoveries) charge-offs
during the year to average loans
outstanding during the year (.01)% (.02)% (.06)% .31% .72%
======= ======= ======= ====== ======
Ratio of allowance for loan losses to
total loans at December 31 1.20% 1.82% 1.70% 1.81% 2.12%
======= ======= ======= ====== ======
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
------------------------------------------------------ --------------------------------------------
1996 1995 1994 1993 1992 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Real estate $ 241 $ 337 $ 400 $ 406 $ 205 43% 43% 46% 46% 41%
Installment 1,287 1,480 1,204 732 511 13% 13% 12% 11% 14%
Commercial and
collateral 2,152 2,741 2,749 2,270 2,761 43% 43% 41% 42% 44%
All other 375 327 190 124 180 1% 1% 1% 1% 1%
Unallocated 37 965 1,074 1,694 1,558 n/a n/a n/a n/a n/a
------ ------ ------ ------ ------ --- --- --- --- ---
$4,092 $5,850 $5,617 $5,226 $5,215 100% 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 19
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,
1996, was $54.6 million, or $15.82 per share, compared with $50.7 million or
$14.70 per share at December 31, 1995 and $41.0 million or $12.02 per share at
December 31, 1994. At December 31, 1996, the Corporation's Tier 1 leverage ratio
was 8.31 percent. The Corporation's risk-based capital ratios based on Federal
Reserve Board guidelines were 13.74 percent for Tier 1, or "core" capital, and
14.88 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 is 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 operations.
For additional discussion, see "Examination and Supervision," on page
7 of this report, and Note Q to the Corporation's Annual Report to Shareholders.
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 1996 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 25.5 to 31.3 percent of earnings over the last
five years. Dividends declared in 1996 were $0.63 per share, compared to the
$0.58 of dividends declared in 1995. Dividends for 1994 were $0.51 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 1996 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 March 14,
1997, 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 1996
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, 1996 and 1995
Consolidated Statements of Income for the Years Ended December
31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity for the Years
Ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
Report of Independent Auditors
Quarterly Financial Information
Consolidated Financial Highlights
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 N/A
of Regulations of CoBancorp Inc. (filed as Exhibit 3 to the
Form 10-Q of the Registrant for the quarter ended June 30,
1995, and incorporated herein by reference)
10a Executive Supplemental Income Agreement (filed as Exhibit 10 N/A
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 to the N/A
Form 10-K of the Registrant for the year ended December
31, 1986, incorporated herein by reference)
10d Employment Agreement Among LCB Bancorp, Inc., Lorain County N/A
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)
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REG. S-K
EXHIBIT PAGE
NUMBER EXHIBIT HEREOF
------ ------- ------
10k LCB Bancorp, Inc. 1992 Long-Term Incentive Plan (filed as N/A
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, Among CoBancorp N/A
Inc., PREMIERBank & 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)
10o Agreement for Information Technology Services Between
Electronic Data Systems Corporation and CoBancorp, Inc., dated
February 15, 1995 with Addenda (filed as Exhibit 10o to the
Form 10-K of the Registrant for the year ended December 31,
1995, incorporated herein by reference)
10p Data Processing Services Agreement Between M & I Data Services
and PremierBank and Trust, dated July 3, 1996, with Addenda.
13 1996 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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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 28, 1997 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 28, 1997
Executive Officer, Director
Timothy W. Esson Executive Vice President March 28, 1997
and Treasurer, Director
Theodore S. Altfeld Director March 28, 1997
Robert S. Cook Director March 28, 1997
Michael B. Duffin Director March 28, 1997
Thomas E. Haywood Director March 28, 1997
Larry D. Jones Director March 28, 1997
Thomas R. Miklich Director March 28, 1997
Richard J. Stewart Director March 28, 1997
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