<PAGE> 1
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.
2
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<TABLE>
COBANCORP INC.
FORM 10-K REPORT
TABLE OF CONTENTS
<CAPTION>
ITEM PAGE
---- ----
<S> <C> <C>
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
</TABLE>
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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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<TABLE>
EXECUTIVE OFFICERS OF THE REGISTRANT
(AS OF MARCH 1, 1996)
<CAPTION>
Executive
Officer
Name Age Position Since
---- --- -------- -----
<S> <C> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
CAPTION PAGE
------- ----
<S> <C>
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
</TABLE>
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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.
<TABLE>
<CAPTION>
OWNED OR MORTGAGE LEASE
OFFICE LOCATION LEASED INDEBTEDNESS EXPIRATION
--------------- ------ ------------ ----------
<S> <C> <C> <C>
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
</TABLE>
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<TABLE>
<CAPTION>
OWNED OR MORTGAGE LEASE
OFFICE LOCATION LEASED INDEBTEDNESS EXPIRATION
--------------- ------ ------------ ----------
<S> <C> <C> <C>
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
</TABLE>
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.
<TABLE>
RETURN ON EQUITY AND ASSETS
<CAPTION>
DECEMBER 31
-----------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
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
</TABLE>
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)
<TABLE>
<CAPTION>
1995
AVERAGE
DAILY YIELD/
BALANCE INTEREST RATE
------- -------- ----
<S> <C> <C> <C>
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 =====
</TABLE>
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.
13
<PAGE> 14
AVERAGE CONSOLIDATED BALANCE SHEETS, NET INTEREST INCOME AND RATES
FULLY TAXABLE EQUIVALENT (IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1994
AVERAGE
DAILY YIELD/
BALANCE INTEREST RATE
------- -------- ----
<S> <C> <C> <C>
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 =====
</TABLE>
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
<PAGE> 15
AVERAGE CONSOLIDATED BALANCE SHEETS, NET INTEREST INCOME AND RATES
FULLY TAXABLE EQUIVALENT (IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1993
AVERAGE
DAILY YIELD/
BALANCE INTEREST RATE
------- -------- ----
<S> <C> <C> <C>
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 =====
</TABLE>
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
<PAGE> 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:
<TABLE>
SUMMARY OF CHANGES IN NET INTEREST INCOME
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C>
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.
</TABLE>
16
<PAGE> 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
<PAGE> 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):
<TABLE>
LOAN PORTFOLIO
<CAPTION>
DECEMBER 31
-----------
1995 1994 1993 1992 1991
--------- --------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C>
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
========= ========= ========= ========== ===========
</TABLE>
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
<TABLE>
<CAPTION>
WITHIN 1-5 AFTER
1 YEAR YEARS 5 YEARS TOTAL
------ ----- ------- -----
<S> <C> <C> <C> <C>
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
========= ======== ========= =========
</TABLE>
Of the loans due after one year, approximately $38,474,000 have variable
interest rates, and $123,841,000 have fixed interest rates.
18
<PAGE> 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
<PAGE> 20
Summary information with respect to the securities portfolio at December 31
follows (in thousands of dollars):
<TABLE>
<CAPTION>
1995 1994 1993
Held to Available 1995 Carrying Carrying
Maturity for Sale Yield Value Value
----------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
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
=========== ============ ============ ============
</TABLE>
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
<PAGE> 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
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------
1995 1994 1993
---------- --------- ---------
<S> <C> <C> <C>
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%
</TABLE>
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
<TABLE>
<S> <C>
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
=======
</TABLE>
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
<PAGE> 22
The following table presents information related to short-term funds (in
thousands of dollars).
<TABLE>
<CAPTION>
SHORT-TERM FUNDS
DECEMBER 31
-----------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
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%
</TABLE>
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).
<TABLE>
<CAPTION>
DECEMBER 31
-----------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
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
=== === ===== ===== =====
</TABLE>
22
<PAGE> 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):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
-----------------
<S> <C>
Interest income that would have been recorded under original terms $ 77
Interest income recorded during the period 51
----
Net reduction in interest income $ 26
===
</TABLE>
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
<PAGE> 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).
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
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%
====== ====== ===== ====== ======
</TABLE>
Additionally, $100,000 was provided in 1993 for possible losses on other real
estate owned.
24
<PAGE> 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).
<TABLE>
<CAPTION>
PERCENT OF LOANS IN EACH
AMOUNT CATEGORY TO TOTAL LOANS
------------------------------------------ ------------------------------------------
1995 1994 1993 1992 1991 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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%
===== ===== ===== ===== ===== === === === === ===
</TABLE>
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:
<TABLE>
<CAPTION>
CAPTION PAGE
<S> <C>
Loan Maturities and Sensitivity to Changes in Interest Rates 18
Investment Securities Yield by Maturity Date 20
Certificates of Deposit Over $100,000 21
</TABLE>
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.
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<PAGE> 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.
26
<PAGE> 27
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
<TABLE>
<CAPTION>
REG. S-K
EXHIBIT PAGE
NUMBER EXHIBIT HEREOF
------ ------- ------
<S> <C> <C>
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)
</TABLE>
27
<PAGE> 28
<TABLE>
<CAPTION>
REG. S-K
EXHIBIT PAGE
NUMBER EXHIBIT HEREOF
------ ------- ------
<S> <C> <C>
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
</TABLE>
(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.
28
<PAGE> 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.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY WITH REGISTRANT DATE
--------- ------------------------ ----
<S> <C> <C>
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
</TABLE>
29
<PAGE> 1
EXHIBIT 10o
AGREEMENT FOR INFORMATION TECHNOLOGY SERVICES
THIS AGREEMENT ("Agreement") is between ELECTRONIC DATA SYSTEMS
CORPORATION ("EDS"), a Texas corporation with an address at 5400 Legacy Drive,
Plano, Texas 75024, and COBANCORP, INC. ("Customer"), an Ohio Corporation with
an address at 124 Middle Avenue, Elyria, Ohio 44036.
WHEREAS, Customer desires to purchase certain information technology
services from EDS, a provider of such services.
NOW, THEREFORE, Customer and EDS hereby agree as follows:
ARTICLE I - DEFINITIONS
1.1 DEFINITIONS. In this Agreement:
(a) "Additional Services" are the Services described in Section
3.1(d).
(b) "Basic Services" are the Services listed in Schedule A.
(c) "Business Day" is each weekday, Monday through Friday, which
is not a holiday of Customer.
(d) "Conversion Services" are the Services described in Section
3.1(c).
(e) "CPI" is the Consumer Price Index for All Urban Consumers,
U.S. City Average, for All Items (1982-1984 = 100) as
published by the Bureau of Labor Statistics of the U.S.
Department of Labor. If the Bureau of Labor Statistics stops
publishing the CPI, the parties will substitute another
comparable measure published by a mutually agreeable source.
However, if such change is merely to redefine the base period
for the CPI from 1982-1984 to some other period, the parties
will continue to use the CPI but will, if necessary, convert
the two CPI's being compared to the same basis by multiplying
one of them by the appropriate conversion factor.
(f) "Data Center" is the space at one or more locations where EDS
performs Services, excluding Customer locations.
(g) "EDS Systems" are all Systems, except for Systems provided by
Customer, used by EDS to provide Services, including without
limitation any improvements, modifications or enhancements made
by EDS to any System and provided to Customer under this
Agreement.
(h) "Effective Date" is the date that this Agreement is executed
by EDS pursuant to Section 9.10.
(i) "Equipment" is all telecommunications lines, modems and other
equipment, including without limitation terminals, control
units, ports, logical units, and all related data transmission
services required by EDS for Customer to access the EDS
Systems, transmit data to EDS and receive reports and other
output from EDS.
(j) "Initial Term" is defined in Section 2.1.
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<PAGE> 2
(k) "Operational Date" is the later of (i) the Effective Date, or
(ii) the first day of the calendar month in which any
Conversion Services are completed and Customer has the
capability to input transactions or data for processing
by EDS.
(l) "Optional Services" are the Services listed in Schedule B.
(m) "Renewal Terms" is defined in Section 2.1.
(n) "Service" or "Services" are all of the services to be
provided by EDS under this Agreement, which include the Basic
Services, Optional Services, Conversion Services and
Additional Services.
(o) "System" or "Systems" are (i) computer programs, including
without limitation software, firmware, application programs,
operating systems, files and utilities; (ii) supporting
documentation for such computer programs, including without
limitation input and output formats, program listings,
narrative descriptions, operating instructions and procedures,
user and training documentation, special forms, and source code;
and (iii) the tangible media upon which such programs are
recorded, including without limitation chips, tapes, disks and
diskettes.
ARTICLE II - TERM
2.1 TERM. This Agreement will begin on the Effective Date and, unless
terminated earlier under Section 7.2, 7.3, 7.4, 7.5 or 9.5, will
continue for a period of seven (7) years from the Operational Date (the
"Initial Term"). Thereafter, this Agreement will automatically renew
for successive terms of seven (7) years each (the "Renewal Terms")
unless either party gives the other party written notice at least six
(6) months prior to the expiration date of the Initial Term or the
Renewal Term then in effect that the Agreement will not be renewed
beyond such term.
ARTICLE III. EDS RESPONSIBILITIES
3.1 SERVICES PROVIDED. EDS or its subcontractors will provide Customer with
the following Services:
(a) BASIC SERVICES. Customer's requirements for Basic Services.
(b) OPTIONAL SERVICES. The Optional Services that Customer
requests and EDS agrees to provide.
(c) CONVERSION SERVICES. On a mutually agreeable schedule EDS will
provide those services and instructions ("Conversion Services")
reasonably required for Customer to convert to and use the EDS
Systems. Customer will cooperate in the conversion effort and
timely provide whatever information, data, clerical and office
support, management decisions, approvals and signoffs that EDS
reasonably requires. According to a plan to be developed by
Customer and EDS, EDS will train a mutually designated group of
Customer's personnel in the proper use of the EDS Systems to
enable such personnel to train Customer's user personnel in the
use of the EDS Systems. Customer will cooperate with EDS in
scheduling training in conjunction with Customer's conversion
to the EDS Systems.
2
<PAGE> 3
(d) ADDITIONAL SERVICES. If Customer requests EDS to perform any
Service which is not a Basic Service, an Optional Service or a
Conversion Service, then EDS may provide such service as
an "Additional Service".
3.2 GENERAL TERMS RELATING TO SERVICES. EDS will:
(a) Beginning on the Operational Date, operate the EDS Systems at
the Data Center, and accept data and other input from Customer.
EDS will make daily, monthly and other reports and output,
including specially requested reports, available to Customer at
the Data Center for delivery or transmit them to Customer,
subject to Customer's timely delivery or transmission of data
and other input to the Data Center for processing. EDS will
provide the Services in accordance with the schedule provided
to Customer by EDS upon commencement of the Services, which may
be updated by EDS from time to time. EDS will not be
responsible for the loss of any input or output during transit.
(b) Provide all Equipment at Customer's expense, including related
shipping, installation and maintenance charges, and advise
Customer on the compatibility of its Equipment with the EDS
Systems. Customer may elect, with EDS' approval, to provide
such Equipment at Customer's expense, subject to charges for
Additional Services required for EDS Systems access or
configuration.
(c) Provide for Customer's use one copy of EDS' standard user
documentation and one copy of any revisions describing the
preparation of input for and use of output from the EDS
Systems. Such documentation will address the reports provided
under this Agreement. Upon Customer's request, EDS will provide
additional copies of such documentation at EDS' then standard
charges.
(d) Correct any errors in customer files that result in errors in
reports or other output where such errors (A) are due solely to
either malfunctions of EDS' equipment or the EDS Systems or
errors of EDS' operators, programmers or other personnel, and
(B) are called to EDS' attention within the time frames
specified in Section 5.3. EDS will, to the extent reasonably
practicable, correct any other errors as an Additional
Service.
(e) Provide standard EDS forms for use at the Data Center.
(f) Establish, modify or substitute from time to time any Equipment,
processing priorities, programs or procedures used in the
operation of the EDS Systems or the provision of the Services
that EDS reasonably deems necessary, and notify Customer of
any such changes that will affect Customer's operations.
(g) With the cooperation of Customer, develop, maintain and, as
necessary in the event of a disaster, execute a disaster
recovery plan for the Data Center. EDS will provide Customer
and its auditors and inspectors with access to a summary of
such disaster recovery plan at all reasonable times.
3.3 AUDITS. EDS will provide auditors and inspectors that Customer
designates in writing with reasonable access to the Data Center for the
limited purpose of performing audits or inspections of Customer's
business. EDS will provide to such auditors and inspectors reasonable
assistance, and Customer will compensate EDS for any Additional
Services provided in connection with the audit or inspection. EDS will
not be required to provide access to data of other EDS customers.
3
<PAGE> 4
3.4 REGULATORV COMPLIANCE. EDS will endeavor to maintain the EDS Systems so
that they will not be disapproved by any federal or state regulatory
authority with jurisdiction over Customer's business. If Customer
believes that any modifications to the EDS Systems are required under
any laws, rules or regulations, Customer will promptly so inform EDS.
EDS will perform any modifications to the EDS Systems or recommend
changes to operating procedures of Customer that EDS determines are
necessary or desirable at no additional charge to Customer to meet
regulatory requirements. New or enhanced EDS System features,
functions, reports or other Services that may result from such
modifications or recommendations may be provided as an Additional
Service. Notwithstanding the foregoing, Customer acknowledges that the
EDS Systems may, from time to time, consist in part of System(s)
licensed by EDS from third-party vendor(s) and, therefore, EDS shall
have no duty or responsibility to modify any such third-party System
under this Section 3.4 except to the extent that the vendor thereof has
such a duty or responsibility to modify such System pursuant to the
applicable license agreement between EDS and such vendor.
3.5 FINANCIAL STATEMENTS AND EDP AUDIT. Upon request, EDS will provide at
no charge one copy of EDS' most recent audited financial statements to
Customer. Upon request, EDS will also provide to Customer one copy of
EDS' most recent independent Data Center EDP audit at EDS' then
standard charge for such copy.
ARTICLE IV - PAYMENTS TO EDS
4.1 SERVICE CHARGES. Customer will pay EDS for the Services as follows:
(a) For Basic Services, the monthly charges listed in Section 1 of
Schedule C.
(b) For Optional Services, EDS' standard charges for such Services
at the time they are provided, or, if EDS then has no standard
charges for such Services, upon whatever other basis
that the parties agree.
(c) For Conversion Services, the applicable conversion charge
listed in Section 2 of Schedule C.
(d) For Additional Services, EDS' then standard charges for such
Services, or, if EDS then has no standard charges for such
Services, upon whatever other basis that the parties
agree.
4.2 ADDITIONAL CHARGES. Customer will also pay EDS the following, if
applicable:
(a) All costs incurred by EDS (i) in mailing reports or other
output to Customer, its customers or third parties, and (ii) in
transporting, shipping or delivering reports, output or input
between the Data Center and Customer's locations.
(b) All actual, out-of-pocket costs and expenses, including, without
limitation, travel and travel-related expenses, which are
incurred by EDS in providing Services when incurred at
Customer's request.
(c) Any other charges expressly provided in this Agreement.
(d) All taxes, however designated or levied, based upon any
charges under this Agreement, or upon this Agreement or the
Systems, Services or materials provided hereunder, or their
use, including without limitation state and local
privilege or excise taxes based on gross revenue, sales and use
4
<PAGE> 5
taxes, and any taxes or amounts in lieu thereof paid or payable
by EDS in respect of the foregoing, exclusive, however, of
franchise taxes and taxes based on the net income of EDS.
4.3 TIME OF PAYMENT. All charges under this Agreement will be due and
payable within ten (10) days of invoice date. Any charges not paid
within thirty (30) days of invoice date will bear interest until paid
at a rate equal to the lesser of one-and-one-half percent (1.5%) per
month or the maximum interest rate allowed by applicable law. Customer
authorizes EDS to collect charges for Services through applicable
clearing house procedures.
4.4 COST OF LIVING ADJUSTMENT. Except as provided below, and no more than
once in any twelve (12) month period, EDS may, at its option and by
giving Customer written notice, increase the charges for Basic Services
by a percentage not to exceed the percentage by which the CPI as of
that time is higher than the CPI as of (j) for the first adjustment,
the earlier of the Effective Date or the date of the last adjustment
previously made pursuant to any immediately prior agreement, if any,
under which EDS provided the same or similar Services to Customer, and
(ii) thereafter, the previous time that EDS adjusted its charges to
Customer pursuant to this Section. These increased charges will remain
in effect until EDS adjusts them again pursuant to this Section. If,
however, before the expiration of any twelve (12) month period after
any such adjustment, the CPI has increased by more than eight percent
(8%) from the CPI as of the time of the previous adjustment, then EDS
may increase the charges for such Services by a percentage not to
exceed the percentage by which the CPI as of such time is greater than
the CPI as of the time of such previous adjustment.
ARTICLE V - CUSTOMER RESPONSIBILITIES
5.1 MAINTENANCE OF EQUIPMENT. Customer will maintain all Equipment owned or
leased by Customer in good working order in accordance with
manufacturer's specifications.
5.2 PROVISION OF CUSTOMIZED FORMS. Unless otherwise agreed in writing,
Customer will provide or pay for all customized forms required by
Customer. These forms will conform to EDS' reasonable specifications.
Customer will also provide all forms produced or printed at Customer's
premises and required for the performance of Services, or will pay
mutually agreed charges to EDS for such forms if provided by EDS
at Customer's request.
5.3 CORRECTION OF REPORTS AND OUTPUT. Customer will balance reports to
verify master file information and will inspect and review all reports
and other output (whether printed, microfiched or electronically
transmitted) created from data provided by Customer to EDS. Customer
will reject all incorrect reports or output within two (2) Business
Days after receipt of daily reports or output, within five (5) Business
Days after receipt of annual, quarterly or monthly reports or output,
and within three (3) Business Days after receipt of all other
reports or output.
5.4 PROVISION OF DATA. Customer will he responsible for the quality and
accuracy of all data and other input provided to EDS. EDS may, at its
option, return to Customer for correction before processing any data
submitted by Customer which is incorrect, illegible or not in proper
form. If Customer does not provide its data to EDS in accordance with
EDS' specified format and schedule, EDS will use reasonable efforts to
reschedule and process the data as promptly as possible. Related
expenses incurred by EDS will be charged to Customer.
5.5 USE OF SYSTEM, PROCEDURES, ETC. Customer will comply with all operating
instructions for the EDS Systems which are issued by EDS from time to
time. Except as otherwise provided in this Agreement, Customer will be
responsible for the supervision, management and control of its use
of the EDS
5
<PAGE> 6
Systems, including without limitation (i) implementing sufficient
procedures to satisfy its requirements for the security and accuracy of
the data and other input Customer provides, (ii) implementing
reasonable procedures to verify reports and other output from EDS
within the time frames specified in Section 5.3, and (iii) specifying
the methods of accrual calculation to be used by EDS in providing
the Services from the options available in the EDS Systems.
ARTICLE VI - SYSTEMS, DATA AND CONFIDENTIALITY
6.1 EDS SYSTEMS. All EDS Systems are and will remain the exclusive property
of EDS or licensors of such EDS Systems, as applicable, and, except as
expressly provided in this Agreement, Customer shall have no ownership
interest or other rights in any EDS System. Customer acknowledges that
the EDS Systems include EDS proprietary information and agrees to keep
the EDS Systems confidential at all times. Upon the expiration or
termination of this Agreement, Customer will return all copies of all
items relating to the EDS Systems which are in the possession of
Customer and certify to EDS in writing that Customer has retained no
material relating to the EDS Systems.
6.2 CUSTOMER'S INFORMATION. Information relating to Customer or its
customers contained in Customer's data files is the exclusive property
of Customer and EDS will only be the custodian of that information.
EDS agrees to hold in confidence all proprietary information of
Customer and its customers provided to EDS. However, upon the request
of any appropriate federal or state regulatory authority with
jurisdiction over Customer's business and after EDS has, when
reasonably possible, notified Customer of such request, EDS will allow
such authority access to all records and other information of Customer
and its customers in the possession of EDS and provide as an Additional
Service any related assistance that is required. Promptly after the
termination or expiration of this Agreement and the payment to EDS of
all sums due and owing, including without limitation any amounts due
under Sections 7.6 or 7.7, EDS will, at Customer's request and expense,
return to Customer all of Customer's information, data and files in
EDS' then standard machine-readable format and media.
6.3 CONFIDENTIALITY. Except as otherwise provided in this Agreement, EDS
and Customer each agree that all information communicated to one by the
other or the other's affiliates, whether before or after the Effective
Date, will be received in strict confidence, will he used only for
purposes of this Agreement, and except for the requirements of Section
6.2 will not be disclosed by the recipient party, its agents,
subcontractors or employees without the prior written consent of the
other party. Each party agrees to take all reasonable precautions to
prevent the disclosure to outside parties of such information,
including, without limitation, the terms of this Agreement, except as
required by legal, accounting or regulatory requirements beyond the
reasonable control of the recipient party. The provisions of this
Section will survive the expiration or termination of this Agreement
for any reason.
6.4 SAFEGUARDING DATA INTEGRITY. EDS will maintain internal computer data
integrity safeguards (such as access codes and passwords) to protect
against the accidental or unauthorized deletion or alteration of
Customer's data in the possession of EDS. EDS will provide additional
internal computer data integrity safeguards that Customer reasonably
requests as an Additional Service. EDS will also employ and
maintain controlled access Systems in the Data Center.
6.5 CONTINGENCY PLANNING. The parties' responsibilities with respect to
contingency planning will be as follows:
(a) EDS will develop, maintain and, as necessary in the event of a
disaster, execute a disaster recovery plan (the "EDS Plan") for
the Data Center and will provide to Customer and its auditors
and inspectors such access to the EDS Plan as Customer may
reasonably request from
6
<PAGE> 7
time to time. EDS will not be required to provide access to
information of other EDS customers.
(b) Customer will develop, maintain and, as necessary in the event of a
disaster, execute a business resumption plan (the "Customer Plan")
for all Customer locations and the telecommunications links between the
customer locations and the Data Center and will provide to EDS such
access to the Customer Plan as EDS may reasonably request from
time to time.
(c) EDS will provide to Customer such information as may be reasonably
required for Customer to assure that the Customer Plan is compatible
with the EDS Plan.
(d) Each party will be responsible for the training of its own personnel as
required in connection with all applicable contingency planning
activities.
(e) Each party's contingency planning activities will comply, as
appropriate, with such of the following regulatory policies as may be
applicable to Customer's business, as the same may be amended or
replaced from time to time:
Federal Deposit Insurance Corporation Bank Letter BL-22-88
dated July 14, 1989
Federal Reserve System Supervision and Regulation Number
SR-89-16 dated August 1, 1989
Office of the Comptroller of the Currency Banking Circular
Number BC177 dated July 12, 1989
Office of Thrift Supervision Bulletin Number TB30 dated July
19, 1989
If compliance with any amendments or replacements of the policies
listed above would significantly increase EDS' cost of providing
Services, EDS will be entitled to increase the charges under this
Agreement by an amount that reflects a pro rata al]ocation of EDS'
increased cost among the applicable EDS customers.
ARTICLE VII- TERMINATION AND RELATED MATTERS
7.1 ARBITRATION. Any dispute, controversy or claim arising out of,
connected with, or relating to this Agreement, or the breach,
termination, validity, or enforceability of any provision of this
Agreement, will be resolved by final and binding arbitration by a panel
of three (3) arbitrators in accordance with and subject to the
Commercial Arbitration Rules of the American Arbitration Association
("AAA") then in effect. Following notice of a party's election to
require arbitration, each party will within thirty (30) days select one
arbitrator, and those two arbitrators will within thirty (30) days
thereafter select a third arbitrator. If the two arbitrators are unable
to agree on a third arbitrator within thirty (30) days, the AAA will
within thirty (30) days thereafter select such third arbitrator.
Discovery as permitted by the Federal Rules of Civil Procedure then in
effect will be allowed in connection with arbitration to the extent
consistent with the purpose of the arbitration and as allowed by the
arbitrators. Judgment upon the award rendered in any arbitration may be
entered in any court of competent jurisdiction, or application may be
made to such court for a judicial acceptance of the award and an
enforcement, as the law of the state having jurisdiction may require or
allow. During any arbitration proceed ings, EDS will continue to
provide Services, and Customer will continue to make payments to EDS in
accordance with this Agreement. The fact that arbitration is or may be
allowed will not impair the exercise of any termination rights under
this Agreement.
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7.2 TERMINATION DUE TO ACQUISITION. If fifty percent (50%) or more of the
stock or assets of Customer are acquired by another person or entity,
whether by merger, reorganization, sale, transfer or other similar
transaction, EDS and Customer will negotiate in good faith the terms
and conditions upon which this Agreement may be modified to accommodate
such transaction. If the parties are unable to agree upon such
modification, either party upon written notice to the other may
terminate this Agreement upon the consummation of such acquisition or
on a mutually agreeable date thereafter.
7.3 TERMINATION FOR NON-PAYMENT. If Customer defaults in the payment of any
charges or other amounts due under this Agreement and fails to cure
such default within ten (10) days after receiving written notice
specifying such default, then EDS may, by giving Customer at least
thirty (30) days prior written notice thereof, terminate this Agreement
as of a date specified in such notice.
7.4 TERMINATION FOR CAUSE. If either party materially defaults in its
performance under this Agreement, except for non-payment of amounts due
to EDS, and fails to either substantially cure such default within
ninety (90) days after receiving written notice specifying the default
or, for those defaults which cannot reasonably be cured within ninety
(90) days, promptly commence curing such default and thereafter proceed
with all due diligence to substantially cure the default, then the
party not in default may, by giving the defaulting party at least
thirty (30) days prior written notice thereof, terminate this
Agreement as of a date specified in such notice.
7.5 TERMINATION FOR INSOLVENCY. If Customer becomes or is declared
insolvent or bankrupt, is the subject of any proceedings relating to
its liquidation or insolvency or for the appointment of a receiver,
conservator or similar officer, or makes an assignment for the benefit
of all or substantially all of its creditors or enters into any
agreement for the composition, extension, or readjustment of all or
substantially all of its obligations, then EDS may, by giving Customer
prior written notice thereof, terminate this Agreement as of a date
specified in such notice.
7.6 PAYMENT UPON TERMINATION. The parties acknowledge that upon termination
of this Agreement for any reason, including under Section 7.2, 7.3, 7.4
or 7.5 (but excluding by election by either party not to renew pursuant
to Section 2.1 or termination by Customer pursuant to Section 7.4 or
9.5), EDS will incur damages resulting from such termination that will
be difficult or impossible to ascertain. Therefore, prior to such
termination and in addition to all other amounts then due and owing to
EDS, Customer will pay to EDS as reasonable liquidated damages an
amount equal to the sum of subsections (a) and (b):
(a) All costs reasonably incurred by EDS in connection with such
termination, including without limitation telecommunication
line disengagement expenses and costs of terminating leases on
or shipping or storing any Equipment provided to Customer by or
through EDS under this Agreement, plus a twenty-five percent
(25%) management fee on such costs, plus EDS' charges for any
Additional Services reasonably requested by Customer for
deconversion assistance and EDS' then standard charges for the
resources utilized to prepare any test or conversion tapes
(together, the "Termination Costs"). EDS may, at its option,
invoice Customer for the lesser of (i) EDS' good faith estimate
of the Termination Costs, or (ii) the aggregate of the charges
payable to EDS pursuant to Article IV for the two calendar
months preceding the month in which notice of termination is
given. If the actual Termination Costs are greater or less than
the amount of EDS' invoice that is paid by Customer under the
immediately preceding sentence, then Customer will pay EDS, or
EDS will refund to Customer, as the case may be, the difference
between the actual Termination Costs and the amount paid.
(b) Eighty percent (80%) of the total compensation which would have
been paid or reimbursed to EDS under this Agreement during the
remainder of its term. The amount of total
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compensation will be computed by multiplying the total number
of months remaining in the Initial Term or the Renewal Term
then in effect from the effective date of the termination by
the average monthly charge to Customer for Services under this
Agreement during the twelve (12) calendar months immediately
preceding the calendar month in which notice of termination was
given, and multiplying that number by eighty percent (80%).
This is expressed mathematically as follows: Number of months
remaining in term x average monthly charge for Services during
the twelve (12) months preceding notice of termination x eighty
percent (80%). If this Agreement has been in effect less than
twelve (12) calendar months prior to the giving of the notice
of termination, then the parties will compute the amount due
under this subsection (b) using the average monthly charge for
Services made during such lesser number of calendar months. If
termination of this Agreement occurs prior to the Operational
Date, then the parties will compute the amount due under this
subsection (b) assuming that the Operational Date had occurred
when scheduled by EDS and using the average monthly charges
reasonably estimated to be paid by Customer.
All amounts payable under this Section 7.6 will be invoiced and paid
prior to the effective date of such termination and prior to the
release of any test tapes or other data of Customer.
7.7 PAYMENT UPON NONRENEWAL. If Customer gives or receives notice not to
renew this Agreement pursuant to Section 2.1, or Customer terminates
this Agreement under Section 9.5, Customer will pay to EDS an amount
equal to all amounts then due and payable to EDS, plus (a) EDS' charges
for any Additional Services reasonably requested by Customer for
deconversion assistance, (b) EDS' then standard charges for the
resources utilized to prepare any test or conversion tapes, and (c) all
other costs reasonably incurred by EDS in connection with such election
not to renew or termination that are described in Section 7.6(a) and
that relate to obligations that Customer approved, which extend beyond
the then current term of this Agreement or earlier termination date
under Section 9.5. All amounts payable under this Section 7.7 will be
invoiced and paid prior to the expiration date and prior to the
release of any test tapes or other data of Customer.
ARTICLE VIII- LIABILITY AND INDEMNITY
8.1 LIMITATION OF LIABILITY. Section 3.2(d) sets forth Customer's exclusive
remedies for errors in reports or other output provided by EDS under
this Agreement. If EDS becomes liable to the Customer under this
Agreement for any other reason, whether arising by negligence, willful
misconduct or otherwise, then (a) the damages recoverable against EDS
for all events, acts, delays, or omissions will not exceed in the
aggregate the compensation payable to EDS pursuant to Section 4.1 of
this Agreement for the lesser of the months that have elapsed since the
Operational Date or the three (3) months ending with the latest month
in which occurred the events, acts, delays or omissions for which
damages are claimed, and (b) the measure of damages will not include
any amounts for indirect, consequential or punitive damages of any
party, including third parties, or damages which could have been
avoided had the output provided by EDS been verified before use.
Customer may not assert any cause of action against EDS of which the
Customer knew or should have known more than two (2) years prior to
such assertion. In connection with the conduct of any litigation with
third parties relating to any liability of EDS to Customer or to such
third parties, EDS will have all rights which are appropriate to its
potential responsibilities or liabilities. EDS will have the right to
participate in all such litigation and to settle or compromise its
liability to third parties.
8.2 WARRANTY. EXCEPT AS EXPRESSLY PROVIDED HEREIN, EDS DISCLAIMS ALL OTHER
WARRANTIES, EXPRESS OR IMPLIED, IN FACT OR BY OPERATION OF LAW OR
OTHERWISE, CONTAINED IN OR DERIVED FROM THIS AGREEMENT, ANY OF THE
SCHEDULES
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ATTACHED HERETO, ANY OTHER DOCUMENTS REFERENCED HEREIN, OR IN ANY OTHER
MATERIALS, PRESENTATIONS OR OTHER DOCUMENTS OR COMMUNICATIONS WHETHER
ORAL OR WRITTEN, INCLUDING WITHOUT LIMITATION IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
8.3 FORCE MAJEURE. Each party will be excused from performance under this
Agreement, except for any payment obligations, for any period and to
the extent that it is prevented from performing, in whole or in part,
as a result of delays caused by the other party or any act of God, war,
civil disturbance, court order, labor dispute, third party
nonperformance or other cause beyond its reasonable control, including
failures, fluctuations or nonavailability of electrical power, heat,
light, air conditioning or telecommunications equipment. Such
nonperformance will not be a default or a ground for termination as
long as reasonable means are taken to expeditiously remedy the problem
causing such nonperformance.
8.4 CROSS INDEMNITY. EDS and Customer each will indemnify, defend and hold
harmless the other from any and all claims, actions, damages,
liabilities, costs and expenses, including without limitation
reasonable attorney's fees and expenses, arising out of (a) the death
or bodily injury of any agent, employee, customer or business invitee
of the indemnitor, and (b) the damage, loss or destruction of any
property of the indemnitor.
8.5 PATENT INDEMNITY. EDS and Customer each will indemnify, defend and hold
harmless the other from any and all claims, actions, damages,
liabilities, costs and expenses, including without limitation
reasonable attorney's fees and expenses, arising out of any claims of
infringement by the indemnitor of any United States letters patent, any
trade secret, or any copyright, trademark, service mark, trade name or
similar proprietary rights conferred by common law or by any law of the
United States or any state alleged to have occurred because of Systems
provided or work performed by the indemnitor. However, this indemnity
will not apply unless the indemnitee informs the indemnitor as soon as
practicable of any claim or action alleging such infringement and has
given the indemnitor full opportunity to control the response thereto
and the defense thereof, including, without limitation, any agreement
relating to settlement.
8.6 RELIANCE ON INSTRUCTIONS. EDS is entitled to rely upon and act in
accordance with any instructions, guidelines or information provided to
EDS by Customer, which are given by persons having actual or apparent
authority to provide such instructions, guidelines or information, and
will incur no liability in doing so. Customer will indemnify, defend
and hold harmless EDS from any and all claims, actions, damages,
liabilities, costs and expenses, including without limitation
reasonable attorneys' fees and expenses, arising out of or
resulting from EDS acting in accordance with this Agreement.
ARTICLE IX - MISCELLANEOUS
9.1 BINDING NATURE AND ASSIGNMENT. This Agreement will be binding on the
parties and their respective successors and assigns. Customer may not
assign this Agreement unless it obtains the prior written consent of
EDS, which will not be unreasonably withheld.
9.2 HIRING OF EMPLOYEES. During the term of this Agreement and for a period
of twelve (12) months thereafter, neither party will, without the prior
written consent of the other, offer employment to or employ any person
employed then or within the preceding twelve (12) months by the other
party, if the person was involved in providing or receiving
Services.
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9.3 NOTICES. Any notice under this Agreement will be deemed to be given
when delivered by hand or when mailed by United States mail, first
class postage prepaid, and addressed to the recipient party at its
address set forth above and to the attention of its President in the
case of Customer and to the attention of Division President, Financial
Services Division in the case of EDS. Either party may from time to
time change its address for notification purposes, by giving the other
prior written notice of the new address and the date upon which it will
become effective.
9.4 RELATIONSHIP OF PARTIES. EDS, in providing Services, is acting as an
independent contractor and does not undertake by this Agreement or
otherwise to perform any regulatory or contractual obligation of the
Customer. EDS has the sole right and obligation to supervise, manage,
contract, direct, procure, perform or cause to be performed, all work
to be performed by EDS under this Agreement.
9.5 MODIFICATION. EDS may from time to time modify any of the provisions of
this Agreement to be effective at any time on or after the expiration
of the Initial Term by giving Customer at least six (6) months prior
written notice describing the modification and the date upon which it
will be effective (the "Modification Date"). If EDS gives Customer
notice of a modification pursuant to this Section, Customer may, by
giving EDS written notice at least three (3) months prior to the
Modification Date, terminate this Agreement as of such Modification
Date or at a specified later date. Unless Customer provides such
notice, the modification will be effective for any period after the
Modification Date.
9.6 WAIVER. A waiver by either of the parties of any of the covenants,
conditions, or agreements to be performed by the other or any breach
thereof will not be construed to be a waiver of any succeeding breach
or of any other covenant, condition or agreement contained in this
Agreement.
9.7 MEDIA RELEASES. All media releases, public announcements and public
disclosures by Customer or Customer's employees or agents relating to
this Agreement or the subject matter of this Agreement, including
without limitation promotional or marketing material, but not including
any announcement intended solely for internal distribution by Customer
or any disclosure required by legal, accounting or regulatory
requirements beyond the reasonable control of Customer, will be
coordinated with and approved by EDS prior to release.
9.8 ENTIRE AGREEMENT. This Agreement and all attached Schedules constitute
the entire agreement between EDS and Customer with respect to the
subject matter of this Agreement. There are no understandings or
agreements relative to this Agreement which are not fully expressed
herein and no change, waiver or discharge of this Agreement will be
valid unless in writing and executed by the party against whom such
change, waiver or discharge is sought to be enforced. This Agreement
may be amended only by an amendment in writing, signed by the
parties.
9.9 GOVERNING LAW. This Agreement will be governed by and construed in
accordance with the laws of the State of Texas.
9.10 EXECUTION OF AGREEMENT. Three (3) original copies of this Agreement
will be executed and submitted to EDS by Customer. This Agreement will
become effective when EDS executes this Agreement. EDS will return one
of the executed copies to Customer. By executing this Agreement,
Customer represents that this Agreement has been duly authorized and
constitutes a valid, fully enforceable and legally binding obligation
of Customer. Customer will maintain this Agreement as an official
record of Customer continuously from the time of its execution.
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IN WITNESS WHEREOF, EDS and Customer each have caused this Agreement to
be signed and delivered by its duly authorized representative.
ELECTRONIC DATA SYSTEMS COBANCORP, INC.
CORPORATION
By: /s/ Max Tipton By: /s/ John S. Kreighbaum
----------------- -----------------------
Printed Printed
Name: Max Tipton Name: John S. Kreighbaum
Title: Area Manager Title: President & Chief Executive Officer
Date: Feb 15, 1995 Date: 2/15/95
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ADDENDUM
This Addendum ("Addendum") to the Agreement for Information Technology Services
("Agreement") between ELECTRONIC DATA SYSTEMS CORPORATION ("EDS") and
COBANCORP, INC. ("Customer"), dated of even date herewith, is between Customer
and EDS.
The parties agree to amend the Agreement as follows:
1. Section 1.1(k) of the Agreement is amended to read as follows:
"Operational Date" is the date that Customer has the capability
to input transactions or data for processing by EDS using the
ITI System. EDS will use commercially reasonable efforts to
accomplish the Operational Date on or before June 30, 1995,
subject to compliance by Customer with its obligations under
this Agreement; provided, however, that if either the Effective
Date is later than February 15, 1995, or EDS is unable to
schedule services from a third party consultant conversion
group, then the Operational Date will be a mutually agreed
later date.
2. New Sections 1.1(p) and 1.1(q) are added to the Agreement to read as
follows:
(p) "ITI System" is the EDS System licensed from Information
Technology, Inc.
(q) "Conversion Period" is the one hundred twenty (120) day period
preceding the Operational Date.
3. Section 2.1 of the Agreement is amended to read as follows:
This Agreement will begin on the Effective Date and, unless
terminated earlier under Section 7.2, 7.3, 7.4, 7.5, 7.8, 7.9,
or 9.5, will continue for a period of seven (7) years from the
Operational Date (the "Initial Term"). Thereafter, this
Agreement will automatically renew for successive terms of
seven (7) years each (the "Renewal Terms") unless either party
gives the other party written notice at least six (6) months
prior to the expiration date of the Initial Term or the Renewal
Term then in effect that the Agreement will not be renewed
beyond such term.
4. A new Section 2.2 is added to the Agreement to read as follows:
EXISTING AGREEMENTS. Effective as of the Operational Date, this
Agreement shall replace and supersede in all respects the
Agreement for Information Technology Services between EDS and
LCB Bancorp, Inc. (predecessor-in-interest to Customer) dated
as of August 5, 1991, as amended (the "Prior Agreement").
Effective as of the Operational Date, the Prior Agreement shall
be terminated and each party thereto, together with its
affiliates, officers, directors, employees, and agents, shall
be released and forever discharged from all obligations,
responsibilities and liabilities arising from or relating to
the Prior Agreement, except that Customer shall remain
obligated to pay any amounts due to EDS under the Prior
Agreement that have not been paid prior to the Operational
Date. Effective as of the Effective Date, the Lease Agreement
between EDS and Lorain County Bank dated November 7, 1991, as
amended or modified, shall be terminated and each party
thereto, together with its affiliates, officers, directors,
employees, and agents, shall be released and forever discharged
from all obligations, responsibilities and liabilities
arising from or relating to such lease agreement.
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5. Section 3.1(c) of the Agreement is amended to read as follows:
During the Conversion Period, EDS will provide those services
and instructions ("Conversion Services") reasonably required
for Customer to convert to and use the EDS Systems, as set
forth in Schedule E. Customer will cooperate in the conversion
effort, perform its obligations set forth in Schedule E, and
timely provide whatever information, data, clerical and office
support, management decisions, approvals and signoffs that EDS
reasonably requires. During the Conversion Period and in
accordance with the plan set forth in Schedule F, EDS will
train designated Customer personnel in the proper use of the
ITI System to enable such personnel to train Customer's user
personnel in the use of such ITI Systems. Customer will
cooperate with EDS in scheduling training in conjunction
with Customer's conversion to such ITI Systems.
6. Section 3.2(a) of the Agreement is amended to read as follows:
(i) Beginning on the Operational Date, operate the EDS
Systems at the Data Center, and accept data and other
input from Customer. EDS will make daily, monthly and
other reports and output, including specially requested
reports, available to Customer at the Data Center for
delivery or transmit them to Customer, subject to
Customer's timely delivery or transmission of data and
other input to the Data Center for processing.
(ii) EDS will provide the Services in accordance with the
schedule provided to Customer by EDS upon commencement
of the Services, which may be updated by EDS from time
to time ("Services Schedule"). EDS will provide
Customer 30 days prior written notice describing
changes to the Services Schedule that materially affect
Customer's operations ("Material Schedule Change") and
giving the date on which such Material Schedule Change
will be effective. If EDS gives Customer notice of a
Material Schedule Change and Customer gives EDS written
notice of Customer's objection to such change at least
15 days prior to the effective date of such Material
Schedule Change, then the parties will mutually agree
on a revised Services Schedule. Until the parties are
able to agree on a revised Services Schedule, however,
EDS will provide Services in accordance with its then
standard Services Schedule.
(iii) EDS will not be responsible for the loss of any input
during transit (including, without limitation, transit
by courier service or over datacommunication lines);
provided, however, that EDS will be responsible for
input or output from the time such input or output is
received by EDS at the Data Center until the time such
input or output is released at the Data Center for
transmission or delivery to Customer.
7. The first sentence of Section 3.2(d) of the Agreement is amended to
read as follows:
At no additional charge to Customer, correct any errors in
customer files that result in errors in reports or other output
where such errors (i) are due solely to either malfunctions of
EDS' equipment or the EDS Systems or errors of EDS' operators,
programmers or other personnel, and (ii) are called to EDS'
attention within the time frames specified in Section
5.3.
8. A new second sentence is added to Section 3.2(f) to read as follows:
If any such change will have a material adverse effect on
Customer's operations, then EDS
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will give Customer 30 days' prior notice of such change.
9. A new Section 3.2(h) is added to the Agreement to read as follows:
So long as John Kreighbaum is an executive officer of Customer
and Max Tipton is an EDS employee, EDS will assign Max Tipton
(or another mutually agreeable EDS employee) as the primary
contact responsible for managing activities relating to the
Services provided to Customer.
10. The second sentence of Section 3.3 of the Agreement is amended to read
as follows:
EDS will provide to such auditors and inspectors reasonable
assistance, and Customer will compensate EDS for any Additional
Services provided in connection with the audit or inspection;
provided, however, that if Customer provides EDS with at least
48 hours prior notice of the audit or inspection, then EDS will
waive the charges for up to eight man hours per year of
Additional Services provided in connection with such audit
or inspection.
11. The first sentence of Section 3.4 of the Agreement is amended to read
as follows:
EDS will make reasonable commercial efforts to maintain the EDS
Systems so that they will not be disapproved by any federal or
state regulatory authority with jurisdiction over Customer's
business.
12. New sixth sentence is added to Section 3.4 of the Agreement to read as
follows:
EDS will identify such third-party System(s) to Customer.
13. The second sentence of Section 3.5 of the Agreement is amended to read
as follows:
Upon request, EDS will also provide to Customer one copy of
EDS' most recent independent Data Center EDP audit at the
lesser of (a) $50.00 per copy, or (b) EDS' then standard
charge for such copy.
14. A new Section 3.6 is added to the Agreement to read as follows:
FUTURE TECHNOLOGIES. EDS will use commercially reasonable
efforts to maintain a level of technology that EDS reasonably
and in good faith determines is appropriate for the performance
of the Basic Services. In addition, EDS will advise Customer of
advances in technology relating to Customer's operating needs
of which EDS becomes aware and which EDS believes Customer may
be interested in implementing. EDS will make available to
Customer as an Additional Service any technologies for which
EDS develops commercially available capabilities in the
future.
15. The second sentence of Section 6.2 of the Agreement is amended to read
as follows:
EDS agrees to hold in confidence all proprietary information of
Customer and its customers provided to EDS, and the provisions
of this sentence will survive the expiration or termination
of this Agreement for any reason.
16. The first sentence of Section 7.2 of the Agreement is amended to read
as follows:
If fifty percent or more of the stock or assets of
either CoBancorp, Inc. or PREMIERBank &
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Trust are acquired by another person or entity (whether by
merger, reorganization, sale, transfer, or other similar
transaction) and, in the case of an acquisition of PREMIERBank
& Trust, PREMIERBank & Trust does not continue to operate under
its current banking charter after such transaction, then EDS
and Customer will negotiate in good faith the terms and
conditions upon which this Agreement may be modified to
accommodate such transaction.
17. Section 7.3 of the Agreement is amended to read as follows:
(a) If Customer defaults in the payment of any charges or other
amounts due under this Agreement and fails to cure such default
within ten (10) days after receiving written notice specifying
such default, then EDS may, by giving Customer at least thirty
(30) days prior written notice thereof, terminate this
Agreement as of a date specified in such notice.
(b) Notwithstanding Section 7.3(a), EDS may not terminate this
Agreement pursuant to Section 7.3(a) for Customer's failure to
pay to EDS any amount that is reasonably disputed by Customer
in good faith so long as: (i) Customer notifies EDS promptly
after the receipt of the notice specified in Section 7.3(a) of
any disputed amount being withheld from EDS and specifies the
reasons why that amount is disputed; and (ii) all such amounts
so withheld are, by the end of the cure period specified in
Section 7.3(a), deposited into an Escrow Account
(defined below) as provided in Section 7.10.
18. Section 7.5 of the Agreement is amended to read as follows:
If either party becomes or is declared insolvent or bankrupt,
is the subject of any proceedings relating to its liquidation
or insolvency or for the appointment of a receiver, conservator
or similar officer, or makes an assignment for the benefit of
all or substantially all of its creditors or enters into any
agreement for the composition, extension, or readjustment of
all or substantially all of its obligations, then the other
party may, by giving such party prior written notice thereof,
terminate this Agreement as of a date specified in such
notice.
19. The first sentence of Section 7.6 of the Agreement is amended to read
as follows:
The parties acknowledge that upon termination of this
Agreement for any reason, including under Section 7.2, 7.3, or
7.4 (but excluding by election by either party not to renew
pursuant to Section 2.1 or termination by Customer pursuant to
Section 7.4, 7.5, 7.8, 7.9, or 9.5), EDS will incur damages
resulting from such termination that will be difficult if not
impossible to ascertain.
20. New fourth and fifth sentences are added to Section 7.6(a) of the
Agreement to read as follows:
As of the Effective Date, EDS' charge for master file tapes
is $250.00 per tape and EDS' charge for file layouts is $100.00
per layout. These charges are subject to change by EDS at any
time.
21. All references to "eighty percent (80%)" in Section 7.6(b) of the
Agreement are changed to "sixty percent (60%)."
22. A new Section 7.8 is added to the Agreement to read as follows:
TERMINATION AS OF SECOND ANNIVERSARY OF OPERATIONAL DATE. If for
any reason Customer is
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dissatisfied with the ITI System, then Customer may terminate this
Agreement as of the second anniversary of the Operational Date;
provided, however, that in order to terminate this Agreement under this
Section 7.8 Customer must give EDS at least ninety (90) days prior
written (a) notice of such termination, and (b) certification that
Customer is not deconverting to another Information Technology, Inc.
System. Upon the effective date of any termination under this Section
7.8, Customer will pay to EDS a payment calculated in accordance with
Section 7.7.
23. A new Section 7.9 is added to the Agreement to read as follows:
TERMINATION DUE TO AUDIT FINDINGS. If EDS receives a qualified going
concern opinion in connection with EDS' audited financial statements
and EDS fails to either (a) substantially cure the qualified findings
that concern Customer within ninety (90) days after receiving written
notice from Customer specifying the qualified findings that concern
Customer, or (b) for those findings that cannot reasonably be cured
within ninety (90) days, promptly commence curing such finding and
thereafter proceed with all due diligence to substantially cure the
finding, then Customer may, by giving EDS at least thirty (30) days
prior written notice thereof, terminate this Agreement as of a date
specified in such notice. Upon the effective date of any termination
under this Section 7.9, Customer will pay to EDS a payment Calculated
in accordance with Section 7.7.
24. A new Section 7.10 is added to the Agreement to read as follows:
ESCROW ACCOUNT. An interest~bearing escrow account (the "Escrow
Account") shall be established as follows:
(a) The Escrow Account shall be an interest-bearing account
established by Customer in the name of Customer at a major
national bank selected by Customer and reasonably acceptable to
EDS, and shall be and remain the property of Customer subject
to the disbursement of funds provisions set forth below.
Customer will pay all costs associated with the Escrow Account.
(b) The Escrow Account shall be established pursuant to an escrow
agreement that provides that the funds therein, including
accrued interest, shall be disbursed to EDS or Customer, as
applicable, only in accordance with the mutual agreement of EDS
and Customer or an arbitration or judicial decision binding on
EDS and Customer.
(c) After resolution of any dispute with respect to which funds
were placed in the Escrow Account pursuant to the mutual
agreement of EDS and Customer or an arbitration or judicial
decision binding on EDS and Customer, and after payment from
the Escrow Account of all amounts due to EDS with respect to
that dispute, including accrued interest as agreed upon by the
parties or awarded by such arbitral or judicial tribunal, any
remaining portion of the funds which were placed in the Escrow
Account with respect to that dispute, including undisbursed
accrued interest thereon, shall be promptly paid to Customer.
(d) If the funds which were placed in the Escrow Account with
respect to any dispute are not sufficient to satisfy any
arbitral or judicial award or mutually agreed amount due to EDS
with respect to that dispute, then Customer shall promptly
pay to EDS the balance due, including accrued interest thereon
as agreed upon by the parties or awarded by such arbitral or
judicial tribunal.
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25. A new Section 7.11 is added to the Agreement to read as follows:
RELEASE OF TAPES.
(a) Notwithstanding anything to the contrary in Section 6.2 or
7.6, EDS will release to Customer test tapes and other data of
Customer in the event (i) Customer terminates this Agreement
under Section 7A, (ii) EDS reasonably disputes in good faith
Customer's right to terminate this Agreement under Section 7.4,
and (iii) prior to the effective date of such termination,
Customer deposits one-third of the amount described in Section
7.6 into the Escrow Account as provided in Section 7.10.
(b) Notwithstanding anything to the contrary in Section 7.7, EDS
will release to Customer test tapes and other data of Customer
in the event (i) Customer does not renew this Agreement under
Section 2.1, (ii) Customer reasonably disputes in good faith
the amount owed under Section 7.7, and (iii) prior to the
expiration date, Customer deposits the amount described in
Section 7.7 into the Escrow Account as provided in Section
7.10.
26. The second sentence of Section 8.1 of the Agreement is amended to read
as follows:
If EDS becomes liable to the Customer under this Agreement for any
other reason, whether arising by negligence or otherwise, then (a)
except for damages recoverable against EDS for EDS' willful misconduct,
the damages recoverable against EDS for all events, acts, delays, or
omissions will not exceed in the aggregate the compensation payable to
EDS pursuant to Section 4.1 of this Agreement for the lesser of the
months that have elapsed since the Operational Date or the six (6)
months ending with the latest month in which occurred the events, acts,
delays or omissions for which damages are claimed, and (b) the measure
of damages will not include any amounts for indirect, consequential or
punitive damages of any party, including third parties, or damages
which could have been avoided had the output provided by EDS been
verified before use.
27. The first sentence of Section 8.3 of the Agreement is amended to read
as follows:
Each party will be excused from performance under this Agreement,
except for any payment obligations, for any period and to the extent
that it is prevented from performing, in whole or in part, as a result
of delays caused by the other party or any act of God, war, civil
disturbance, court order, labor dispute, severe inclement weather (such
as snow or ice storms) third party nonperformance or other cause beyond
its reasonable control, including failures, fluctuations or non
availability of electrical power, heat, light, air conditioning or
telecommunications equipment.
28. The first sentence of Section 8.6 of the Agreement is amended to read
as follows:
EDS is entitled to rely upon and act in accordance with any
instructions, guidelines or information provided to EDS by Customer,
which are given by persons designated by Customer to EDS in writing
from time to time, and will incur no liability in doing so.
29. The first sentence of Section 9.3 of the Agreement is amended to read
as follows:
Any notice under this Agreement will be deemed to be given when
delivered by hand, by a
6
<PAGE> 19
nationally recognized overnight courier service, or when mailed
by United States mail, first class postage prepaid, and addressed to
the recipient party at its address set forth above and to the
attention of its President in the case of Customer and to the
attention of Division President, Financial Services Division in the
case of EDS.
30. Section 9.9 of the Agreement is amended to read as follows:
This Agreement will be governed by and construed in accordance with
the laws of the State of Ohio. Arbitration of any dispute under this
Agreement will be conducted in Cleveland, Ohio, unless the
parties agree to another location.
31. A new Article X is added to the Agreement to read as follows:
ARTICLE X - LEASED PREMISES
10.1 DEFINITIONS. In this Article X:
(a) "Common Areas" means areas of each Building that are for the
common use of, or made available for use by, all tenants of
such Building, including without limitation common entrances,
halls, lobbies, elevators, stairways and accessways and ramps,
delivery passages, public toilets, parking lots, drives,
walkways, green spaces, or other facilities related to such
Building owned, operated or maintained, in whole or in part, by
Customer.
(b) "Lease" means the agreement set forth in this Article X.
(c) "Elyria Lease Term" means the period commencing on the
Effective Date and terminating on the earlier of (i) the
expiration or termination of this Agreement, or (ii) the date
the Lease of the Elyria Premises is terminated as set forth in
this Article X. "Powell Lease Term" means the period
commencing on the date on which the Powell Building is ready
for occupancy, as determined by the issuance of a certificate
of occupancy issued by the appropriate regulatory authority,
and terminating on the earlier of (i) the expiration or
termination of this Agreement, or (ii) the date the Lease of
the Powell Premises is terminated as set forth in this
Article X.
(d) "Premises" means (i) approximately 6,500 square feet in the
building (the "Elyria Building") located at 6020 Lake Avenue,
Elyria, Ohio 44036; and (ii) approximately 3,500 square feet in
the building (the "Powell Building") to be located at lot 1778
Wedgewood Section 6, Liberty Township, Ohio. The Premises
located in the Elyria Building is referred to as the "Elyria
Premises" and the Premises located in the Powell Building is
referred to as the "Powell Premises." The Elyria Building and
the Powell Building are collectively referred to as the
"Buildings."
(e) "Elyria Rental" means $30,000.00 per year or $2,500.00 per
month.
(f) "Powell Rental" means $30,000 per year or $2,500.00 per month.
10.2 GRANTING CLAUSE. Customer, in consideration of the covenants and
agreements to be performed by EDS under this Article X, and upon the
terms and conditions stated in this Article X, does hereby lease,
demise and let unto EDS, and EDS does hereby take from Customer, (a)
the Elyria Premises, to have and to hold for the Flyria Lease Term, and
(b) the Powell Premises, to have and to hold for the Powell Lease
Term.
7
<PAGE> 20
10.3 USE. EDS shall use the Premises for general office and computer data
processing uses and for any other purpose which is related to EDS'
business.
1OA RENT.
(a) During the Elyria Lease Term, monthly installments of Elyria
Rental shall be due and payable on or before the first day of
each calendar month. Rental for any fractional month shall
be prorated on actual days.
(b) During the Powell Lease Term, monthly installments of Powell
Rental shall be due and payable on or before the first day of
each calendar month. Rental for any fractional month shall
be prorated on actual days.
(c) The Elyria Rental and the Powell Rental shall be referred to
collectively as the "Rental." Rental shall include any and all
operating expenses (including, without limitation, taxes,
insurance, utilities, repairs, maintenance and replacements for
the Premises, the Buildings and the Common Areas) and use of
existing furniture and equipment owned by Customer. EDS shall
be responsible for obtaining telephone semoes at EDS' sole cost
and expense.
(d) Customer may increase the Rental each year by the same
percentage that EDS is entitled to increase the charges for
Services under Section 4.4 of this Agreement.
10.5 REPAIRS. Customer shall, at Customer's sole expense, without pass
through to EDS, keep the Buildings, including the Premises, in good
repair and free from nuisance of any kind. Customer shall perform all
such repairs promptly and in a workmanlike manner, and shall not
unreasonably interfere with EDS' conduct of its business, its use of or
access to the Premises during such repairs.
10.6 CUSTOMER'S INSURANCE. Customer shall, at its sole cost and expense,
obtain and maintain all risk property insurance for the Buildings,
including the Premises, upon a full replacement cost basis, with no
coinsurance requirement; commercial general liability insurance,
including blanket contractual liability coverage, with limits of not
less than $2,000,000.00, combined single limit, for personal injury and
property damage; and statutory workers compensation and employers
liability coverage. Customer shall deliver, upon written request, a
certificate evidencing such coverages. Such insurance policies shall
provide for no cancellation or material alteration without thirty
(30) days' prior written notice to EDS.
10.7 FIRE OR OTHER CASUALTY.
(a) In the event either the Elyria Premises or the Powell Premises
should be (i) totally destroyed by fire, tornado or other
casualty (such determination to be completed within thirty (30)
days of destruction, except as otherwise provided herein, by an
architect (the "Architect") of recognized good reputation
selected by Customer and approved by EDS, which approval shall
not be unreasonably withheld or delayed), (ii) damaged to the
extent that rebuilding or repairs cannot be completed within
one hundred twenty (120) days (as estimated by the Architect)
after the date of casualty, or (iii) either of the Buildings or
the Premises is damaged to the extent rendering
such Premises unsuitable for the use in effect as of the
beginning of the applicable Lease Term, the Lease of the
applicable Premises shall terminate as of the date of
8
<PAGE> 21
casualty, and Customer and EDS shall be released from any and
all obligations under this Lease related to such Premises,
including the payments of Rental, retroactive to the
casualty date.
(b) If either the Elyria Premises or the Powell Premises should be
partially damaged by fire, tornado or other casualty covered by
Customer's insurance and can be rebuilt within one hundred
twenty (120) days of the casualty date, as reflected in the
Architect's certificate, or if the damage is such that neither
Customer nor EDS elect to terminate the Lease of such Premises,
then Customer shall, at its sole cost and expense, without pass
through to EDS, commence to rebuild or repair the damaged
Premises and shall proceed with diligence to restore the
damaged Premises to substantially the same condition in which
it was immediately prior to the casualty. EDS shall be allowed
a proportionate diminution of Rental during the time the
Premises or any portion thereof is unfit for occupancy.
(c) Notwithstanding any provision herein to the contrary, in the
event the repair of such damage has not been completed within
one hundred twenty (120) days of the casualty, EDS may
terminate the Lease as to the damaged Premises by giving
written notice to Customer within thirty (30) days after the
expiration of one hundred twenty (120) days after the casualty.
Notwithstanding the foregoing, in the event such damage or
destruction occurs in the last twelve (12) months of the
applicable Lease Term, or any renewal or extension thereof, EDS
or Customer shall have the option to terminate the Lease as to
the damaged Premises.
10.8 FORCE MAJEURE. Neither Customer nor EDS shall be deemed to be in
default of this Lease if such default is due to acts of God, acts of
the public enemy, acts of governmental authority, or any other
circumstances which are not within the parties' respective control.
10.9 INDEMNIFICATION. Notwithstanding Section 8.4 of this Agreement, EDS and
Customer shall indemnify, defend and hold the other party harmless from
any and all liabilities, responsibilities or claims arising from any
breach or default in the performance of any obligation to be performed
by indemnitor under the terms of this Article X or arising from any
act, neglect, fault or omission of indemnitor or indemnitor's
respective agents, representatives or employees, and from and against
all costs, reasonable attorneys' fees, expenses and liabilities
incurred in or about such claim or any action or proceeding brought
thereon. In case any action or proceeding shall be brought against
indemnitee by reason of any such claim, indemnitor, upon receipt of
notice from indemnitee, shall defend the same at its expense.
10.10 HAZARDOUS MATERIALS. Customer and EDS shall indemnify, defend and hold
the other harmless from all claims, costs, expenses, actions, causes of
action or liabilities incurred or suffered by indemnitee which may
arise with regard to Hazardous Materials (defined below) in or about
either of the Premises, either of the Buildings or any other buildings
in the development, including, without limitation, the non~compliance
of Customer or EDS, either of the Premises, either of the Buildings, or
the property on which they are located with the Law (defined below).
The term "Hazardous Materials" shall mean any chemical, substance,
material, or waste, or component thereof, whether in a solid, liquid or
gaseous state, which is now or hereafter listed, defined, or regulated
as a hazardous or toxic chemical, substance, material, or waste, or
component thereof, pursuant to the Law, or which would trigger any
employee or community "right-to-know" requirements adopted by any such
body, or for which any such body has adopted any requirements for the
preparation or distribution of any material safety data sheet. The term
"Law" shall mean any and all applicable laws, statutes,
9
<PAGE> 22
ordinances, codes, rules or regulations promulgated by any federal,
state or local governing or regulatory body having jurisdiction. In
case any action or proceeding shall be brought against the indemnitee
by reason of any such claim, cost, expense, action, cause of action or
liability, the indemnitor, upon notice from indemnitee, shall defend
the same at its sole cost and expense.
10.11 BUILDING COMPLIANCE. Customer will be solely responsible for the
compliance of the Premises, the Buildings (including all Common Areas),
and all exterior facilities of the Buildings with the Law (including,
without limitation, the Americans with Disabilities Act). In addition,
Customer represents and covenants that, to the best of Customer's
knowledge, (a) each of the Buildings is in compliance with the Law
(and, upon completion, the Powell Building will be in compliance with
the Law), and (b) no release or spill of Hazardous Materials has
occurred in or about either of the Buildings which has not been cured.
10.12 OPTION TO CANCEL.
(a) Either EDS or Customer may terminate (i) the Lease of either
or both Premises by giving the other party one-hundred eighty
(180) days' prior written notice, or (ii) if an event of force
majeure described in Section 10.8 occurs, immediately the Lease
of the damaged Premises by giving the other party written
notice. If Customer does not purchase the Services described as
Back Office Services in Schedule B to this Agreement, then EDS
may, by giving prior written notice to Customer, terminate this
the Lease of either or both Premises as of a date specified
in such notice.
(b) If the Lease is terminated as set forth in Section 10.12(a),
then all obligations for Rental as to such Premises shall cease
as of the effective date of such termination.
10.13 SURRENDER OF PREMISES. At the end of the Lease Term, EDS may remove all
movable trade fixtures installed by EDS and all furniture and equipment
owned by EDS. EDS will remove such fixtures, furniture and equipment in
a reasonable and workmanlike manner so as not to damage the
Premises.
32. SERVICES FOR AFFILIATED INSTITUTIONS.
(a) SCOPE OF TERM "CUSTOMER". The term "Customer" when used in any
provision of the Agreement or any other instrument or document executed
in connection with the Agreement that sets forth a duty, obligation,
liability, representation, warranty or covenant of any nature of
Customer ("Obligation") includes both (i) CoBancorp, Inc., and (ii) the
Affiliated Institution (as defined below) and any Additional
Institutions (as defined below) to the extent that any such
institutions may be the appropriate party or parties to satisfy or
perform any such Obligation. However, EDS will have the right (but not
the obligation) to rely solely upon CoBancorp, Inc. for the
satisfaction or performance of each such Obligation, and CoBancorp,
Inc. agrees to satisfy or perform or to cause the satisfaction or
performance of each such Obligation and to take all actions necessary
or advisable in connection therewith. "Affiliated Institution" means
PREMIERBank & Trust (successor-in-interest to Lorain County Bank), an
Ohio state bank.
"Additional Institutions" as used herein means state or national banks
that are no less than majority-owned directly or indirectly by
CoBancorp, Inc. for which EDS agrees to provide Services upon the
written request of CoBancorp, Inc.
(b) AGENCY. CoBancorp, Inc. represents and warrants to EDS that it has the
authority to act as
10
<PAGE> 23
the duly authorized and designated agent of each Affiliated
Institution for and on behalf of such institution with respect
to all matters relating to the Agreement, including without
limitation the giving or withholding of any agreement,
approval, acceptance, consent, notice or other action required
or permitted by the Agreement or any Ratification Agreement (as
defined below), the making of all payments to EDS and the
waiver, amendment or modification of any provision of the
Agreement or any Ratification Agreement.
(c) PAYMENT. Until such time, if ever, that there is a default in
the payment when due of any amount due to EDS under the
Agreement, EDS acknowledges that it will receive payment from
CoBancorp, Inc. for all amounts due under the Agreement;
provided, however, that each Affiliated Institution will at all
times be liable for its pro rata share of the amount due for
the Services that are allocable to the Affiliated Institution.
Upon any default in the payment of any amount due to EDS under
the Agreement, each Affiliated Institution will, at EDS'
request, thereafter pay EDS directly for its pro rata share of
all amounts due for the Services that are allocable to the
Affiliated Institution, including without limitation the
Affiliated Institution's pro rata share of all amounts due
under Section 7.6 of the Agreement, if applicable.
Notwithstanding any other provision of the Agreement,
CoBancorp, Inc. will in all events be liable for all amounts
due or to become due under the Agreement.
(d) RATIFICATION AND ACCEPTANCE AGREEMENTS.
(i) The Affiliated Institution will execute the Financial
Institution Ratification and Acceptance Agreement
("Ratification Agreement") in the form attached as
Schedule D concurrently with the execution of the
Agreement.
(ii) EDS will have no obligation to provide Services to an
Additional Institution unless such Additional
Institution has executed and delivered to EDS a
Ratification Agreement. Upon and as of such event, such
Additional Institution will be deemed an Affiliated
Institution within the meaning of, and a party to, the
Agreement (without the necessity of CoBancorp, Inc.
re~executing the Agreement as agent for such Additional
Institution). CoBancorp, Inc. and EDS agree to amend
the Agreement to reflect the inclusion of Additional
Institutions that become Affiliated Institutions within
the meaning of the Agreement.
(e) TERMINATION OF AFFILIATION. An Affiliated Institution may not
cease to be a party to, bound by, and an Affiliated Institution
under, the Agreement without the prior written consent of EDS,
even if such Affiliated Institution ceases to be an
affiliate of CoBancorp, Inc.
33. Except as amended by this Addendum, the Agreement will be and remain in
full force and effect in accordance with its terms. Capitalized terms
used in this Addendum will be as defined in the Agreement unless
otherwise expressly defined in this Addendum.
34. Three (3) original copies of this Addendum will be executed and
submitted to EDS by Customer. This Addendum will become effective when
EDS executes this Addendum. EDS will return one of the executed
copies to Customer.
11
<PAGE> 24
IN WITNESS WHEREOF, the parties have executed this Addendum as of the date
set forth above.
ELECTRONIC DATA SYSTEMS COBANCORP, INC.
CORPORATION
By: /s/ Max Tipton By: /s/ John S. Kreighbaum
------------------- ------------------------
Printed Printed
Name: Max Tipton Name: John S. Kreighbaum
Title: Area Manager Title: President & Chief Executive Officer
Date: Feb 15, 1995 Date: 2/15/95
12
<PAGE> 25
ADDENDUM
THIS ADDENDUM ("Addendum") to the Agreement for Information Technology Services
between ELECTRONIC DATA SYSTEMS CORPORATION ("EDS") and COBANCORP, INC.
("Customer"), dated of even date herewith as amended and modified (the
"Agreement"), is between Customer and EDS.
The parties agree to amend the Agreement as follows:
1. DEFINITIONS. In this Addendum, the terms listed in Exhibit A will be as
defined in Exhibit A.
2. EDS SYSTEMS. Section 1.1(g) of the Agreement is amended to read as
follows:
"EDS Systems" are all Systems, except for Systems provided by
Customer and the Output Management Software, that EDS uses to
provide Services, including without limitation any
improvements, modifications or enhancements made by EDS to any
System and provided to Customer under this Agreement.
3. EDS RESPONSIBILITIES.
(a) In the provision of Services, EDS will make the Output
Management Equipment available to Customer at Customer's
principal location. Notwithstanding the location of the Output
Management Equipment at Customer's location, all rights, title,
and interest in and to the Output Management Equipment will be
and remain in EDS and, except as expressly provided in this
Addendum, Customer will have no interest in the Output
Management Equipment.
(b) EDS will arrange for the initial transportation of the Output
Management System to Customer's principal location. The initial
installation of the Output Management System will be performed
by EDS at no cost to Customer. Customer will be responsible for
any relocation of the Output Management System. Customer will
provide prior written notice to EDS of all such relocations.
(c) EDS will arrange with the vendor of any Output Management
Software owned by a third party for a direct license, or a
sublicense through EDS, for Customer for such System. Customer
agrees to execute any such license or sublicense required by
the vendor.
(d) EDS will be responsible for maintenance at Customer's location,
commonly known as "site maintenance", of the Output Management
System after installation and Customer will pay EDS the then
standard charges of EDS for such maintenance.
(e) After installation of the Output Management System, EDS will
electronically transmit Reports to Customer, subject to
Customer's timely delivery or transmission of data and other
input to the Data Center for processing. Notwithstanding any
provision of the Agreement to the contrary, neither hard copies
nor microfiche of Reports will be made available for delivery
to Customer. EDS will transmit the Reports in accordance with
the schedule provided to Customer by EDS upon installation of
the Output Management System, which may be updated by EDS
from time to time.
(f) EDS will provide for Customer's use one copy of EDS' standard
user documentation and one copy of any revisions describing the
use of the Output Management System. Upon
<PAGE> 26
Customer's request, EDS will provide additional copies of such
documentation at EDS' then standard charges.
(g) EDS will establish, modify or substitute from time to time any
processing priorities, programs, procedures, or
telecommunication lines, modems or other equipment used in the
operation of the Output Management System or the provision of
the Services provided under this Addendum that EDS reasonably
deems necessary, and notify Customer of any such changes that
will affect Customer's operations.
(h) EDS will archive on optical media the Reports previously
transmitted to Customer pursuant to Section 3(e) of this
Addendum. If Customer requests information from such optical
media, EDS will make such information available to Customer and
Customer will pay EDS the then standard charges of EDS for such
Service.
4. CUSTOMER RESPONSIBILITIES.
(a) Customer, with the advice of EDS, will prepare and maintain
the space in which the Output Management Equipment will be
installed in accordance with the manufacturer's specifications
as to environment, power, HVAC and the like. In addition,
Customer is responsible for providing, installing, maintaining,
and paying all costs associated with (i) the cabling for the
Output Management Equipment, and (ii) the dial-up
telecommunication line required for use of the Output
Management System.
(b) Customer will take good care of the Output Management
Equipment and will use such equipment only in the manner
contemplated by the manufacturers thereof. Upon the expiration
or earlier termination of this Agreement, the Output Management
Equipment will be in the same condition as when delivered,
ordinary wear and tear excepted.
(c) Without EDS' prior written consent, Customer will not (i)
install any System other than the Output Management Software on
the Output Management Equipment or otherwise modify the Output
Management System, (ii) sell, assign, lease, transfer, or
disclose to any third party the Output Management System, (iii)
copy or reproduce the Output Management Software, or (iv)
reverse assemble, reverse compile, or otherwise recreate the
Output Management Software.
(d) Customer will comply with all operating instructions for the
Output Management System which are issued by EDS from time to
time. Except as otherwise provided in this Addendum, Customer
will be responsible for the supervision, management, and
control of its use of the Output Management System.
(e) At the expiration or earlier termination of the Agreement for
any reason, Customer will make the Output Management System
available to EDS for pickup.
5. EDS CHARGES. Customer will pay EDS for the Output Management System as
set forth in Exhibit C to this Addendum. The charges set forth in
Exhibit C will be subject to the adjustment provisions of the
Agreement, including without limitation the cost of living
adjustment provision of the Agreement.
6. OUTPUT MANAGEMENT SOFTWARE. All Output Management Software is and will
remain the exclusive property of EDS or licensors of such Output
Management Software, as applicable, and except as expressly provided in
this Addendum, Customer shall have no ownership interest or other
rights in any Output Management Software. Customer acknowledges that
the Output Management Software includes EDS proprietary information and
agrees to keep the Output Management Software
2
<PAGE> 27
confidential at all times. Upon the expiration or termination of this
Addendum, Customer will return all copies of all items relating to the
Output Management Software which are in the possession of Customer and
certify to EDS in writing that Customer has retained no material
relating to the Output Management Software.
7. ADDENDUM CONTROLS. The terms and conditions of this Addendum apply
solely to the Output Management System and do not modify either party's
obligations relating to other Systems, Services or equipment being
provided under the Agreement. The Agreement will also apply, to the
extent appropriate, to the provision by EDS of the Output Management
System and the related Services described in this Addendum. However,
with regard to the Output Management System and the related Services
described in this Addendum, in the event of any conflict between the
Agreement and this Addendum, the terms and conditions of this
Addendum will control.
8. AGREEMENT. Except as amended by this Addendum, the Agreement will be
and remain in full force and effect in accordance with its terms.
Capitalized terms used in this Addendum will be as defined in the
Agreement unless otherwise expressly defined in this Addendum.
9. EFFECTIVE DATE. Three (3) original copies of this Addendum will be
executed and submitted to EDS by Customer. This Addendum will become
effective as of the date set forth below when EDS executes this
Addendum. EDS will return one of the executed copies to Customer.
IN WITNESS WHEREOF, the parties have executed this Addendum as of the date set
forth above.
ELECTRONIC DATA SYSTEMS COBANCORP, INC.
CORPORATION
By: /s/ Max Tipton By: /s/ John S. Kreighbaum
----------------------- -----------------------------
Printed Printed
Name: Max Tipton Name: John S. Kreighbaum
Title: Area Manager Title: President & Chief Executive Officer
Date: Feb 15, 1995 Date: 2/15/95
3
<PAGE> 1
Consolidated Financial Highlights
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 1995 1994 1993 1992 1991 1990
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the year ended December 31
Per common share:
Net income $ 1.86 $ 1.68 $ 1.56 $ 1.31 $ 0.98 $ 0.55
Cash dividends 0.58 0.51 0.40 0.33 0.24 0.27
Book value 14.70 12.02 11.80 10.22 9.14 8.33
Gross operating income $ 44,548 $ 39,768 $ 39,197 $ 39,078 $ 39,264 $ 40,333
Operating expenses 37,034 32,826 32,816 33,570 35,249 38,820
--------- --------- --------- --------- --------- ---------
Income before income taxes 7,514 6,942 6,381 5,508 4,015 1,513
Federal income tax expense (credit) 1,112 1,256 1,100 1,130 761 (320)
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 6,402 $ 5,686 $ 5,281 $ 4,378 $ 3,254 $ 1,833
=============================================================================================================================
- -----------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data at December 31
Total Assets $ 529,530 $ 531,727 $ 491,801 $ 463,124 $ 408,750 $ 406,013
Total investment securities 159,415 149,807 152,934 172,767 144,360 121,035
Total loans 320,509 330,133 288,649 246,405 223,295 239,247
Total deposits 452,135 465,837 427,586 402,110 354,878 332,936
Shareholders' equity 50,672 40,982 39,733 34,162 30,407 27,575
- -----------------------------------------------------------------------------------------------------------------------------
Key Ratios
Return on average assets 1.20% 1.15% 1.10% 1.01% 0.81% 0.46%
Return on average equity 13.98% 14.28% 14.60% 13.76% 11.30% 6.67%
Total equity to assets 9.57% 7.71% 8.08% 7.38% 7.44% 6.79%
Tier 1 risk-based capital 14.87% 13.04% 13.34% 13.39% 12.78% 11.94%
Total capital (risk-based) 16.12% 14.29% 14.60% 14.65% 14.04% 13.20%
Nonperforming loans to total assets 0.18% 0.08% 0.29% 0.55% 1.19% 1.69%
Net charge-offs to total loans (0.02)% (0.06)% 0.28% 0.68% 1.36% 0.52%
Delinquencies to total loans 0.54% 0.44% 0.95% 1.85% 3.99% 6.06%
</TABLE>
All share and per share amounts 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.
1
<PAGE> 2
To Our Shareholders
Shareholders and Friends:
Our appreciation and gratitude are extended to Staff, Directors,
Shareholders, Customers and Friends for making 1995 another year of success and
record earnings performance. Proactive and innovative vision designed to enhance
and strengthen our Organization remained high priority and resulted in
significant strides and accomplishments.
You will note from the financial information outlined in this report that
CoBancorp Inc.'s operating and performance measurements identify continuing
positive trends and are some of the best in its class. Nineteen Hundred
Ninety-Five was our most financially successful year and will be detailed in the
accompanying review, analysis and graphs which summarize careful management of
operating fundamentals, size of our Company and shareholder return.
Our focus and commitment to strategic change over the past five years have
transformed us into a much stronger, leaner and resilient financial institution.
Cultural, operational and geographical challenges have been aggressively
addressed over the past few years resulting in a well-positioned company
possessing strong forward momentum.
Despite much accomplishment, our corporate journey is just beginning and
the framework of our next five-year plan is in place. The advances and
achievements envisioned under this initiative are designed to logically and
confidently build off the infrastructure of systems, procedures and controls
that are now in place.
Customer service and satisfaction coupled with staff professionalism,
empowerment and fulfillment will create new paradigms that will serve as the
blueprint from which we will operate to the year 2000.
The year 1995 is now a component of our 100-year history, and it is
appropriate to report that it was a year of positive significance that will
dramatically impact our future. Plans were announced to construct a new regional
headquarters and `showcase' branch in Powell, Ohio, one of the fastest growing
communities in the Columbus/Delaware MSA. Closer to home, major construction
commenced on our new administrative headquarters in the Elyria Midway Mall
complex, one of the larger shopping/service areas in northern Ohio. A number of
new locations were acquired and/or opened in the areas of Avon, Eaton Township,
Kipton, Lorain, North Olmsted, Oberlin, Sheffield Lake, South Amherst and
Wellington, making PREMIERBank & Trust the dominant financial institution in
Lorain County, controlling the largest market share.
Moving eastward, we unveiled our third Cuyahoga County Office which is
situated within the BP America Building, Public Square, in the heart of downtown
Cleveland. Our acquisitions and openings will permit the Bank to enhance its
operating efficiencies while entering into some new markets. More important,
expansion is part of a strategy of developing the Bank's presence in the
Lorain-Elyria-Columbus MSA, specifically focusing on western Cuyahoga County and
galvanizing our presence in Lorain County. Prior to some potential
reconfiguration of our branch network, PREMIERBank & Trust will operate over 40
offices in eight Ohio counties.
Looking ahead, we enter 1996 in a strong position. Loan quality remains at
a very high level supported by excellent underwriting, controls and systems. For
the second consecutive year the Bank did not experience a net loan loss, or,
stated another way, recoveries on loans previously charged off exceeded loans
charged off during the year. Our reserve for possible loan losses is sizable and
should provide an insulating effect against any unforeseen losses that might
develop in the future.
The initiatives established in 1995 addressing operating efficiency should
continue to positively impact earnings. These enhancements are logically
balanced between higher revenues and reduced operating expense. To that end, the
staffing models,
2
<PAGE> 3
expense controls and service-charge systems, should continue to strengthen the
Bank's operating fundamentals while contributing to greater returns.
Controls and systems to strategically and carefully manage the balance
sheet to ensure safety and soundness were enhanced during the year. As reflected
in 1995, the Bank will expand its asset base in a fashion that only assures
targeted and acceptable returns on both assets and equity.
This past year produced another record year for the Trust Department, both
in assets managed and earnings. The addition of a new 401K program has enhanced
retirement plans available to industry, business and small firms. Technological
improvements and new professional staff have enabled the department to expand
benefits and personalized service to our growing client base.
As we continuously look for additional ways of providing financial services
to our customers, we recently introduced alternative investment products
provided through Compulife, Inc. and Compulife Investor Services, Inc. Under
this arrangement, conservative investment products including tax-deferred
annuities, tax-exempt investment trusts, mutual funds and discount brokerage
services are available through `One Source Financial Centers' located in
PREMIERBank & Trust's lobbies. Customers are provided a free, confidential,
no-obligation evaluation to assist them in reviewing and clarifying their
financial objectives.
We would like to pay special tribute to Mrs. J. Sue Snyder, Senior Vice
President, Human Resources Department, who recently passed away. She was a
dedicated and loyal executive whose personal contributions over the past 38
years are a critical component of the Organization's successful legacy. Her
friendship and leadership will be sorely missed, and the Bank and the community
are richer for her having lived.
In closing, we remain committed to building on traditions with
innovativeness and positive results. The ideals and spirit that have served as
the foundation of our Organization for the past century will guide us in
becoming one of the finest regional community banks in Ohio. We believe these
efforts will provide shareholder rewards that are consistent with acceptable
levels of return on investment.
John S. Kreighbaum
Chairman, President and Chief Executive Officer
Timothy W. Esson
Executive Vice President
Robert T. Bowman
Chairman Emeritus
3
<PAGE> 4
MANAGEMENT DISCUSSION
The following discussion is presented to assist in understanding the
current financial condition and results of CoBancorp Inc. and its subsidiary,
PREMIERBank & Trust. This discussion should be read in conjunction with the
audited consolidated financial statements and related disclosures presented in
other sections of this annual report.
RESULTS OF OPERATIONS
OVERVIEW
CoBancorp Inc.'s net income increased 12.60% in 1995 when compared to 1994,
and 7.67% in 1994 when compared to 1993. The following table summarizes certain
key performance measures:
<TABLE>
<CAPTION>
1995 1994 1993
- ------------------------------------------------------------
<S> <C> <C> <C>
Net income ($000) $ 6,402 $ 5,686 $ 5,281
Net income/share ($) 1.86 1.68 1.56
Return on average assets
(ROA) (%) 1.20 1.15 1.10
Return on average equity
(ROE) (%) 13.98 14.28 14.60
- ------------------------------------------------------------
</TABLE>
NET INTEREST INCOME
The Corporation's primary source of earnings is net interest income, which
is the difference between revenue generated from earning assets such as loans
and investment securities, and the interest cost of liabilities which fund those
assets, such as interest-bearing deposits and short-term funds. For purposes of
this discussion, net interest income is adjusted to a taxable equivalent basis
to compare the yields on certain tax-exempt investments and loans with other
sources of interest income. On a fully taxable equivalent basis, net interest
income was $26,199,000 in 1995, compared to $25,756,000 in 1994 and $23,713,000
in 1993. The increase in net interest income in 1995 was attributable mainly to
an increase in average earning assets and, to a lesser extent, an increase in
the rate earned on those assets. These increases were partially offset by an
increase in the rate paid on interest-bearing liabilities and an increase in the
volume of those liabilities. Net interest margin, which is net interest income
on a fully taxable equivalent basis divided by average earning assets, was 5.31%
in 1995, 5.70% in 1994 and 5.39% in 1993. Net interest margin is affected by
changes in both the level of interest rates and changes in the amounts and mix
of interest-earning assets and interest-bearing liabilities. Average earning
assets grew $41,361,000, or 9.15%, to $493,373,000 in 1995, compared to
$452,012,000 in 1994 and $439,961,000 in 1993. Expressed as a percentage of
total average assets, earning assets were 92.7%, 91.4% and 91.7% in 1995, 1994
and 1993, respectively. The following table shows changes in interest income and
expense due to variances in rates and volume:
<TABLE>
<CAPTION>
1995 VS. 1994
DUE TO CHANGE IN
- -------------------------------------------------------------
($000) VOLUME RATE NET
- -------------------------------------------------------------
<S> <C> <C> <C>
Increase (decrease) in tax-
equivalent interest income:
Loans $ 1,492 $ 1,116 $ 2,608
Securities 1,740 298 2,038
Other 17 47 64
- -------------------------------------------------------------
Total 3,249 1,461 4,710
(Increase) decrease in
interest expense:
NOW 56 4 60
Savings & IMMA 470 45 515
Time (2,207) (2,440) (4,647)
Short-term funds (43) (152) (195)
- -------------------------------------------------------------
Total (1,724) (2,543) (4,267)
- -------------------------------------------------------------
Increase (decrease) in tax-
equivalent net interest
income $ 1,525 $(1,082) $ 443
- -------------------------------------------------------------
</TABLE>
4
<PAGE> 5
<TABLE>
<CAPTION>
1994 VS. 1993
DUE TO CHANGE IN
- --------------------------------------------------------------
($000) VOLUME RATE NET
- --------------------------------------------------------------
<S> <C> <C> <C>
Increase (decrease) in tax-
equivalent interest income:
Loans $ 4,652 $ (946) $ 3,706
Securities (2,171) (517) (2,688)
Other (84) 30 (54)
- --------------------------------------------------------------
Total 2,397 (1,433) 964
(Increase) decrease in
interest expense:
NOW 47 186 233
Savings & IMMA (281) 807 526
Time 121 200 321
Short-term funds 64 (63) 1
Total (49) 1,130 1,081
Increase (decrease) in
tax-equivalent net
interest income $ 2,348 $ (303) $ 2,045
- --------------------------------------------------------------
</TABLE>
Changes in interest income and interest expense not arising solely from
rate or volume variances are included in rate variances.
PROVISION FOR LOAN LOSSES
The provision for loan losses is an operating expense recorded to maintain
the related allowance for loan losses balance sheet account, and is provided to
cover losses that may be incurred in the normal course of lending. Actual losses
on loans are charged against the allowance for loan losses, and the related loan
is removed from the loan asset account on the balance sheet. The total provision
for loan and real estate losses was $180,000 in 1995, $208,000 in 1994 and
$920,000 in 1993. Further information is contained in the section of this
discussion entitled "Credit Quality and Experience".
NONINTEREST INCOME
The following table presents components of other operating income for the
past three years:
<TABLE>
<CAPTION>
($000) 1995 1994 1993
- ------------------------------------------------------
<S> <C> <C> <C>
Service charges on deposits $1,995 $1,821 $1,586
Trust fees 1,360 1,234 1,149
Other service charges
and fees 1,081 902 1,067
- ------------------------------------------------------
Subtotal 4,436 3,957 3,802
Securities gains 284 454 665
Total $4,720 $4,411 $4,467
- ------------------------------------------------------
</TABLE>
Total noninterest income, exclusive of securities gains, increased
$478,000, or 12.1% in 1995 when compared to 1994. 1994 represented an increase
of $155,000, or 4.1%. In early 1995, the Corporation completed a comprehensive
internal and competitive review of service charges. As a result, service charges
on deposit accounts increased $174,000 in 1995. The increase of $234,000 in 1994
was due primarily to growth in transaction and savings account deposits, coupled
with pricing adjustments. Income from trust activities has increased each year.
Total assets managed by the Trust Department aggregated $204,000,000,
$181,300,000 and $220,000,000 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.
5
<PAGE> 6
NONINTEREST EXPENSES
The following table shows significant components of noninterest expenses
during the past three years:
<TABLE>
<CAPTION>
($000) 1995 1994 1993
- ----------------------------------------------------------
<S> <C> <C> <C>
Salaries, wages and benefits $ 9,541 $ 9,301 $ 8,410
Occupancy-net 1,501 1,407 1,196
Furniture and equipment 764 615 546
Taxes, other than income
and payroll 600 584 542
FDIC insurance 560 966 924
Data processing 1,521 1,523 1,239
Office supplies, printing
and postage 1,177 1,106 1,280
Other 5,395 5,588 5,150
Total $21,059 $21,090 $19,287
- ----------------------------------------------------------
</TABLE>
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.
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
concentrations, as well as sound credit policy guidelines and procedures.
Nonperforming loans include loans accounted for on a nonaccrual basis as well as
accruing loans that are contractually past due 90 days or more as to principal
or interest. The following table presents information about nonperforming
assets:
6
<PAGE> 7
<TABLE>
<CAPTION>
($000) 1995 1994 1993
- ----------------------------------------------------
<S> <C> <C> <C>
Nonaccrual loans $859 $358 $1,315
Other real estate owned 49 640
Loans past due 90 days or
more and still accruing 106 51 135
Total nonperforming assets $965 $458 $2,090
Nonperforming assets as a
percentage of total loans 0.30% 0.14% 0.72%
</TABLE>
Asset quality remains a major focus of the organization, and nonperforming
loans are substantially lower than the industry average.
ALLOWANCE FOR LOAN LOSSES AND
LOAN CHARGE-OFFS AND RECOVERIES
The allowance for loan losses is the reserve maintained to cover possible
losses that may be incurred in the normal course of lending. The allowance for
loan losses is increased by the provision for loan losses which is charged
against income and by recoveries of loans previously charged off. The allowance
is decreased by the charge off of loans that are determined by management to be
uncollectible. In determining the adequacy of the allowance for loan losses,
management on a regular basis evaluates and gives consideration to a variety of
factors. These include estimated future losses on significant loans including
identified problem credits, historical loss experience based on volume and types
of loans, trends in portfolio volume, maturity and composition. Also,
off-balance sheet credit risk (i.e. unadvanced lines of credit), volume and
trends in delinquencies and nonaccruing loans, economic conditions in the Bank's
market areas, and any other relevant factors are evaluated. Potential problem
loans are those loans which are on the Bank's "watch list." These loans exhibit
characteristics which could cause the loan 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 discussed in Note D, 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.
7
FINANCIAL CONDITION
The following discussion addresses key elements of financial condition
including earning assets, sources of funds supporting those assets, capital
adequacy and asset and liability management.
EARNING ASSETS
LOANS
Loans comprise the majority of the Corporation's earning assets,
representing 66.5% of average earning assets in 1995 and 69.2% 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 following table
illustrates the mix within the loan portfolio:
<TABLE>
<CAPTION>
1995 1994 1993
- --------------------------------------------------------
<S> <C> <C> <C>
Real estate mortgages 43.3% 46.2% 45.9%
Commercial and collateral 43.0% 41.3% 42.5%
Installment 12.8% 11.6% 10.6%
Credit card and other 0.9% 0.9% 1.0%
Total 100.0% 100.0% 100.0%
- --------------------------------------------------------
</TABLE>
The largest category in the loan portfolio is residential real estate
mortgage loans, which were 43.3% of total loans at December 31, 1995, compared
to 46.2% of total loans at the same date in 1994. These loans are primarily
residential first mortgages which can qualify for sale in the secondary market.
At December 31, 1995 and 1994, there were approximately $17,942,000 and
$17,633,000, respectively, in home equity loans. During 1995, approximately
$14,000,000 of residential real estate mortgage loans were sold in the secondary
market. These sales provided a source of fee income and additional funds for new
lending.
The mix within the commercial loan portfolio is diverse and represents
loans to a broad range of businesses located primarily within the Bank's defined
market areas. There are no significant industry concentrations.
The installment loan portfolio is made up primarily of loans to individuals
for the purchase of vehicles and other consumer assets, as well as other
personal purposes.
Fixed rate loans maturing within one year and loans with adjustable rates
that reprice annual or more frequently (exclusive of scheduled repayments),
totaled $129,418,000, or 40.4% of the loan portfolio, at December 31, 1995. This
compares with $121,742,000, or 36.9%, at December 31, 1994.
8
<PAGE> 8
INVESTMENT SECURITIES
The investment portfolio represented 32.9% of average earning assets during
1995, compared to 30.3% in 1994 and 39.7% in 1993. These investments provide a
stable yet diversified income stream and serve a useful role in liquidity and
interest-rate sensitivity management. In addition, they serve as a source of
collateral for low-cost funding. Management bases its decisions on purchases of
investment securities based upon an assessment of current economic and financial
trends. The tax-equivalent yield on the investment portfolio was 7.32% in 1995,
7.18% in 1994 and 7.17% in 1993.
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 rating of obligations of states and political
subdivisions will be A, AA, or AAA, with the majority rated AA or AAA 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.
As discussed in Note C, in accordance with the Financial Accounting
Standards Board's (FASB) special report, the Corporation reclassified
$48,706,000 of securities from the held-to-maturity to the available-for-sale
category. This reclassification will permit added flexibility in the management
of interest rate sensitivity, investment returns, asset allocation and
liquidity. Securities which are in the held-to-maturity category are purchased
with the intent and ability to hold them to maturity and are carried at
amortized cost.
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%, 0.5% and 1.2%, respectively, of average earning assets.
SOURCES OF FUNDS
DEPOSITS
The Corporation's major source of funds is core deposits of retail and
business customers. Core deposits include non-interest and interest-bearing
demand deposits, savings and other time deposits, exclusive of Certificates of
Deposit over $100,000. The following table illustrates the distribution of
average deposits for the past three years:
<TABLE>
<CAPTION>
1995 1994 1993
- --------------------------------------------------------
<S> <C> <C> <C>
Noninterest demand 13.8% 14.0% 12.5%
Interest demand (NOW) 11.0% 12.6% 13.4%
Savings and insured money
market accounts 33.3% 40.7% 39.8%
Other time deposits and
certificates of deposit
under $100,000 29.7% 28.2% 30.2%
- --------------------------------------------------------
Total core deposits 87.8% 95.5% 95.9%
Certificates of deposit
over $100,000 12.2% 4.5% 4.1%
Total 100.0% 100.0% 100.0%
- --------------------------------------------------------
</TABLE>
At year-end 1995, certificates of deposit over $100,000 represented 9.5% of
total deposits.
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 1995, these funds represented 4.7% of average
earning assets, compared to 4.5% in 1994 and 5.0% in 1993. The following table
contains information on these funds:
<TABLE>
<CAPTION>
($000) 1995 1994 1993
- ----------------------------------------------------------
<S> <C> <C> <C>
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%
- ----------------------------------------------------------
</TABLE>
9
<PAGE> 9
SHAREHOLDERS' EQUITY AND CAPITAL ADEQUACY
Shareholders' equity is a stable, noninterest-bearing source of funds and
provides stability and support for asset growth.
Cash dividends are evaluated by management on an ongoing basis. During the
past five years, the dividend payout ratio has ranged from 25.4% in 1991 to
31.3% in 1995. Dividends per share were $0.577 per share in 1995, $0.512 in 1994
and $0.399 in 1993.
Capital adequacy refers to the level of capital required to sustain growth
over time to absorb unanticipated losses. The following table contains
additional information related to capital:
<TABLE>
<CAPTION>
($000) 1995 1994 1993
- --------------------------------------------------------------
<S> <C> <C> <C>
Total equity $ 50,672 $ 40,982 $ 39,733
Book value per share $ 14.70 $ 12.02 $ 11.80
Tier 1 capital 47,740 41,581 38,746
Total risk-based capital 51,777 45,588 42,396
Risk-adjusted assets 321,121 318,982 290,405
Tier 1 capital ratio 14.87% 13.04% 13.34%
Total capital ratio 16.12% 14.29% 14.60%
Tier 1 leverage ratio 9.05% 8.09% 7.90%
- --------------------------------------------------------------
</TABLE>
Total equity is computed in accordance with generally accepted accounting
principles and, as such, includes the net adjustment for unrealized gains or
losses on securities available-for-sale. This adjustment was $1,315,000 in 1995,
$(2,913,000) in 1994 and $982,000 in 1993. Regulatory capital and risk-adjusted
assets are computed according to federal reserve board guidelines, and exclude
the market value adjustment related to available-for-sale investment securities.
The Corporation's and the Bank's capital ratios substantially exceed the
Federal Reserve Board's capital guidelines for a well-capitalized institution,
which are Tier 1 capital ratio of at least 6.00%, 10.00% for total capital and
5.00% for the 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.
INTEREST RATE SENSITIVITY AND LIQUIDITY MANAGEMENT
The Bank's Asset/Liability Committee manages the overall rate sensitivity
and mix of balance sheet assets to anticipate and minimize negative effects due
to interest rate fluctuations, to maintain a consistent net interest margin and
to maintain consistent growth in net interest income. Interest rate risk is
monitored through gap analysis to properly position the Corporation in various
interest rate scenarios.
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.
10
<PAGE> 10
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
DECEMBER 31
1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 26,611,296 $ 29,271,444
Investment securities available-for-sale 129,466,384 71,604,165
Investment securities held-to-maturity 29,948,383 78,202,883
Federal funds sold 2,900,000 2,500,000
Loans 320,508,725 330,132,961
Less allowance for loan losses 5,849,689 5,616,859
Net loans 314,659,036 324,516,102
Bank premises and equipment, net 11,640,337 10,585,653
Accrued income and prepaid expenses 4,228,757 3,980,626
Other assets 10,076,157 11,066,084
Total Assets $ 529,530,350 $ 531,726,957
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Demand-noninterest bearing $ 70,008,577 $ 69,649,373
Demand-interest bearing 53,962,361 55,965,771
Savings and other time 328,163,756 340,221,731
Total deposits 452,134,694 465,836,875
Short-term funds 22,453,980 21,357,228
Other liabilities 3,839,195 2,770,882
Employee stock ownership plan obligation 430,260 780,260
Total liabilities 478,858,129 490,745,245
Shareholders' equity
Capital stock, no par value, 5,000,000 shares authorized
3,447,160 shares issued and outstanding (3,409,311 in 1994) 5,896,098 5,182,737
Capital surplus 18,553,553 16,623,320
Retained earnings 25,337,492 22,868,953
Unrealized gain (loss) on available-for-sale investment
securities (net of income tax) 1,315,338 (2,913,038)
Employee stock ownership plan obligation (430,260) (780,260)
TOTAL SHAREHOLDERS' EQUITY 50,672,221 40,981,712
Total Liabilities and Shareholders' Equity $ 529,530,350 $ 531,726,957
</TABLE>
See accompanying notes to consolidated financial statements
11
<PAGE> 11
CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income
Loans (including fees)
Taxable $ 29,669,860 $ 27,108,064 $23,382,522
Tax-exempt 190,612 160,825 175,218
Investment securities
Taxable 5,789,178 4,405,702 8,099,418
Tax-exempt 4,012,945 3,580,522 2,916,890
Federal funds sold and other short-term funds 166,290 101,532 155,215
Total interest income 39,828,885 35,356,645 34,729,263
Interest Expense
Deposits 14,963,571 10,891,503 11,970,871
Short-term funds 831,670 636,854 638,295
Total interest expense 15,795,241 11,528,357 12,609,166
Net interest income 24,033,644 23,828,288 22,120,097
Provision for Loan and Real Estate Losses 180,000 208,333 920,000
Net interest income after provision for
loan and real estate losses 23,853,644 23,619,955 21,200,097
Other Income
Service charges on deposit accounts 1,994,693 1,820,807 1,586,405
Trust fees 1,360,000 1,234,037 1,149,262
Other 1,080,559 902,351 1,066,717
Security gains 284,274 454,219 665,373
Total other income 4,719,526 4,411,414 4,467,757
Other Expenses
Salaries, wages and benefits 9,541,034 9,301,485 8,410,219
Occupancy-net 1,501,004 1,406,883 1,196,260
Furniture and equipment 764,318 615,305 546,415
Taxes, other than income and payroll 599,523 584,121 541,965
FDIC insurance 559,675 965,612 924,145
Other 8,093,662 8,216,267 7,668,251
TOTAL OTHER EXPENSES 21,059,216 21,089,673 19,287,255
Income before income taxes 7,513,954 6,941,696 6,380,599
Income Tax Expense (Benefit)
Current 1,298,000 1,511,000 1,080,000
Deferred (186,000) (255,000) 20,000
Total income tax expense 1,112,000 1,256,000 1,100,000
Net Income $ 6,401,954 $ 5,685,696 $ 5,280,599
Net Income Per Share (amounts reflect a three percent
stock dividend in 1995 and four-for-three stock
splits in 1994 and 1993) $ 1.86 $ 1.68 $ 1.56
</TABLE>
See accompanying notes to consolidated financial statements.
12
<PAGE> 12
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31
1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $ 6,401,954 $ 5,685,696 $ 5,280,599
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan and real estate losses 180,000 208,333 920,000
Provision for depreciation and amortization 1,433,910 1,211,917 1,026,158
Accretion of discounts on purchased loans (103,702) (491,577)
Amortization of premiums, less accretion of discounts on
investment securities (347,707) (12,508) 332,613
(Increase) decrease in refundable taxes (212,340) 243,723 (243,723)
Realized securities gains on available-for-sale securities (284,274) (454,219) (665,373)
(Credit) provision for deferred income taxes (186,000) (255,000) 20,000
(Increase) decrease in interest receivable (340,943) (560,812) 437,562
Increase (decrease) in interest payable 95,686 210,877 (114,462)
(Increase) in other assets (212,947) (347,184) (567,817)
Increase (decrease) in other Liabilities 290,567 50,087 (2,123)
Net Cash Provided By Operating Activities 6,714,204 5,489,333 6,423,434
Investing and Lending Activities
Proceeds from sales of available-for-sale investment securities 32,727,163 38,295,166 54,757,889
Maturities of available-for-sale investment securities 8,481,652 17,255,095 56,155,855
Maturities of held-to-maturity investment securities 7,387,123 3,725,331
Purchases of available-for-sale investment securities (40,793,428) (42,374,244) (89,259,979)
Purchases of held-to-maturity investment securities (10,371,621) (19,209,616)
Net (increase) decrease in credit card receivables (101,434) 45,390 397,988
Net decrease (increase) in longer-term loans 9,882,205 (40,855,489) (44,250,140)
Purchases of premises and equipment, net of retirements (2,217,265) (1,031,599) (3,167,403)
Net Cash Provided (Used) By Investing Activities 4,994,395 (44,149,966) (25,365,790)
Deposit and Financing Activities
Net (Decrease) Increase in Demand Deposits and Savings Accounts (35,513,764) 7,587,826 39,008,588
Net increase (decrease) in certificates of deposit 21,811,582 30,663,432 (13,532,659)
Net increase (decrease) in short-term funds 1,096,752 1,112,200 (2,459,637)
Cash dividends (2,003,182) (1,745,427) (1,347,730)
Dividend reinvestment plan 380,423 446,715 288,757
Long-term incentive plan 259,442 315,843 67,683
Net Cash (Used) Provided By Financing Activities (13,968,747) 38,380,589 22,025,002
(Decrease) Increase In Cash and Cash Equivalents (2,260,148) (280,044) 3,082,646
Cash and Cash Equivalents at Beginning of Year 31,771,444 32,051,488 28,968,842
Cash and Cash Equivalents at End of Year $ 29,511,296 $ 31,771,444 $ 32,051,488
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE> 13
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1995, UNREALIZED
1994 AND 1993 GAINS (LOSSES) EMPLOYEE
ON AVAILABLE- STOCK OWNER-
CAPITAL CAPITAL RETAINED FOR-SALE SHIP PLAN
STOCK SURPLUS EARNINGS SECURITIES OBLIGATION TOTAL
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1993 $ 3,947,905 $16,623,320 $14,995,815 $(1,405,260) $ 34,161,780
Net income 5,280,599 5,280,599
Cash dividends-$0.399* per share (1,347,730) (1,347,730)
Reduction in employee stock
ownership plan obligation 300,000 300,000
Shares issued (18,841*) under
dividend reinvestment plan 288,757 288,757
Shares issued (5,713*) under
long-term incentive plan 67,683 67,683
Adjustment to unrealized gains
on available-for-sale securities,
net of tax $ 982,078 982,078
- ----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 4,304,345 16,623,320 18,928,684 982,078 (1,105,260) 39,733,167
Net income 5,685,696 5,685,696
Cash Dividends-$0.512* Per Share (1,745,427) (1,745,427)
Reduction in employee stock
ownership plan obligation 325,000 325,000
Shares issued (17,400*) under
dividend reinvestment plan 446,715 446,715
Shares issued (25,945*) under
long-term incentive plan 431,677 431,677
Adjustment to unrealized gains
(losses) on available-for-sale
securities, net of tax (3,895,116) (3,895,116)
- ----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 5,182,737 16,623,320 22,868,953 (2,913,038) (780,260) 40,981,712
Net income 6,401,954 6,401,954
Cash dividends - $0.577 per share (2,003,182) (2,003,182)
Reduction in employee stock
ownership plan obligation 350,000 350,000
Shares issued (17,278) under
dividend reinvestment plan 380,423 380,423
Shares issued (21,184) under
long-term incentive plan 332,938 332,938
Three percent stock dividend 1,930,233 (1,930,233)
Adjustment to unrealized gains
(losses) on available-for-sale
securities, net of tax 4,228,376 4,228,376
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 $ 5,896,098 $18,553,553 $25,337,492 $ 1,315,338 $ (430,260) $ 50,672,221
<FN>
*Restated for a three percent stock dividend in 1995 and four-for-three stock
splits in 1994 and 1993.
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
NOTE A -- ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of CoBancorp Inc. (the Corporation) and its wholly-owned subsidiary,
PREMIERBank & Trust (the Bank). All material intercompany accounts and
transactions have been eliminated.
SECURITIES HELD-TO-MATURITY AND AVAILABLE-FOR-SALE: Management determines the
appropriate classification of debt securities at the time of purchase. Debt
securities are classified as held-to-maturity when the Corporation has the
positive intent and ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost.
Debt securities not classified as held-to-maturity are classified as
available-for-sale. Available-for-sale securities are stated at fair value with
the unrealized gains and losses, net of tax, reported as a separate component of
shareholders' equity. There are no securities classified as trading.
The amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity or, in the case of mortgage-backed securities, over the
estimated life of the security. Such amortization is included in interest income
from investments. Interest and dividends are included in interest income from
investments. Realized gains and losses are included in net securities gains
(losses). The cost of securities sold is based on the specific identification
method.
FINANCIAL INSTRUMENTS: The Bank invests in on-balance sheet financial
instruments as part of the overall asset and liability management process. The
Bank does not buy and sell financial instruments for the purpose of earning a
profit due to changes in the market price of the instruments. No off-balance
sheet financial instruments, other than those disclosed in Note M, have been
used by the Bank.
LOANS: Interest on loans is credited to earnings based upon
the principal amount outstanding. Interest on nonaccrual loans is recognized on
a cash basis.
DEPRECIATION AND AMORTIZATION: Bank premises and equipment are stated at cost
less accumulated depreciation. Depreciation is computed on straight-line and
declining-balance methods, based on the following ranges of lives:
<TABLE>
<CAPTION>
YEARS
- ------------------------------------------------------
<S> <C>
Buildings 10-40
Equipment and leasehold improvements 3-20
</TABLE>
Intangible assets are amortized using the straight-line method over the
assets' estimated life, generally ten years.
The asset account is relieved of the cost of the item and the allowance for
depreciation is relieved of accumulated depreciation when property is retired or
otherwise disposed. Any resulting gain or loss is reflected in operations
concurrently. Costs of major additions and improvements are capitalized.
Expenditures for maintenance and repairs are charged to operations as incurred.
ALLOWANCE FOR LOAN LOSSES: The provision for loan losses charged to operating
expense and the adequacy of the allowance for loan losses is based upon a
continuing evaluation of the loan portfolio, prior years' loss experience,
current economic conditions and other pertinent factors.
INCOME TAXES: Certain items of income and expense are recognized in taxable
years other than those in which such amounts are recognized in the financial
statements. Provisions are made in the financial statements for any
deferred taxes that arise in recognition of these temporary differences in
accordance with FASB Statement No. 109, "Accounting for Income Taxes." The
cumulative effect of adoption of FASB Statement No. 109 was not material to the
Corporation's results of operations for the year ended December 31, 1993.
CASH EQUIVALENTS: Cash equivalents include amounts due from banks and federal
funds sold. Generally, federal funds are purchased and sold for periods less
than thirty days.
FAIR VALUES OF FINANCIAL INSTRUMENTS: FASB Statement No. 107, "Disclosures
about Fair Value of Financial Instruments," requires disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instrument.
FASB Statement No. 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirement. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Corporation.
15
<PAGE> 15
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amounts reported in the balance
sheet for cash and short-term instruments approximate those assets' fair
values.
INVESTMENT SECURITIES (INCLUDING MORTGAGE-BACKED SECURITIES): Fair values
for investment securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based
on quoted market prices of comparable instruments.
LOANS RECEIVABLE: For variable-rate loans that reprice frequently and with
no significant change in credit risk, fair values are based on carrying
values. The fair values for certain mortgage loans (e.g., one-to-four
family residential), credit card loans, and other consumer loans are based
on quoted market prices of similar loans sold in conjunction with
securitization transactions, adjusted for differences in loan
characteristics. The fair values for other loans (e.g., commercial real
estate and rental property mortgage loans, commercial and industrial loans,
financial institution loans, and agricultural loans) are estimated using
discounted cash flow analyses, using interest rates currently being offered
for loans with similar terms to borrowers of similar credit quality. The
carrying amount of accrued interest approximates its fair value.
DEPOSIT LIABILITIES: The fair values disclosed for demand deposits (e.g.,
interest and noninterest checking, passbook savings, and certain types of
money market accounts) are, by definition, equal to the amount payable on
demand at the reporting date (i.e., their carrying amounts). The carrying
amounts for variable-rate, fixed-term money market accounts and
certificates of deposit approximate their fair values at the reporting
date. Fair values for fixed-rate certificates of deposit are estimated
using a discounted cash flow calculation that applies interest rates
currently being offered on certificates to a schedule of aggregated
expected monthly maturities on time deposits.
SHORT-TERM FUNDS: The carrying amounts of the funds under repurchase
agreements and other short-term funds approximate their fair values.
LONG-TERM BORROWINGS: The carrying amounts of the Corporation's long-term
borrowings (other than deposits) approximate their fair values.
POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS: The Corporation does not
provide postretirement or postemployment benefits except as provided by the
defined benefit plan discussed in Note J.
SEGMENT OF BUSINESS: The Corporation operates in the single industry of
banking. While the Corporation offers a wide range of services, they are
all deemed to be a part of commercial banking. PREMIERBank & Trust operates
38 branch offices in 8 counties in Northeast and North Central Ohio, as
well as a loan origination office in Worthington, Ohio.
PER SHARE AMOUNTS: Earnings per share computations are based on the average
number of shares of capital stock outstanding during the year. All per
share amounts have been adjusted to reflect a three percent stock dividend
in 1995, four-for-three stock splits in 1994 and 1993, and a four percent
stock dividend in 1992.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
RECLASSIFICATIONS: Certain amounts in the 1994 and 1993 financial
statements have been reclassified to conform to the 1995 presentation.
NOTE B -- RESTRICTIONS ON CASH AND DUE FROM BANKS
PREMIERBank & Trust is required to maintain reserve balances with the
Federal Reserve Bank. The average amount of those reserve balances for the year
ended December 31, 1995, was $2,247,000.
16
<PAGE> 16
NOTE C -- INVESTMENT SECURITIES
The following is a summary of available-for-sale and held-to-maturity
securities:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 AVAILABLE-FOR-SALE SECURITIES
Gross Gross
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S. Government agencies $ 31,365,822 $ 316,722 $ 31,636 $ 31,650,908
Collateralized mortgage-backed securities 45,563,545 488,410 476,290 45,575,665
States of the U.S. and political subdivisions 48,230,831 1,815,854 120,124 49,926,561
Other 2,313,250 2,313,250
$127,473,448 $2,620,986 $ 628,050 $129,466,384
<CAPTION>
HELD-TO-MATURITY SECURITIES
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
States of the U.S. and political subdivisions $ 29,948,383 $ 874,470 $ 86,004 $ 30,736,849
<CAPTION>
DECEMBER 31, 1994 AVAILABLE-FOR-SALE SECURITIES
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S. Government agencies $ 28,505,524 $ 781 $ 1,264,863 $ 27,241,442
Collateralized mortgage-backed securities 45,252,684 21,399 3,254,648 42,019,435
States of the U.S. and political subdivisions 1,000,000 83,638 1,083,638
Other 1,259,650 1,259,650
$ 76,017,858 $ 105,818 $ 4,519,511 $ 71,604,165
<CAPTION>
HELD-TO-MATURITY SECURITIES
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S. Government agencies $ 5,490,570 $ 177,320 $ 5,313,250
States of the U.S. and political subdivisions 72,712,313 $ 416,336 2,917,857 70,210,792
$ 78,202,883 $ 416,336 $ 3,095,177 $ 75,524,042
</TABLE>
Gross proceeds from sales of investment securities during 1995, 1994 and
1993 were $32,727,163, $38,295,166 and $54,757,889, respectively. For the same
periods, gross gains of $345,715, $615,066 and $768,985 and gross losses of
$61,441, $160,847 and $103,612 were realized, respectively. The net adjustment
to unrealized gains (losses) on available-for-sale securities, net of tax,
included as a separate component of shareholders' equity totaled $4,228,376, in
1995, ($3,895,116) in 1994 and $982,078 in 1993.
The amortized cost and estimated fair value of debt and marketable equity
securities at December 31, 1995, by contractual maturity, are shown below.
Mortgage-backed securities that may have prepayment provisions are assigned to a
maturity category based on estimated average life. Expected maturities will
differ from contractual maturities because the issuers of securities may have
the right to prepay obligations without prepayment penalties.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE SECURITIES
Estimated
Cost Fair Value
- ----------------------------------------------------------------
<S> <C> <C>
Due in 1 year or less $ 4,425,241 $ 4,483,667
Due in 1 to 5 years 36,027,547 36,401,406
Due in 5 to 10 years 61,735,714 62,741,565
DUE AFTER 10 YEARS 25,284,946 25,839,746
$127,473,448 $129,466,384
</TABLE>
17
<TABLE>
<CAPTION>
HELD-TO-MATURITY SECURITIES
Estimated
Cost Fair Value
- ----------------------------------------------------------------
<S> <C> <C>
Due in 1 year or less $ 2,082,890 $ 2,115,734
Due in 1 to 5 years 13,262,493 13,656,779
Due in 5 to 10 years 10,484,463 10,734,503
Due after 10 years 4,118,537 4,229,833
$ 29,948,383 $ 30,736,849
</TABLE>
At December 31, 1995 and 1994, investment securities with a carrying value
of approximately $100,685,315 and $80,721,505, respectively, were pledged as
collateral to secure public deposits and for other purposes.
On November 15, 1995, the FASB staff issued a special report, "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities." In accordance with provisions in that special report,
management chose to reclassify certain securities classified as held-to-maturity
to available-for-sale in a single transaction in December 1995. The amortized
cost of those securities was $48,705,886 and the net unrealized gain on those
securities was $1,757,891.
18
<PAGE> 17
NOTE D -- LOANS
The composition of the loan portfolio at December 31 was:
<TABLE>
<CAPTION>
1995
Estimated
Carrying Amount Fair Value
- -------------------------------------------------------
<S> <C> <C>
REAL ESTATE $138,664,113 $140,325,240
Installment 41,154,570 39,947,967
Commercial and collateral 137,701,651 133,664,400
All other 2,988,391 2,988,391
$320,508,725 $316,925,998
</TABLE>
<TABLE>
<CAPTION>
1994
Estimated
Carrying Amount Fair Value
- -------------------------------------------------------
<S> <C> <C>
Real estate $152,695,507 $147,153,620
Installment 38,363,874 37,311,565
Commercial and collateral 136,186,623 140,746,508
All other 2,886,957 2,886,957
$330,132,961 $328,098,650
</TABLE>
Included in commercial and collateral loans for 1995 and 1994 are
$2,588,807 and $2,946,474, respectively, of tax-exempt industrial revenue
development bonds.
Transactions in the allowance for loan losses were:
<TABLE>
<CAPTION>
1995 1994 1993
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1 $ 5,616,859 $ 5,226,401 $ 5,214,700
Provision for loan losses 180,000 208,333 820,000
Recoveries on loans
charged off 680,655 614,195 1,337,624
6,477,514 6,048,929 7,372,324
Loans charged off (627,825) (432,070) (2,145,923)
Balance at December 31 $ 5,849,689 $ 5,616,859 $ 5,226,401
</TABLE>
At December 31, 1995, nonperforming loans were $964,986, and other real
estate was $0. At December 31, 1994, the corresponding amounts were $408,735 and
$49,570, respectively.
Effective January 1, 1995, the Corporation adopted Statement of Financial
Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of
a Loan" as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosures." These standards address the
accounting for certain loans when it is probable that all amounts due, pursuant
to the contractual terms of the loan, will not be collected. Impairment is
measured based on either the present value of expected future cash flows using
the initial effective interest rate on the loan, the observable market price of
the loan, or the fair value of the collateral if the loan is collateral
dependent. If the recorded investment in the loan exceeds the measure of fair
value, a valuation allowance is established as a component of the allowance for
loan losses. The adoption of these accounting standards did not have a material
impact on the overall allowance for loan losses and did not affect CoBancorp's
charge-off or income recognition policies. At December 31, 1995, CoBancorp did
not have any impaired loans outstanding.
NOTE E -- BANK PREMISES AND EQUIPMENT
Bank premises and equipment at December 31 were:
<TABLE>
<CAPTION>
1995 1994
- ------------------------------------------------------------
<S> <C> <C>
Land and improvements $ 2,214,358 $ 2,218,060
Buildings 9,492,718 9,528,425
Equipment and leasehold
improvements 12,484,913 11,214,728
Construction in progress 717,423
24,909,412 22,961,213
Less accumulated depreciation
and amortization (13,269,075) (12,375,560)
$ 11,640,337 $ 10,585,653
</TABLE>
19
NOTE F -- DEPOSITS
Time certificates of deposit with balances of $100,000 or more, principally
public and corporate funds, were $42,842,392 and $36,896,549 at December 31,
1995 and 1994, respectively. Interest expense on these deposits amounted to
$3,402,732, $810,522 and $602,849 for 1995, 1994 and 1993, respectively.
20
<PAGE> 18
Total interest paid on deposits in 1995, 1994 and 1993 was $14,877,688,
$10,678,550 and $12,083,166, respectively.
The carrying amounts and fair values of deposits consisted of the following
at December 31. For deposits with no defined maturities, FASB Statement No. 107
defines fair value as the amount payable on demand.
<TABLE>
<CAPTION>
1995
Estimated
Carrying Amount Fair Value
- ----------------------------------------------------------
<S> <C> <C>
Demand - noninterest bearing $ 70,008,577 $ 70,008,577
Demand - interest bearing 53,962,361 53,962,361
Savings 143,601,686 143,601,686
Certificates of deposit 153,625,646 148,810,981
IRAs 30,936,424 29,043,383
$452,134,694 $445,426,988
<CAPTION>
1994
Estimated
Carrying Amount Fair Value
- ----------------------------------------------------------
<S> <C> <C>
Demand - noninterest bearing $ 69,649,373 $ 69,649,373
Demand - interest bearing 55,965,771 55,965,771
Savings 177,471,243 177,471,243
Certificates of deposit 131,629,889 125,017,271
IRAs 31,120,599 29,231,997
$465,836,875 $457,335,655
</TABLE>
NOTE G -- CAPITAL STOCK
On July 17, 1995, the Corporation declared a three percent stock dividend,
payable on September 1, 1995, to shareholders of record August 22, 1995. The
increase in the number of shares outstanding as a result of the stock dividend
was 99,431. The dividend was recorded at fair market value. Cash was paid for
any resulting fractional shares. On January 18, 1994, the Corporation declared a
four-for-three stock split, payable on February 22, 1994, to shareholders of
record February 1, 1994. The increase in the number of shares outstanding as a
result of the stock split was 841,773. Cash was paid for any resulting
fractional shares. On June 21, 1993, the Corporation declared a four-for-three
stock split, payable on July 23, 1993, to shareholders of record July 15, 1993.
The increase in the number of shares outstanding as a result of the stock split
was 627,908. Cash was paid for any resulting fractional shares.
The Corporation adopted a dividend reinvestment plan in 1987. The plan
allowed shareholders to elect to use their dividends to purchase shares of
capital stock at ninety-five percent of the fair market value of such stock as
determined on the dividend declaration date. During 1993, 18,841 shares were
issued under the plan. In April of 1994, the Corporation terminated the 1987
dividend reinvestment plan and replaced it with a new plan, which allows
shareholders to elect to use all or part of their dividends to purchase shares
of capital stock at the fair market value of such stock as determined on the
dividend declaration date. Additionally, cash can be contributed directly to the
plan for the purchase of shares of capital stock with an annual limit of
$25,000. During 1995 and 1994, a total of 17,278 and 17,400 shares,
respectively, were issued under the plans. Beginning in November 1995, shares
for the dividend reinvestment plan are acquired in the market, rather than
issued from the Corporation's authorized but unissued shares.
NOTE H -- DIVIDEND RESTRICTION
The payment of dividends by member banks of the Federal Reserve System,
without prior Federal regulatory approval, is limited to the current year's net
profits as defined and the retained net profits for the two preceding years. At
December 31, 1995, approximately $14,055,000 was available to the subsidiary
bank for the payment of dividends without prior regulatory approval.
21
<PAGE> 19
NOTE I -- INCOME TAXES
Significant components of the Corporation's deferred tax assets and
liabilities as of December 31, are as follows:
<TABLE>
<CAPTION>
1995 1994
- -----------------------------------------------------------
<S> <C> <C>
Deferred Tax Assets:
Unrealized gain (loss) on
available-for-sale securities,
net of tax $1,500,655
Provision for Loan Losses $1,310,134 1,155,554
Deferred Compensation 576,383 563,453
Nonaccrual Loan Interest 8,954 248,387
Other 213,123 80,216
2,108,594 3,548,265
Deferred Tax Liabilities:
Tax over Book Depreciation 348,560 591,279
Unrealized gain (loss) on
available-for-sale securities,
net of tax 677,598
Pension Costs 203,690 191,014
Insurance Costs 65,562
Other 206,322 113,672
1,436,170 961,527
NET DEFERRED TAX ASSET $ 672,424 $2,586,738
</TABLE>
The reasons for the difference between tax expense based on the statutory
rate of 34 percent in 1995, 1994 and 1993 and the effective tax rates were:
<TABLE>
<CAPTION>
1995 1994 1993
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax expense at
statutory rates $ 2,555,000 $ 2,360,000 $ 2,169,000
Reduction in taxes resulting from:
Tax-exempt interest (1,274,000) (1,272,000) (1,051,000)
Other (169,000) 168,000 (18,000)
$ 1,112,000 $ 1,256,000 $ 1,100,000
</TABLE>
The Corporation made income tax payments of approximately $1,525,000,
$975,000 and $1,634,000 during 1995, 1994 and 1993, respectively.
NOTE J -- PENSION PLAN
The Corporation has a trusteed, noncontributory retirement plan covering
eligible employees. Pension benefits are based on employees' career average
compensation. The Bank's funding policy is to contribute sufficient amounts to
meet minimum funding requirements set forth by required laws plus such
additional amounts as the Bank may determine appropriate. During 1995, the
Corporation's pension contribution was $217,282. There was no pension
contribution in 1994.
A summary of the components of pension expense is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
- ------------------------------------------------------------------
<S> <C> <C> <C>
Service cost benefits earned
during the period $ 219,506 $ 229,680 $ 184,495
Interest cost on projected
benefit obligation 185,495 192,763 174,274
RETURN ON PLAN ASSETS (200,715) (226,203) (227,774)
Net amortization
and deferral (24,286) (43,104) (50,756)
Net pension expense $ 180,000 $ 153,136 $ 80,239
</TABLE>
22
The funded status of the plan at December 31, 1995 and 1994, was as
follows:
<TABLE>
<CAPTION>
1995 1994
- -------------------------------------------------------------
<S> <C> <C>
Actuarial present value of
accumulated benefit obligation
Vested $ 2,237,967 $ 2,283,084
Nonvested 176,328 151,003
$ 2,414,295 $ 2,434,087
Actuarial present value of
projected benefit obligation $(3,027,399) $(3,151,832)
22
Plan assets at fair value 3,046,861 3,433,306
Plan assets in excess of
projected benefit obligation 19,462 281,474
Unrecognized transition asset,
net of amortization (651,235) (744,269)
UNRECOGNIZED NET LOSS 1,230,860 1,024,600
Net pension asset included in
other assets $ 599,087 $ 561,805
</TABLE>
23
<PAGE> 20
The long-term rate of return used to determine the expected return on plan
assets included in net pension expense is 7 percent. The projected benefit
obligation was determined using an assumed discount rate of 7 percent, and an
annual compensation increase of 5 percent. At December 31, 1995 and 1994, plan
assets consisted primarily of money market, equity and fixed income funds.
NOTE K -- EMPLOYEE STOCK OWNERSHIP PLAN
The Corporation has a noncontributory employee stock ownership plan (ESOP)
that covers substantially all employees. In 1986, the ESOP borrowed $2,680,260.
The balance outstanding at December 31, 1995, of $430,260 is due in November
1996 under a loan agreement with an unaffiliated bank to finance a purchase of
shares of the Corporation's capital stock for the ESOP. The loan agreement
provides for the payment of interest at a fluctuating rate. The rate of interest
on the loan at December 31, 1995, was 7.785 percent. Interest incurred on this
loan obligation was $54,926, $61,104 and $70,094 in 1995, 1994 and 1993,
respectively. At December 31, 1995, 33,640 shares of the Corporation's common
stock owned by the ESOP were pledged as security for the payment of principal
and interest as provided in the loan agreement.
It is anticipated that funds for servicing the loan agreement will be
provided essentially from contributions paid by the Corporation or its
subsidiary to the ESOP, from earnings attributable to such contributions and
from cash dividends paid to the ESOP on shares of the Corporation's capital
stock which it owns. Neither the Corporation, nor its subsidiary, has guaranteed
the payments required by the loan agreement, nor made any commitment to make
contributions to the ESOP for this purpose. However, as required by generally
accepted accounting principles, the ESOP's obligation has been recorded on the
Corporation's consolidated balance sheet with an offsetting reduction of
shareholders' equity.
Contributions by the Corporation and its subsidiary to the ESOP are
expensed in the year the contribution is approved. These contributions were
$291,350, $165,375 and $267,600 in 1995, 1994 and 1993, respectively.
Dividends received for shares owned by the ESOP amounted to $149,613,
$146,453 and $121,770 in 1995, 1994 and 1993, respectively, and were used to
service the loan obligation.
NOTE L -- RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank makes loans and enters into
other transactions with its directors, officers and entities having a specified
relationship to such directors and officers. Transactions entered into between
the Bank and such related parties have been and are in the ordinary course of
business made on substantially the same terms and conditions as transactions
with other parties. As of December 31, 1995 and 1994, the Bank had loans
outstanding to related parties of approximately $6,320,616 and $7,538,657,
respectively.
NOTE M -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Loan commitments are made to accommodate the financial needs of the Bank's
customers. Standby letters of credit commit the Bank to make payments on behalf
of customers when certain specified future events occur. Both arrangements have
credit risk essentially the same as that involved in extending loans to
customers and are subject to the Bank's normal credit policies. Collateral
(e.g., securities, receivables, inventory or equipment) is obtained based on
management's credit assessment of the customer.
The Bank's maximum potential obligation to extend credit for loan
commitments (unfunded loans and unused lines of credit) and standby letters of
credit at December 31, 1995 and 1994, was:
<TABLE>
<CAPTION>
1995 1994
- -------------------------------------------------------
<S> <C> <C>
Real estate $17,195,000 $21,385,000
Commercial and collateral 33,538,000 36,853,000
All other 15,651,000 18,070,000
$66,384,000 $76,308,000
</TABLE>
Most of the Bank's business activity is with customers located within the
Bank's defined market area. As of December 31, 1995, the Bank had no significant
concentrations of credit risk in its loan portfolio. The Bank also has no
exposure to highly leveraged transactions and no foreign credits in its loan
portfolio.
NOTE N -- SERVICE AGREEMENT
In 1995, the Corporation renegotiated its agreement to purchase information
technology services from a data processing company. This agreement has a term of
seven years and may be renewed for successive terms of seven years each. The
agreement provides for payment of a monthly charge based on the number of
application and transaction accounts maintained. These payments are partially
offset by amounts received by the Corporation for the use of certain facilities
by the processor. The amount included in
24
<PAGE> 21
"other expenses" in connection with the service agreement was $1,261,213
for 1995, $1,276,647 for 1994 and $859,884 for 1993. The minimum annual base
charge in connection with this agreement is $486,000 annually.
Additionally, the Corporation entered into an agreement to lease certain
data processing equipment from a different company. The agreement has a term of
seven years. The annual lease fee in connection with this agreement is
approximately $252,000.
NOTE O -- LONG-TERM INCENTIVE PLAN
On January 21, 1992, the Board of Directors of the Corporation adopted a
Long-Term Incentive Plan ("Plan") for officers and key employees of the
Corporation. Under the terms of the Plan, eligible employees may be granted
stock options, restricted stock or long-term performance awards based on certain
conditions. There were 190,435 shares of stock reserved and available for
distribution under the Plan. Stock options are exercisable at the fair market
value of the stock at the time of the grant. On January 21, 1992, options which
cover 126,164 shares of stock were granted by the Board of Directors at a fair
market value of $11.85 per share. During 1995, 19,042 options were exercised at
$11.85 and 2,142 were exercised at $15.80. In 1994, 20,946 options were
exercised at $11.85 and 4,999 were exercised at $15.80. Finally, in 1993, 5,713
shares were exercised at $15.80. No options were granted in 1995 or 1993. On
November 15, 1994, options which cover 47,397 shares of stock were granted by
the Board of Directors at a fair market of $22.09 per share. All shares and per
share amounts have been restated for a three percent stock dividend in 1995, a
four percent stock dividend in 1992 and four-for-three stock splits in 1994 and
1993.
The Corporation accounts for the plan under the provisions of Accounting
Principles Board (APB) Opinion No. 25, "Accounting For Stock Issued To
Employees."
In 1995, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 123, "Accounting Disclosure of Stock-Based Compensation." The
statement is effective for fiscal years beginning after December 15, 1995. The
adoption of FASB 123 is not expected to have a material effect on the
Corporation's financial statements.
NOTE P -- COBANCORP INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION
BALANCE SHEETS (Parent Company Only)
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
- ----------------------------------------------------------------
<S> <C> <C>
Assets
Cash $ 288 $ 223,351
Investment in bank subsidiary 50,886,687 41,412,688
Other assets 215,505 125,933
Total Assets $51,102,480 $41,761,972
Liabilities and Shareholders' Equity
Liabilities
Employee stock ownership
plan obligation $ 430,260 $ 780,260
Total Liabilities 430,260 780,260
Shareholders' Equity 50,672,220 40,981,712
Total Liabilities and
Shareholders' Equity $51,102,480 $41,761,972
</TABLE>
STATEMENTS OF INCOME (Parent Company Only)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1995 1994 1993
- -----------------------------------------------------------------
<S> <C> <C> <C>
Income
Dividends from
bank subsidiary $1,340,089 $1,366,365 $1,250,749
Other income 75,885 1,000
Total income 1,415,974 1,367,365 1,250,749
Expenses 259,644 288,960 171,793
Income Before Equity in
Undistributed Net Income
of Bank Subsidiary 1,156,330 1,078,405 1,078,956
Equity in Undistributed
Net Income of Bank
Subsidiary 5,245,624 4,607,291 4,201,643
Net Income $6,401,954 $5,685,696 $5,280,599
</TABLE>
25
<PAGE> 22
STATEMENTS OF CASH FLOWS (Parent Company Only)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1995 1994 1993
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net Income $ 1,156,330 $ 1,078,405 $ 1,078,956
(Increase) in Other Assets (16,075) (9,999) (100)
Net Cash Provided by
Operating Activities 1,140,255 1,068,406 1,078,856
Financing Activities
Cash Dividends (2,003,182) (1,347,730)
Dividend
Investment Plan 380,423 446,715 288,757
Long-Term
Incentive Plan 259,441 315,843 67,683
Net Cash Used by
Financing Activities (1,363,318) (982,869) (991,290)
(Decrease) Increase
in Cash and Cash
Equivalents (233,063) 85,537 87,566
Cash and Cash Equivalents
at Beginning of Year 223,351 137,814 50,248
Cash and Cash
Equivalents at End
of Year $ 288 $ 223,351 $ 137,814
</TABLE>
NOTE Q -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information is contained on page 22.
NOTE R -- ACQUISITIONS
On November 10, 1995, the Bank entered into an agreement to acquire certain
assets and assume certain liabilities representing eleven (11) Lorain County
branch offices of Bank One, Cleveland, N.A. The transaction closed on February
16, 1996.
26
<PAGE> 23
Report Of Ernst & Young LLP, Independent Auditors
The Shareholders
CoBancorp Inc.
We have audited the accompanying consolidated balance sheets of CoBancorp
Inc. and subsidiary as of December 31, 1995 and 1994, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of CoBancorp Inc.
and subsidiary at December 31, 1995 and 1994, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Cleveland, Ohio
January 19, 1996
27
<PAGE> 24
MARKET AND DIVIDEND INFORMATION
All common shares of CoBancorp Inc. are voting shares and are traded on the
NASDAQ National Market System. There are currently 3,447,160 shares outstanding,
held among approximately 1,719 shareholders of record as of December 31, 1995.
Prices are the high and low closing prices as reported by NASDAQ. All per-share
amounts have been adjusted for a three percent stock dividend in September 1995
and a four-for-three stock split in February 1994.
<TABLE>
<CAPTION>
TRADING RANGES OF COMMON STOCK
BID PRICES DIVIDEND PER SHARE
1995 1994 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $20.87 $24.27 $14.48 $15.19 $0.1359 $0.1238
Second Quarter 18.45 23.54 15.19 15.75 0.1456 0.1262
Third Quarter 18.45 22.00 15.82 18.56 0.1456 0.1262
Fourth Quarter 17.75 22.00 19.13 25.50 0.1500 0.1359
$0.5771 $0.5121
</TABLE>
28
<PAGE> 25
The following is a summary of unaudited quarterly results of operations for the
years 1995, 1994 and 1993:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH FULL YEAR
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1995
Interest income $ 9,760,554 $10,098,322 $10,043,559 $9,926,450 $39,828,885
Interest expense 3,598,738 4,101,478 4,175,916 3,919,109 15,795,241
Net interest income 6,161,816 5,996,844 5,867,643 6,007,341 24,033,644
Provision for loan losses 60,000 60,000 60,000 0 180,000
Security gains (4,118) 7,623 240,607 40,162 284,274
Net overhead 4,327,341 4,235,406 4,026,569 4,034,648 16,623,964
Income before income taxes 1,770,357 1,709,061 2,021,681 2,012,855 7,513,954
Net income 1,460,357 1,421,061 1,661,681 1,858,855 6,401,954
Net income per common share 0.43 0.41 0.48 0.54 1.86
Dividends paid per common share 0.1359 0.1456 0.1456 0.1500 0.5771
- -----------------------------------------------------------------------------------------------------
1994
Interest income $ 8,394,404 $ 8,620,442 $ 8,805,930 $9,535,869 $35,356,645
Interest expense 2,742,931 2,784,411 2,869,878 3,131,137 11,528,357
Net interest income 5,651,473 5,836,031 5,936,052 6,404,732 23,828,288
Provision for loan losses 125,000 83,333 0 0 208,333
Security gains 291,131 117,394 44,969 725 454,219
Net overhead 4,350,613 4,350,743 4,116,790 4,314,332 17,132,478
Income before income taxes 1,466,991 1,519,349 1,864,231 2,091,125 6,941,696
Net income 1,216,991 1,277,349 1,542,231 1,649,125 5,685,696
Net income per common share 0.36 0.38 0.45 0.49 1.68
Dividends paid per common share 0.1238 0.1262 0.1262 0.1359 0.5121
- -----------------------------------------------------------------------------------------------------
1993
Interest income $ 8,614,197 $ 8,706,940 $ 8,759,519 $8,648,607 $34,729,263
Interest expense 3,185,375 3,193,055 3,300,071 2,930,665 12,609,166
Net interest income 5,428,822 5,513,885 5,459,448 5,717,942 22,120,097
Provision for loan losses 600,000 250,000 50,000 20,000 920,000
Security gains 140,716 340,756 100,673 83,228 665,373
Net overhead 3,752,133 3,788,369 3,962,098 3,982,271 15,484,871
Income before income taxes 1,217,405 1,816,272 1,548,023 1,798,899 6,380,599
Net income 1,006,405 1,433,272 1,306,023 1,534,899 5,280,599
Net income per common share 0.30 0.43 0.39 0.44 1.56
Dividends paid per common share 0.0874 0.0928 0.1019 0.1165 0.3986
</TABLE>
All share and per-share amounts have been adjusted for a three percent stock
dividend in 1995 and four-for-three stock splits in 1994 and 1993.
29
<PAGE> 26
COBANCORP INC.
BOARD OF DIRECTORS
JOHN S. KREIGHBAUM
Chairman, President and Chief Executive Officer
CoBancorp Inc., Elyria, Ohio
Chairman and Chief Executive Officer
PREMIERBank & Trust, Elyria, Ohio
TIMOTHY W. ESSON
Executive Vice President and Treasurer
CoBancorp Inc., Elyria, Ohio
President
PREMIERBank & Trust, Elyria, Ohio
THEODORE S. ALTFELD
Vice President
EBM Group Corp., Elyria, Ohio
ROBERT T. BOWMAN
Chairman Emeritus
CoBancorp Inc. and PREMIERBank & Trust, Elyria, Ohio
ROBERT S. COOK
Executive Vice President
R. W. Beckett Corporation, North Ridgeville, Ohio
MAUREEN M. CROMLING
President and Chief Executive Officer
Ross Environmental Services, Inc., Grafton, Ohio
GARIS F. DISTELHORST
President
NACSCORP, Inc., Oberlin, Ohio
MICHAEL B. DUFFIN
President
Duffin Manufacturing Company, Elyria, Ohio
THOMAS E. HAYWOOD
President and Chief Executive Officer
Brandau Jewelers, Inc., Elyria, Ohio
LARRY D. JONES
President and Chief Executive Officer
Erie Shores Computer, Inc., Elyria, Ohio
THOMAS R. MIKLICH
Chief Financial Officer
Invacare Corporation, Elyria, Ohio
RICHARD J. STEWART
Chairman
Stewart Appliances, Inc., Elyria, Ohio
A. E. SZAMBECKI
President and Chief Executive Officer
Hallrich, Inc., Stow, Ohio
RICHARD A. VAN AUKEN
President and Chief Executive Officer
Jennings and Churella Construction Company,
Wellington, Ohio
30A
<PAGE> 27
PREMIERBANK & TRUST
BOARD OF DIRECTORS
JOHN S. KREIGHBAUM
Chairman and Chief Executive Officer
PREMIERBank & Trust, Elyria, Ohio
Chairman, President and Chief Executive Officer
CoBancorp Inc., Elyria, Ohio
TIMOTHY W. ESSON
President
PREMIERBank & Trust, Elyria, Ohio
Executive Vice President and Treasurer
CoBancorp Inc., Elyria, Ohio
THEODORE S. ALTFELD
Vice President
EBM Group Corp., Elyria, Ohio
ROBERT T. BOWMAN
Chairman Emeritus
CoBancorp Inc. and PREMIERBank & Trust, Elyria, Ohio
ROBERT S. COOK
Executive Vice President
R. W. Beckett Corporation, North Ridgeville, Ohio
MAUREEN M. CROMLING
President and Chief Executive Officer
Ross Environmental Services, Inc., Grafton, Ohio
GARIS F. DISTELHORST
President
NACSCORP, Inc., Oberlin, Ohio
MICHAEL B. DUFFIN
President
Duffin Manufacturing Company, Elyria, Ohio
THOMAS E. HAYWOOD
President and Chief Executive Officer
Brandau Jewelers, Inc., Elyria, Ohio
SHARON L. HERZER
Firm Administrator and Chief Executive Officer
Wickens, Herzer & Panza, Lorain, Ohio
LARRY D. JONES
President and Chief Executive Officer
Erie Shores Computer, Inc., Elyria, Ohio
THOMAS R. MIKLICH
Chief Financial Officer
Invacare Corporation, Elyria, Ohio
RICHARD J. STEWART
Chairman
Stewart Appliances, Inc., Elyria, Ohio
A. E. SZAMBECKI
President and Chief Executive Officer
Hallrich, Inc., Stow, Ohio
RICHARD A. VAN AUKEN
President and Chief Executive Officer
Jennings and Churella Construction Company,
Wellington, Ohio
JERRY M. WOLF
President and Chief Executive Officer
Midwest Acoust-A-Fiber, Inc., Delaware, Ohio
30B
<PAGE> 28
COBANCORP INC.
EXECUTIVE OFFICERS
JOHN S. KREIGHBAUM
Chairman, President and Chief Executive Officer
TIMOTHY W. ESSON
Executive Vice President and Treasurer
PREMIERBANK & TRUST
EXECUTIVE OFFICERS
JOHN S. KREIGHBAUM
Chairman and Chief Executive Officer
TIMOTHY W. ESSON
President
JAMES R. BRYDEN
Regional President/North Central District
LOIS E. GUNNING
Corporate Secretary
MARY A. BARNES
Senior Vice President/Branch Administration
DENNIS K. MILLER
Senior Vice President/Operations Manager
ROBERT J. SCOTT
Senior Vice President/Director of Investment Management and Trust Services
BRUCE E. STEVENS
Senior Vice President/Director of Lending
NORTH CENTRAL DISTRICT
ADVISORY COUNCIL
JOHN S. KREIGHBAUM
Chairman, President and Chief Executive Officer
CoBancorp Inc., Elyria, Ohio
Chairman and Chief Executive Officer
PREMIERBank & Trust, Elyria, Ohio
TIMOTHY W. ESSON
Executive Vice President and Treasurer
CoBancorp Inc., Elyria, Ohio
President
PREMIERBank & Trust, Elyria, Ohio
JAMES R. BRYDEN
Regional President/North Central District
PREMIERBank & Trust, Worthington, Ohio
STEVEN W. WILSON
Owner
S. W. Wilson Personal Clothier, Delaware, Ohio
JERRY M. WOLF
President and Chief Executive Officer
Midwest Acoust-A-Fiber, Inc., Delaware, Ohio
REGULATORY AND S.E.C. COUNSEL
Grady & Associates, Cleveland, Ohio
30C
<PAGE> 29
SHAREHOLDERS' INFORMATION
SHAREHOLDERS' ANNUAL MEETING
The Annual Meeting of the Shareholders of CoBancorp Inc. will be held at 11:00
a.m., Wednesday, May 8, 1996, at Lorain County Community College, Classroom
Conferencing Center, 1005 North Abbe Road, Elyria, Ohio 44035.
COMMON STOCK INFORMATION
CoBancorp Inc. common stock is traded on the NASDAQ National Market System under
the symbol COBI. CoBancorp Inc.'s CUSIP is 190750 10 9.
REGISTRAR AND TRANSFER AGENT
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
10-K REPORT
A copy of the Corporation's 1995 Annual Report filed with the Securities and
Exchange Commission on Form 10-K without exhibits is available to shareholders
without charge. To obtain a copy, direct your request to the Office of the
Controller, CoBancorp Inc., P. O. Box 4001, Elyria, Ohio 44036-2001. Exhibits
will be furnished to shareholders upon request after the Corporation receives
payment to cover its costs of furnishing the exhibits.
DIVIDEND REINVESTMENT AND
STOCK PURCHASE PLAN
A Dividend Reinvestment and Stock Purchase Plan is available to shareholders of
CoBancorp Inc. The Plan provides an opportunity to invest cash dividends and
optional cash payments in CoBancorp Inc. stock. For details, contact CoBancorp
Inc., P. O. Box 4001, Elyria, Ohio 44036-2001, or telephone (216) 329-8000 or
(800) 522-3034.
31
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
NAME STATE OF INCORPORATION
- ---- ----------------------
PREMIERBank & Trust Ohio
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-56464) pertaining to the CoBancorp Inc. 1992 Long-Term
Incentive Plan of our report dated January 19, 1996, with respect to the
consolidated financial statements of CoBancorp Inc. and subsidiary included in
the Annual Report (Form 10-K) for the year ended December 31, 1995.
Ernst & Young, LLP
Cleveland, Ohio
March 29, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF COBANCORP INC. AND SUBSIDARY AS OF DECEMBER 31,
1995, AND THE RELATED STATEMENTS OF INCOME, CASH FLOWS AND SHAREHOLDERS' EQUITY
FOR THE YEAR THEN ENDED, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000745276
<NAME> COBANCORP INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 25,368
<INT-BEARING-DEPOSITS> 1,243
<FED-FUNDS-SOLD> 2,900
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 129,466
<INVESTMENTS-CARRYING> 29,948
<INVESTMENTS-MARKET> 30,737
<LOANS> 320,509
<ALLOWANCE> 5,850
<TOTAL-ASSETS> 529,530
<DEPOSITS> 452,135
<SHORT-TERM> 22,454
<LIABILITIES-OTHER> 4,269
<LONG-TERM> 0
<COMMON> 5,896
0
0
<OTHER-SE> 44,776
<TOTAL-LIABILITIES-AND-EQUITY> 529,530
<INTEREST-LOAN> 29,861
<INTEREST-INVEST> 9,802
<INTEREST-OTHER> 166
<INTEREST-TOTAL> 39,829
<INTEREST-DEPOSIT> 14,964
<INTEREST-EXPENSE> 15,795
<INTEREST-INCOME-NET> 24,034
<LOAN-LOSSES> 180
<SECURITIES-GAINS> 284
<EXPENSE-OTHER> 21,059
<INCOME-PRETAX> 7,514
<INCOME-PRE-EXTRAORDINARY> 7,514
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,402
<EPS-PRIMARY> 1.86
<EPS-DILUTED> 1.86
<YIELD-ACTUAL> 5.31
<LOANS-NON> 859
<LOANS-PAST> 106
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,617
<CHARGE-OFFS> 628
<RECOVERIES> 681
<ALLOWANCE-CLOSE> 5,850
<ALLOWANCE-DOMESTIC> 4,885
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 965
</TABLE>
