<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, 1996.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
FOR THE TRANSITION PERIOD FROM _______________TO _______________.
COMMISSION FILE NUMBER 0-13166.
COBANCORP INC.
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO 34-1465382
------------------------------ -------------------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION IDENTIFICATION NO.)
1530 WEST RIVER ROAD, NORTH
ELYRIA, OHIO 44035
- ---------------------------------------- -------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: 216-329-8000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
- --------------------------------------------------------------------------------
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter periods that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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The aggregate market value, computed using the closing bid quotation as reported
by the Nasdaq National Market System, of the voting stock held by nonaffiliates
of the registrant (exclusive of 226,144 shares held by the CoBancorp Inc.
Employee Stock Ownership Plan and 259,482 non-ESOP shares held by directors and
executive officers of the Corporation) as of January 31, 1997:
Common Stock, no par value--$63,816,257
The number of shares outstanding of the issuer's classes of common stock as of
January 31, 1997:
Common Stock, no par value--3,453,824 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the year
ended December 31, 1996, are incorporated by reference into Parts I and II.
Portions of the Registrant's Proxy Statement for the annual
shareholders' meeting to be held April 16, 1997, are incorporated by reference
into Part III.
The index to exhibits in this filing begins on page 27.
2
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COBANCORP INC.
FORM 10-K REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
- ---- ----
<S> <C>
PART I
1. BUSINESS ............................................................................... 4
Description of Business ................................................................ 4
Acquisitions ........................................................................... 5
Competition ............................................................................ 6
Regulation ............................................................................. 6
Examination and Supervision ............................................................ 7
Federal Reserve System ................................................................. 7
Insurance of Deposits .................................................................. 7
Community Reinvestment Act ............................................................. 7
Executive Officers of the Registrant ................................................... 8
Supplemental Financial Data ............................................................ 8
2. PROPERTIES ............................................................................. 9
3. LEGAL PROCEEDINGS ...................................................................... 11
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .................................... 11
PART II
5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
........................................................................................ 11
6. SELECTED FINANCIAL DATA ................................................................ 11
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS .. 11
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ............................................ 26
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ... 26
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ..................................... 27
11. EXECUTIVE COMPENSATION ................................................................. 27
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ......................... 27
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ......................................... 27
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K ........................ 27
SIGNATURES
SIGNATURES ............................................................................. 29
</TABLE>
3
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PART I
ITEM 1. BUSINESS
DESCRIPTION OF BUSINESS
CoBancorp Inc. (the "Corporation"), headquartered in Elyria, Ohio, is a
bank holding company registered with the Federal Reserve System whose principal
asset is the common stock of its wholly owned commercial bank subsidiary,
PREMIERBank & Trust (the "Bank").
The Corporation was organized under Ohio law in November 1983 and
remained inactive until September 8, 1984. On that date, the Bank's shareholders
became Corporation shareholders in a tax-free and regulatory reorganization.
This transaction was accounted for as a pooling of interests.
As a bank holding company, the Corporation is exclusively engaged and
intends to continue to engage in the management of the Bank. The Bank was
chartered by the State of Ohio in 1926 and is a member bank of the Federal
Reserve System. As of December 31, 1996, the Bank operates thirty-six (36)
banking offices throughout its market area of Lorain County and portions of
Cuyahoga, Erie, Richland, Huron, Delaware, Franklin and Crawford Counties. The
Bank has 41 automated teller machines ("ATMs") and is a member of the MAC and
Plus ATM networks. As a member bank of the Federal Reserve System, the Bank's
deposits are insured by the Federal Deposit Insurance Corporation (the "FDIC")
to the extent permitted by law. The Bank is subject to primary regulation by the
Federal Reserve and the Ohio Department of Commerce, Division of Banking. The
Bank is also subject to regulation by the FDIC. The Corporation's activities as
a bank holding company are regulated by the Federal Reserve, and the
Corporation's corporate governance is determined by Ohio law.
The Bank provides commercial and retail banking services to individual,
business, institutional and governmental customers. These services include
personal and commercial checking accounts, savings and time deposit accounts,
personal and business loans, a credit card system and safe deposit facilities.
CoBancorp, Inc. operates in markets that are diverse in their economic base,
ranging from service, governmental and educational orientation in the Columbus,
Ohio MSA, to heavy and light industrial activity in the Cleveland/Elyria markets
and agricultural orientation in the geographical area between Lorain and
Columbus.
Consistent with formally approved Loan Policy, the Bank offers a variety
of commercial loans involving differing characteristics depending on purpose,
intent, maturity and collateral; real estate loans structured to include
traditional and nonresidential lending activities; and consumer loans designed
to meet a multitude of credit needs on both a secured an unsecured basis. As
guidance in underwriting criteria for each category of loans referenced above,
loan-to-value ratios and lien positions are considered as components to
structures and designs. They will vary based on characteristics contained in the
respective loan category.
The Trust Department of the Bank performs complete trust administrative
functions and offers agency and trust services to individuals, partnerships,
corporations, institutions and municipalities.
As of December 31, 1996, in the opinion of management, the Corporation
did not have any concentration of loans to similarly situated borrowers. There
were no foreseeable losses relating to other interest-earning nonloan assets.
Growth of the Bank's commercial loan portfolio has originated in the
nontraditional part of its operating franchise, i.e. Columbus MSA and Cleveland,
thus permitting geographical diversification in its lending processes. This is
perceived by management as being an appropriate risk diversification strategy
attempting to balance its portfolio and guard against cyclical cycles of certain
industry classifications.
The Bank is not significantly affected by seasonal activity or large
deposits of individual customers. The Bank is not engaged in operations in any
foreign country.
On December 31, 1996, the Corporation and its subsidiary employed
approximately 339 full-time and 75 part-time employees. None of the employees is
represented by a union or collective bargaining group. Management considers its
relations with employees to be satisfactory. Employee benefit programs are
considered by management to be competitive with benefits provided by other
financial institutions and major employers within the normal operating area.
4
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ACQUISITIONS
On February 16, 1996, the Registrant and its banking subsidiary,
PremierBank & Trust completed the acquisition of eleven branches of Bank One,
Cleveland, N.A. ("Bank One") located in Lorain County, Ohio. The branches
acquired by Premier had total deposits of approximately $111 million. The
branches were acquired by the Bank for total consideration of $5,526,681,
representing a premium of 5% on core deposits.
Under the terms of the transaction, the Bank acquired the branches and
associated assets such as furniture, fixtures and equipment and approximately
$283,000 of certain deposit account-related loans, and the Bank assumed the
deposit account liabilities of Bank One associated with these branches. Eight of
the branches are situated on real estate acquiried by the Bank, and the other
three are leased. During 1996, three of the branches acquired from Bank One were
consolidated into existing PremierBank branch locations.
On February 27, 1997 CoBancorp acquired Jefferson Savings Bank, an
Ohio-chartered savings association with assets of approximately $62 million, by
means of a merger of an interim subsidiary of CoBancorp with and into Jefferson.
Cash in the amount of $6,733,000 was paid to Jefferson's shareholders. They also
received additional consideration of $649,498 attributable to certain favorable
tax benefits (confirmed by an IRS Private Letter Ruling dated May 31, 1996) in
exchange for Jefferson's 3,535 issued and outstanding shares. The transaction
was accounted for under the purchase method. Jefferson remains a separate
savings association subsidiary of CoBancorp.
The terms of the sale, including the purchase price and form of
consideration were the result of arms'-length negotiations between the parties.
Prior to this transaction, there has been no material relationship between
Jefferson and CoBancorp, its affiliates, any officer or director of CoBancorp or
any of their affiliates.
In connection with the acquisition, CoBancorp acquired all of the
equipment and other physical property used in Jefferson's banking business.
CoBancorp intends to continue to use the assets acquired in this transaction in
the manner utilized by Jefferson prior to the acquisition.
Jefferson conducts its operations in three branch locations in Madison
County, Ohio, all of which will continue in operation for the immediate future
following the acquisition.
5
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COMPETITION
The Bank actively competes with other financial institutions in its
market area. Competition for deposits comes principally from other commercial
banks, savings and loan associations, credit unions and brokerage house "money
market funds" located in its primary market area. The primary factors in
competing for deposits are interest rates paid on deposits and convenience of
office hours and locations. During periods when money market rates are
relatively high, obligations offered by governments, government agencies and
other entities seeking funds add significantly to competition for deposits.
The Bank's principal competition for loans is provided by other
commercial banks, savings and loan associations, mortgage companies and credit
unions. The primary factors in loan competition are interest rates, extent and
time interval of interest rate adjustments, origination charges and convenience
of office location for applications, closing and servicing.
REGULATION
The Corporation is subject to regulation under the Bank Holding Company
Act of 1956, as amended (the "Act"). The Act requires the prior approval of the
Federal Reserve Board for a bank holding company to acquire or hold more than a
5 percent voting interest in any bank, and restricts interstate banking
activities.
The Act restricts the Corporation's non-banking activities to those
which are closely related to banking. The Federal Reserve Board has determined
by regulation that the following activities are permissible for bank holding
companies and their subsidiaries. Some of these activities include the
following: making, acquiring or servicing loans or other extensions of credit;
trust company functions; leasing personal or real property; courier services;
management and consulting for other depository institutions; and real estate
appraising. The Corporation presently has no non-banking activities, but may in
the future engage in one or more of the non-banking activities identified above.
The Corporation's cash revenues are derived primarily from dividends
paid by the Bank, its subsidiary. These dividends are subject to various legal
and regulatory restrictions. Reference is made to Note H of the Registrant's
1996 Annual Report to Shareholders, which is contained in Exhibit 13 of this
filing.
Under the Act and regulations of the Federal Reserve Board pursuant
thereto, a bank holding company and its subsidiaries are prohibited from
engaging in certain tie-in arrangements in connection with the extension of
credit.
The Bank is a stock-form commercial bank organized under the laws of the
State of Ohio, and its deposits are insured by the FDIC. The Bank derives its
lending, investment and other powers from the applicable provisions of Ohio law
and the regulations of the Ohio Department of Banking (the "Banking
Department"), subject to limitation or other modification under applicable
federal laws and regulations of such agencies as the FDIC and the Federal
Reserve Board. The Bank is subject to periodic examination and supervision by
the Federal Reserve Board and the Banking Department.
The Banking Department regulates the Bank's internal organization as
well as its deposit, lending and investment activities. The Superintendent of
the Banking Department must approve changes to the Bank's Certificate of
Incorporation, establishing or relocating branch offices, mergers and the
issuance of additional stock. Many of the areas regulated by the Banking
Department are subject to similar regulation by the Federal Reserve Board.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (the
"FDIC Improvement Act") covers a wide expanse of banking regulatory issues. The
FDIC Improvement Act deals with the recapitalization of the Bank Insurance Fund
(the "BIF"), with deposit insurance reform, including requiring the FDIC to
establish a risk-based premium assessment system, and with a number of other
regulatory and supervisory matters.
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EXAMINATION AND SUPERVISION
Both the Banking Department and the Federal Reserve Board issue
regulations and require the filing of reports describing the activities and
financial condition of banks under their jurisdiction. Each regulatory body
conducts periodic examinations to test compliance with various regulatory
requirements and generally supervises the operations of such banks. This
supervision and regulation is intended primarily for the protection of
depositors.
The Corporation and the Bank are subject to various regulatory capital
requirements. Further discussion is included in Note Q to the Notes to the
Registrant's Annual Report to Shareholders, which is incorporated herein by
reference.
FEDERAL RESERVE SYSTEM
Under Federal Reserve Board regulations, the Bank is required to
maintain reserves against its transaction accounts (primarily checking and NOW
accounts), and non-personal time deposits. The current reserve requirement for
transaction accounts is 3 percent for the first $52 million, and 10 percent of
any additional deposits in transaction accounts. Since December 31, 1990, no
reserves must be maintained on time deposits, which include borrowings with
original maturities of less than one and one-half years. These amounts and
percentages are subject to adjustment by the Federal Reserve Board. Money market
deposit accounts are subject to the reserve requirement applicable to time
deposits when held by an entity other than a natural person.
INSURANCE OF DEPOSITS
Deposits in the Bank are insured by the Federal Deposit Insurance
Corporation (the "FDIC"), to the legal maximum. Under FIRREA, the deposits of
commercial banks continue to be insured to a maximum of $100,000 for each
insured depositor.
COMMUNITY REINVESTMENT ACT
Ratings of depository institutions under the Community Reinvestment Act
of 1977 ("CRA") must be disclosed. The disclosure will include both a four-unit
descriptive rating for all CRA examinations at banks and thrifts after July 1,
1990, using terms such as satisfactory and unsatisfactory, and a written
evaluation of each institution's performance. At its most recent CRA performance
evaluation, the Bank received an outstanding evaluation of its CRA performance.
7
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EXECUTIVE OFFICERS OF THE REGISTRANT
(AS OF JANUARY 31, 1997)
<TABLE>
<CAPTION>
Executive
Officer
Name Age Position Since
---- --- -------- -----
<S> <C> <C>
John S. Kreighbaum 50 Chairman, President and Chief Executive Officer 1991
Timothy W. Esson 47 Executive Vice President and Treasurer 1980
James R. Bryden 54 Regional President/North Central District 1987
Robert J. Scott 48 Senior Vice President/Director of Investment
Management and Trust Services 1993
Bruce E. Stevens 48 Senior Vice President/Director of Lending 1993
</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 19
Loan Maturities and Sensitivity to Changes in Interest Rates 19
Investment Securities Carrying Value and Yield by Maturity Date 20
Deposits 21
Short-Term Funds 22
Credit Quality and Experience 22
</TABLE>
8
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ITEM 2. PROPERTIES
The principal office of CoBancorp Inc. and PREMIERBank & Trust is
located at 1530 West River Road North, Elyria, Ohio. At December 31, 1996, the
Bank owned 23 of its banking and ATM facilities and leased the other 20
facilities. Currently, two of its full-service branches are located in
supermarkets.
Through the Bank, the Corporation owns and operates a total of 42 ATMs
at various branch offices and at seven remote locations and is a member of the
MAC Network, which provides its members with regional ATM access, and the Plus
System ATM network, which provides its members with international access.
The following table sets forth certain information regarding the
properties of the Corporation and the Bank. Neither the Corporation nor the Bank
has any mortgage indebtness on any of its properties.
<TABLE>
<CAPTION>
OWNED OR LEASE
OFFICE LOCATION LEASED EXPIRATION
--------------- ------ ----------
<S> <C> <C>
ELYRIA
1530 West River Road North Owned
124 Middle Avenue Owned
230 East Broad Street Owned
248 North Abbe Road Leased March 2008
1000 North Abbe Road Owned
38473 Chestnut Ridge Road Leased November 1997
Elyria United Methodist Home
807 West Avenue Leased December 1999
672 Oberlin Road Owned
*8703 West Ridge Road Leased June 1999
*Elyria Memorial Hospital
630 East Rive Street Leased July 2001
AMHERST
160 Cleveland Avenue Owned
938 North Leavitt Road Owned
AVON
36000 Detroit Road Leased May 2011
AVON LAKE
*33388 Walker Road Leased March 1997
CLEVELAND
200 Public Square Leased November 2000
CRESTLINE
350 North Seltzer Street Owned
DELAWARE
95 East William Street Owned
*1760 Columbus Pike (Wal-Mart) Leased March 1999
*561 W. Central Drive (Grady Memorial
Hospital) Leased May 1998
GRAFTON
432 North Main Street Owned
GREENWICH
13 Main Street Owned
</TABLE>
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<TABLE>
<CAPTION>
OWNED OR LEASE
OFFICE LOCATION LEASED EXPIRATION
--------------- ------ ----------
<S> <C> <C>
HURON
410 Cleveland Road East Leased May 1997
KIPTON
299 State Street Owned
LORAIN
3903 Pearl Avenue Leased November 2000
1619 Kansas Avenue Owned
1139 Tower Boulevard Leased February 1999
301 West Erie Avenue Owned
2808 W. 21st Street Owned
NORTH RIDGEVILLE
38659 Center Ridge Road Owned
34210 Center Ridge Road Owned
NORTH OLMSTED
**4700 Great Northern Boulevard Leased June 2001
OBERLIN
49 South Main Street Owned
*Oberlin College (Wilder Hall) Leased monthly
*291 South Main Street (Station Square) Leased March 1999
15181 State Route 58 (Lorain Co. JVS) Leased December 1999
POWELL
9494 Wedgewood Boulevard Leased September 2016
SHEFFIELD LAKE
**4100 Ivanhoe Drive Leased monthly
SHILOH
23 West Main Street Owned
SOUTH AMHERST
107 N. Lake Street Owned
VERMILION
4530 Liberty Avenue Owned
WELLINGTON
216 N. Main Street Owned
WESTLAKE
801 Crocker Road Owned
WORTHINGTON
2182 West Dublin-Granville Road Leased April 1997
</TABLE>
* Remote ATM only
** Full-service branch located on premises of a supermarket.
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ITEM 3. LEGAL PROCEEDINGS
There is no pending litigation of a material nature in which the
Corporation or the Bank is involved at December 31, 1996, and no such legal
proceeding was terminated during the fourth quarter of 1996. Furthermore, there
is no material proceeding in which any director, officer, or affiliate of the
Registrant, or any associate of any such director or officer, is a party, or has
a material interest, adverse to the Corporation or the Bank.
As a part of its ordinary course of business, the Corporation and the
Bank are each a party to lawsuits (such as garnishment proceedings) involving
claims to the ownership of funds in particular accounts and involving the
collection of delinquent accounts. All such litigation is incidental to the
business of the Bank and the Corporation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Reference is made to the table "Market and Dividend Information" which
is contained in the Registrant's 1996 Annual Report to Shareholders, included in
this filing in Exhibit 13 and incorporated herein by reference, for information
concerning the principal market for Registrant's Common Stock, market prices,
number of shareholders and dividends. Reference is made to Note H to the
Consolidated Financial Statements which is contained in the Registrant's 1996
Annual Report to Shareholders, for information concerning dividend restrictions,
which is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
Reference is made to the table entitled "Consolidated Financial
Highlights," contained in the Registrant's 1996 Annual Report to Shareholders,
which is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CoBancorp Inc. is a bank holding company with total consolidated assets
at year-end 1996 of $599 million. Its subsidiary, PREMIERBank & Trust, maintains
offices in Lorain County, as well as Cuyahoga, Erie, Huron, Richland, Delaware,
Crawford and Franklin Counties.
This section of the report provides a narrative discussion and analysis
of the consolidated financial condition and results of operations of CoBancorp
Inc. and PREMIERBank & Trust for the past three years. The supplemental
financial data included in this section should be read in conjunction with the
consolidated financial statements and related disclosures included in the
Registrant's 1996 Annual Report to Shareholders, presented as Exhibit 13 of this
filing, which are incorporated herein by reference. All shares outstanding and
per share data have been adjusted for a three percent stock dividend in 1995
and a four-for-three stock splits in 1994 and 1993.
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PERFORMANCE OVERVIEW
Net income for 1996 was $7,132,000, or $2.07 per share, compared to
$6,402,000, or $1.86 per share in 1995, and $5,686,000 or $1.68 per share in
1994. Two key measures of performance in the banking industry are return on
average equity (ROE) and return on average assets (ROA). ROE is the ratio of
income earned to average shareholders' equity. ROE for 1996 was 13.8 percent,
compared to 14.0 percent in 1995 and 14.3 percent in 1994. ROA measures how
effectively a corporation uses its assets to produce earnings. For 1996, return
on average assets was 1.20 percent. ROA was 1.20 percent in 1995 and 1.15
percent in 1994.
The following table sets forth operating and capital ratios of the
Corporation.
RETURN ON EQUITY AND ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Return on average assets 1.20% 1.20% 1.15%
Return on average equity 13.81 13.98 14.28
Dividend payout ratio 30.47 31.28 30.70
Ratio of average equity to average assets 8.67 8.56 8.06
</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 $28,276,000 in 1996,
from $26,199,000 in 1995 and $24,756,000 in 1994. Reference is made to the
"Summary of Changes in Net Interest Income" on page 16 of this report for a
detailed analysis of factors affecting this trend in net interest income. Net
interest margin, which is net interest income divided by average earning assets,
was 5.24 percent in 1996 compared with 5.31 percent in 1995 and 5.70 percent for
1994.
Average earning assets, as a percentage of total average assets,
increased to 90.5 percent this year compared to 92.7 percent in 1995 and 91.4
percent in 1994.
The trends in various components of the balance sheet and their
respective yields and rates which affect interest income and expense are shown
in the following tables.
12
<PAGE> 13
AVERAGE CONSOLIDATED BALANCE SHEETS, NET INTEREST INCOME AND RATES
FULLY TAXABLE EQUIVALENT (IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1996
AVERAGE
DAILY YIELD/
BALANCE INTEREST RATE
------- -------- ----
<S> <C> <C> <C>
Assets
Interest-earning assets
Loans (including fees)
Taxable $ 327,872 $30,286 9.24%
Tax-exempt 2,432 189 7.77%
Investment securities
Taxable 134,024 8,830 6.59%
Tax-exempt 68,541 5,382 7.85%
Federal funds sold and
other short-term funds 6,602 388 5.88%
--------- -------
Total interest-earning assets 539,471 45,075 8.35%
Noninterest-earning assets:
Cash and due from banks 27,501
Bank premises and equipment 14,760
Other assets 20,255
Less allowance for loan losses (5,988)
---------
Total assets $ 595,999
=========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing transaction
accounts $ 63,051 $ 1,142 1.81%
Savings 176,077 4,235 2.40%
Time deposits 201,112 10,789 5.36%
Short-term funds 21,549 633 2.94%
--------- -------
Total interest-bearing
liabilities 461,789 16,799 3.64%
-------
Noninterest-bearing liabilities:
Demand deposits 77,597
Other liabilities 4,953
Shareholders' equity 51,660
---------
Total liabilities and
shareholders' equity $ 595,999
=========
Net interest income $28,276
=======
Net yield/rate on interest-earning assets 5.24%
====
</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 1996, 1995 and 1994.
13
<PAGE> 14
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 assets 491,941 41,994 8.54%
Noninterest-earning assets:
Cash and due from banks 23,808
Bank premises and equipment 11,013
Other assets 14,601
Less allowance for loan losses (5,756)
---------
43,666
---------
Total assets $ 535,607
=========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing transaction
accounts $ 51,056 1,044 2.05%
Savings 153,721 3,529 2.30%
Time deposits 193,854 10,390 5.36%
Short-term borrowings 23,144 832 3.59%
--------- -------
Total interest-bearing
liabilities 421,775 15,795 3.75%
-------
Noninterest-bearing liabilities:
Demand deposits 63,613
Other liabilities 4,419
Shareholders' equity 45,800
---------
Total liabilities and
shareholders' equity $ 535,607
=========
Net interest income $26,199
=======
Net yield/rate on interest-earning assets 5.31%
====
</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 1996, 1995 and 1994.
14
<PAGE> 15
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 assets 452,013 37,284 8.25%
Noninterest-earning assets:
Cash and due from banks 23,706
Bank premises and equipment 10,676
Other assets 13,422
Less allowance for loan losses (5,481)
---------
42,323
---------
Total assets $ 494,336
=========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing transaction
accounts $ 53,760 1,104 2.05%
Savings 174,097 4,044 2.32%
Time deposits 140,050 5,743 4.10%
Short-term borrowings 22,350 637 2.85%
--------- -------
Total interest-bearing
liabilities 390,257 11,528 2.95%
-------
Noninterest-bearing liabilities:
Demand deposits 59,674
Other liabilities 4,586
Shareholders' equity 39,819
---------
Total liabilities and
shareholders' equity $ 494,336
=========
Net interest income $25,756
=======
Net yield/rate on interest-earning assets 5.70%
====
</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 1996, 1995 and 1994.
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 (in thousands of dollars):
SUMMARY OF CHANGES IN NET INTEREST INCOME
<TABLE>
<CAPTION>
1996 VS. 1995 1995 VS. 1994
INCREASE (DECREASE) DUE TO (1) INCREASE (DECREASE) DUE TO (1)
--------------------------------- -----------------------------------
VOLUME RATE NET VOLUME RATE NET
------- ----- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans, net of unearned
income (2) $ 306 $ 207 $ 513 $ 1,492 $ 1,116 $ 2,608
Securities 2,741 (398) 2,343 1,740 298 2,038
Federal funds sold 221 3 224 17 47 64
------- ----- ------- ------- ------- -------
Total interest-earning
assets 3,268 (188) 3,080 3,249 1,461 4,710
Interest expense:
Interest-bearing transaction
accounts (249) 152 (97) 56 4 60
Savings (852) 145 (707) 470 45 515
Time deposits (179) (218) (397) (2,207) (2,440) (4,647)
Short-term funds 144 54 198 (43) (152) (195)
------- ----- ------- ------- ------- -------
Total interest-bearing
liabilities (1,136) 133 (1,003) (1,724) (2,543) (4,267)
------- ----- ------- ------- ------- -------
Change in net interest income $ 2,132 $ (55) $ 2,077 $ 1,525 $(1,082) $ 443
======= ===== ======= ======= ======= =======
</TABLE>
(1) Changes in interest income not arising solely from rate or volume variances
are included in rate variances.
(2) Nonaccrual loans are included in average loan balances.
16
<PAGE> 17
PROVISION FOR LOAN LOSSES
During 1996, $1,775,000 of the allowance for loan losses was returned to
income. The expense related to the total provision for loan and real estate
losses was $180,000 in 1995 and $208,000 in 1994. Additional discussion
regarding the provision for loan losses and the allowance for loan losses is
contained in this report in the section entitled "Credit Quality and Experience"
on page 24.
NONINTEREST INCOME
Total noninterest income, exculsive of securities gains, increased
$1,586,000, or 35.8% in 1996 when compared to 1995. 1995 represented an increase
of $479,000, or 12.1% over 1994. In 1996, service charges on deposit accounts
increased $944,000. This increase was primarily a result of the acquisition of
eleven branches from Bank One, as well as ongoing evvaluation of service
charges. In 1995, the Corporation completed a comprehensive internal and
competitive review of service charges. As a result, service charges on deposits
increased $174,000 that year. In 1994, the increase in service charges of
$235,000 was due primarily to growth in transaction and savings account
deposits, as well as pricing adjustments. Income from trust activities has
increased each year, to $1,424,000 in 1996. Total assets managed by the Trust
Department aggregated $218,600,000, $204,000,000 and $181,300,000 at December
31, 1996, 1995 and 1994, respectively. Gains and losses on the sale of
investment securities also impact comparisons. Security transaction resulted in
gains of $409,000, $284,000 and $454,000 in 1996, 1995 and 1994 respectively.
NONINTEREST EXPENSES
The Corporation and the Bank have continued to focus efforts on cost
efficiency during the last three years. In early 1995, a comprehensive program
was begun to review and challenge staffing levels in the organization, with the
objective of ensuring optimal levels of customer service by staffing based on
customers' banking patterns. In 1996, this program was enhanced by the
implementation of neighborhood banking hours. Full-time equivalent staff was 373
at December 31, 1996, compared to 313 and 328 at the same dates in 1995 and
1994. During 1996, approximately 45 full-time equivalent employees were added as
a result of the Bank One branch acquisitions. As a result of increased staff,
plus normal salary growth, total salaries and wages increased approximately
$1,521,000 in 1996, to $9,089,000. For the same period, however, the cost of
employee benefits increased just $144,000, due primarily to increased employment
taxes associated with the increased number of employees. Total salaries and
wages were level in 1995 compared with 1994. The cost of employee benefits
increased $229,000 in 1995, due primarily to pension and Employee Stock
Ownership Plan costs. The increase in salaries, wages and benefits in 1994 when
compared to 1993 was due primarily to wage and benefit cost increases and
increases in the number of employees due to branch acquisitions.
FDIC insurance expense decreased significantly in both 1996 and 1995, to
$254,000 and $560,000 respectively, from $966,000 in 1994. In September 1995,
the Federal Deposit Insurance Corporation (FDIC) reduced the annual premium from
$0.23 per $100 of insured deposits to approximately $0.04 per $100 deposits
insured in the Bank Insurance Fund (BIF). In December 1995, the FDIC lowered the
rate for BIF insured deposits to zero. The Bank also has approximately $27
million of deposits acquired from Savings and Loan institutions which are
insured by the FDIC in the Savings Association Insurance Fund (SAIF). These
deposits were assessed at $0.23 per $100 per year through September 30, 1996. On
September 30, 1996, the FDIC imposed a one-time assessment of approximately
$0.657 per $100 of SAIF insured deposits, which resulted in a one-time cost of
$190,000 in the third quarter of 1996. Going forward, BIF deposits will be
assessed at $0.013 per $100, and SAIF deposits will be assessed at $0.0648 per
$100.
17
<PAGE> 18
INCOME TAXES
The Corporation employs various strategies in investments and loans to
maximize after-tax profits. This ongoing process considers the levels of
tax-exempt securities and loans, investment securities gains or losses and
allowable loan loss deductions. The Corporation's effective income tax rate
(income tax expense divided by income before income taxes) was 18.9% in 1996,
compared to 14.8% in 1995 and 18.1% in 1994. The effective tax rate is lower
than the statutory rate primarily due to the effect of income on tax-exempt
securities and loans. The income tax provision was $1,663,000 in 1996, compared
with $1,112,000 in 1995 and $1,256,000 in 1994. For the year ended December 31,
1996, no valuation allowance is required on any of the deferred tax assets
recorded due primarily to the earnings history of the Corporation and the
significant amount of federal income taxes paid in prior years.
FINANCIAL CONDITION
The consolidated financial condition of the Corporation and the Bank as
of December 31, 1996 and 1995 is presented in the comparative balance sheets
contained in Exhibit 13 of this filing and is incorporated herein by reference.
The following discussions address key elements of financial condition, including
earning assets, the source of funds supporting earnings assets, credit quality
and experience, asset and liability management and capital adequacy.
EARNING ASSETS
LOANS
Loans comprise the majority of the Corporation's earning assets,
representing 61.2 percent of average earning assets in 1996, and 66.5 percent in
1995. At year-end 1996, total loans were $340,454,000 which was an increase of
$19,945,000 or 6.2% from $320,509,000 at year-end 1995.
The largest categories in the loan portfolio are residential real estate
mortgage loans, which comprised 42.7 percent of total loans at the end of 1996
and commercial and collateral loans which totaled 42.9 percent of the portfolio.
Installment loans comprised 13.4 percent of the portfolio. All other loans were
1.0 percent of the portfolio. In 1995, real estate mortgages were 43.3 percent
of the loan portfolio, commercial and collateral loans were 43.0 percent,
installment loans were 12.8 percent and other loans were 0.9 percent.
The mix within the commercial loan portfolio is diverse and represents
loans to a broad range of business interests, located primarily within the
Bank's defined market area, with no significant industry concentration. The
installment loan portfolio is composed principally of financing to individuals
for vehicles and consumer assets, as well as other personal purposes. The real
estate portfolio is primarily residential first mortgages that can qualify for
sale into the secondary market. At December 31, 1996, and 1995, there were
approximately $20,172,000 and $17,942,000, respectively, in home equity loans.
During 1996, approximately $8,220,000 of residential real estate mortgage loans
were sold in the secondary market, which provided a source of fee income and
additional funds for new lending.
18
<PAGE> 19
Loans by major category at the end of the last five years were as
follows (in thousands of dollars):
LOAN PORTFOLIO
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Real estate $145,467 $138,664 $152,695 $132,589 $ 99,761
Installment 45,600 41,155 38,364 31,229 34,145
Commercial and collateral 146,167 137,702 136,187 122,699 109,169
All other 3,220 2,988 2,887 2,932 3,330
-------- -------- -------- -------- --------
Total (net of unearned income) $340,454 $320,509 $330,133 $289,449 $246,405
======== ======== ======== ======== ========
</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, 1996, reported at maturity for fixed rate loans, repricing
interval for variable rate loans, are as follows (in thousands of
dollars):
LOAN MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES
<TABLE>
<CAPTION>
WITHIN 1-5 AFTER
1 YEAR YEARS 5 YEARS TOTAL
-------- ------- ------- --------
<S> <C> <C> <C> <C>
Real estate $ 29,217 $35,913 $80,337 $145,467
Installment 3,239 33,173 9,188 45,600
Commercial and collateral 134,490 8,692 2,985 146,167
All other 0 3,220 0 3,220
-------- ------- ------- --------
$166,946 $80,998 $92,510 $340,454
======== ======= ======= ========
</TABLE>
Of the loans due or repricing after one year, approximately $33,945,000
have variable interest rates, and $136,343,000 have fixed interest rates.
INVESTMENT SECURITIES
The investment portfolio is comprised of U.S. Treasury and other U.S.
Government agency-backed securities, collateralized mortgage-backed securities,
tax-exempt obligations of states and political subdivisions, and certain other
investments. The quality of obligations of states and political subdivisions
will be A, AA, or AAA, the majority of which will be AA or AAA, as rated by a
nationally recognized service. As a matter of policy, in support of our service
areas, we may purchase certain unrated bank-qualified bonds of local schools,
townships and municipalities, provided they are a sound credit risk.
The investment portfolio represented 37.5 percent of average earning
assets in 1996 and 32.9 percent in 1995. The tax-equivalent yield on the entire
portfolio was 7.01, 7.32 and 7.18 percent in 1996, 1995 and 1994, respectively.
These investments provide a stable yet diversified income stream and serve
useful roles in liquidity and interest rate sensitivity management. In addition,
the investment portfolio serves as a source of collateral for low-cost funding.
The decision to purchase securities is based upon the assessment of current
economic and financial trends.
As discussed in Note C of the Registrant's 1996 Annual Report to
Shareholders, which is incorporated herein by reference, in accordance with the
Financial Accounting Standards Board's special report issued on November 15,
1995, the Corporation reclassified approximately $48,706,000 of securities from
the held-to-maturity to the available-for-sale category in a single transaction
in December 1995.
19
<PAGE> 20
The portfolio accounting designations are made in order to attain the
objectives of the Corporation's investment portfolio, which are to generate
interest income, serve as a liquidity source and play an important role in the
management of the interest rate sensitivity of the Corporation. Accordingly,
securities purchased for the available-for-sale category are those which may be
sold prior to their maturity for purposes of bank asset allocations, rate
sensitivity or liquidity and, hence, tend to be more liquid. Securities in the
held-to-maturity category are purchased with the intent and ability to hold them
to maturity and are, therefore, carried at amortized cost.
Summary information with respect to the securities portfolio at December
31 follows (in thousands of dollars):
<TABLE>
<CAPTION>
1996 1995 1994
Held to Available 1996 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 $ 37,932 7.00% $ 18,937 $14,193
1 to 5 years 0 14,770 6.73% 11,705 18,539
5 to 10 years 0 1,146 6.12% 1,009 0
Over 10 years 0 2,986 7.87%
-------- -------- -------- --------
Total 0 56,834 6.96% 31,651 32,732
States of the U.S. and political
subdivisions
Under 1 year 0 30,943 6.49% 2,927 3,803
1 to 5 years 0 21,962 6.47% 34,116 26,701
5 to 10 years 0 7,190 7.14% 41,699 42,469
Over 10 years 0 6,750 7.48% 1,133 823
-------- -------- -------- --------
Total 0 66,845 6.64% 79,875 73,796
Collateralized mortgage-backed
securities
Under 1 year 7,171 20 5.79% 10,883 9,225
1 to 5 years 17,966 15,413 5.24% 16,857 10,980
5 to 10 years 1,188 19,773 5.34% 16,826 19,897
Over 10 years 0 889 5.72% 1,010 1,918
-------- -------- -------- --------
Total 26,325 36,095 5.34% 45,576 42,020
Other
Under 1 year 0 2,687 6.21% 0 1,260
Total $ 26,325 $162,461 $157,102 $149,808
======== ======== ======== ========
</TABLE>
The yield at December 31, 1996, was the combined rate for the
held-to-maturity and available-for-sale securities portfolios.
Mortgage-backed securities and other securities which may have
prepayment provisions are assigned to a maturity category based on estimated
average life. Securities with a call provision are assigned to a maturity
category based on call date. Yield represents the weighted average yield to
maturity. The yield on obligations of states and political subdivisions has been
calculated on a fully taxable equivalent basis, assuming a 34% tax rate.
FEDERAL FUNDS SOLD
Short-term federal funds sold are used to manage interest rate
sensitivity and to meet liquidity needs. During 1996, 1995 and 1994, these funds
represented approximately 1.0 percent, 0.4 percent and 0.5 percent,
respectively, of average earnings assets.
20
<PAGE> 21
SOURCES OF FUNDS
DEPOSITS
The Corporation's major source of investable funds is core deposits from
retail and business customers. These core deposits consist of interest-bearing
and noninterest-bearing demand deposits, savings and other time deposits,
excluding certificates of deposit over $100,000. Average interest-bearing core
deposits, comprised of interest-bearing checking accounts, savings, money market
and other time deposit accounts, increased by 5.8 percent in 1996 to 93.6
percent of average deposits as compared to 87.8 percent in 1995 and 95.5 percent
in 1994.
The following table presents the average amount of and the average rate
paid on each of the following deposit categories (dollar amounts in thousands).
AVERAGE DEPOSITS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
AMOUNT
Noninterest-bearing demand deposits $ 77,597 $ 63,613 $ 59,674
Interest bearing transaction accounts 63,051 51,056 53,760
Savings deposits 176,077 153,721 174,097
Time deposits 201,112 193,854 140,050
-------- -------- --------
$517,837 $462,244 $427,581
======== ======== ========
AVERAGE RATE FOR THE YEAR
Interest bearing transaction accounts 1.81% 2.05% 2.05%
Savings deposits 2.40% 2.30% 2.32%
Time deposits 5.36% 5.36% 4.10%
</TABLE>
The maturity distribution of certificates of deposit of $100,000 or more
at December 31, 1996, was (in thousands of dollars):
CERTIFICATES OF DEPOSIT OVER $100,000
<TABLE>
<S> <C>
Three months or less $14,283
Over three through six months 7,530
Over six through twelve months 4,037
Over twelve months 1,439
-------
$27,289
=======
</TABLE>
There were seven other time deposits of $100,000 or more at December 31,
1996, which will mature in 1996 through 1997.
SHORT-TERM FUNDS
Other interest-bearing liabilities include securities sold under
agreements to repurchase, sweep accounts, federal funds purchased and notes
payable, treasury tax and loan. During 1996, these funds represented 4.0 percent
of average earning assets, compared to 4.7 percent in 1995 and 4.5 percent in
1994.
The Corporation enters into sales of securities under agreements to
repurchase for periods up to 29 days, which are treated as financings and
reflected in the consolidated balance sheet as a liability.
21
<PAGE> 22
The following table presents information related to short-term funds (in
thousands of dollars).
SHORT-TERM FUNDS
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance at December 31 $25,521 $22,454 $21,357
Maximum outstanding at any month-end 27,527 30,013 33,049
Average amount outstanding 21,549 23,144 22,350
Weighted average interest rate 2.94% 3.59% 2.85%
Weighted rate at December 31 2.72% 2.80% 2.18%
</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, 1996, were $1,792,000, compared to $965,000 at
December 31, 1995 and $458,000 at December 31, 1994. Total nonperforming loans
as a percentage of total loans were 0.53 percent at December 31, 1996, compared
to 0.30 percent at December 31, 1995 and 0.14 percent at December 31, 1994.
The following table summarizes nonaccrual and past due loans (in
thousands of dollars).
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Accruing loans past due
90 days or more as to principal or interest:
Loans secured by real estate $ 0 $ 35 $ 3 $ 58 $ 0
Loans to individuals 85 71 48 57 108
Commercial and industrial loans 0 0 0 26 0
All other 0 0 0 0 0
------ ---- ------ ------ ------
$ 85 $106 $ 51 $ 141 $ 108
====== ==== ====== ====== ======
Nonaccrual loans:
Loans secured by real estate $1,529 $783 $ 358 $ 518 $ 866
Commercial and collateral 178 76 0 77 761
All other 0 0 0 723 805
------ ---- ------ ------ ------
$1,707 $859 $ 358 $1,318 $2,432
====== ==== ====== ====== ======
</TABLE>
As of December 31, 1996, there were no past-due restructured loans.
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, 1996
-----------------
<S> <C>
Interest income that would have been recorded under original terms 91
Interest income recorded during the period 21
----
Net reduction in interest income $70
</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 1996 Annual Report to
Shareholders, the Corporation adopted Statement of Financial Accounting
Standards (SFAS) No. 114 and 118 effective January 1, 1995. The adoption did
not have a material impact on the allowance for loan losses. As of December 31,
1996 and 1995, there were no loans outstanding which met the Standards'
definition of an impaired loan.
ALLOWANCE FOR LOAN LOSSES AND LOAN CHARGE-OFFS
The allowance for loan losses is the reserve maintained to cover losses
that may be incurred in the normal course of lending. The allowance for loan
losses is increased by provisions charged against income and recoveries of loans
previously charged off. The allowance is decreased by loans that are determined
uncollectible by management and charged against the allowance.
In determining the adequacy of the allowance for loan losses, management
on a regular basis evaluates and gives consideration to the following factors:
estimated future losses of significant loans including identified problem
credits; historical loss experience based on volume and types of loans; trends
in portfolio volume, maturity and composition; off-balance sheet credit risk;
volume and trends in delinquencies and nonaccruals; economic conditions in the
market area; and any other relevant factors that may be pertinent.
During the fourth quarter of 1996, the Allowance for Loan Losses was
reduced by $1,775,000. This reversal of the provision was deemed appropriate in
light of management's extensive review of the following factors: historical loss
experience, including a three year pattern of net recoveries, current watch list
loans, estimated future losses, geographic diversification and industry mix of
the portfolio and current economic conditions.
23
<PAGE> 24
The Allowance for Loan Losses had been supplemented by $2,000,000 for
1990 as a result of a regularly-scheduled regulatory exam. After the additional
provision, the alloance stood at $4,644,000, or 1.94% of outstanding loans.
Since that time, the Bank's charge-off and recovery history would suggest that
the additional provision was not necessary.
Potential problem loans are those loans which are on the Corporation's
"watch list." These loans exhibit characteristics that could cause the loans to
become nonperforming or require restructuring in the future. Periodically, and
at a minimum monthly, this "watch list" is reviewed and adjusted for changing
conditions. As of December 31, 1996, there were loans with principal balances
of approximately $8.0 million on the watch list, none of which were classified
as "doubtful" or "loss."
The following table contains information relative to loan loss
experience for each of the five years in the period ended December 31, 1996 (in
thousands of dollars).
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Allowance for loan losses at beginning
of year $ 5,850 $ 5,617 $ 5,226 $5,215 $4,099
Loans charged off:
Real estate 21 2 31 198 17
Installment 446 510 297 471 866
Credit card 82 85 61 91 128
Other 4 4 5 2 1
Commercial and collateral 163 27 38 1,384 1,838
------- ------- ------- ------ ------
716 628 432 2,146 2,850
Recoveries on loans charged off:
Real estate 5 3 33 51 2
Installment 311 318 246 330 555
Credit card 22 16 32 16 12
Other 1 2 1 12
Commercial and collateral 395 342 303 928 597
------- ------- ------- ------ ------
733 681 615 1,337 1,166
------- ------- ------- ------ ------
Net (recoveries) charge-offs (17) (53) (183) 809 1,684
Provision (credit) for loan losses (1,775) 180 208 820 2,800
------- ------- ------- ------ ------
Allowance for loan losses at end of year $ 4,092 $ 5,850 $ 5,617 $5,226 $5,215
======= ======= ======= ====== ======
Ratio of net (recoveries) charge-offs
during the year to average loans
outstanding during the year (.01)% (.02)% (.06)% .31% .72%
======= ======= ======= ====== ======
Ratio of allowance for loan losses to
total loans at December 31 1.20% 1.82% 1.70% 1.81% 2.12%
======= ======= ======= ====== ======
</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
------------------------------------------------------ --------------------------------------------
1996 1995 1994 1993 1992 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate $ 241 $ 337 $ 400 $ 406 $ 205 43% 43% 46% 46% 41%
Installment 1,287 1,480 1,204 732 511 13% 13% 12% 11% 14%
Commercial and
collateral 2,152 2,741 2,749 2,270 2,761 43% 43% 41% 42% 44%
All other 375 327 190 124 180 1% 1% 1% 1% 1%
Unallocated 37 965 1,074 1,694 1,558 n/a n/a n/a n/a n/a
------ ------ ------ ------ ------ --- --- --- --- ---
$4,092 $5,850 $5,617 $5,226 $5,215 100% 100% 100% 100% 100%
====== ====== ====== ====== ====== === === === === ===
</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 19
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,
1996, was $54.6 million, or $15.82 per share, compared with $50.7 million or
$14.70 per share at December 31, 1995 and $41.0 million or $12.02 per share at
December 31, 1994. At December 31, 1996, the Corporation's Tier 1 leverage ratio
was 8.31 percent. The Corporation's risk-based capital ratios based on Federal
Reserve Board guidelines were 13.74 percent for Tier 1, or "core" capital, and
14.88 percent for total qualifying capital.
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These ratios substantially exceed the Federal Reserve Board's capital guidelines
for well-capitalized institutions, which are 6.00 percent for Tier 1 capital,
10.00 percent for total qualifying capital, and 5.00 percent for leverage ratio.
It is management's intent to maintain a level of capitalization that allows the
flexibility to take advantage of opportunities that may arise in the future.
The Corporation is not aware of any recommendations by the regulatory
authorities which, if implemented, would have a material effect on the
Corporation's liquidity, capital, resources or results of operations.
For additional discussion, see "Examination and Supervision," on page
7 of this report, and Note Q to the Corporation's Annual Report to Shareholders.
COMMON STOCK AND RELATED MARKET DATA
COMMON STOCK
Reference is made to the table "Market and Dividend Information" which
is included in the Registrant's 1996 Annual Report to Shareholders, contained in
this filing as Exhibit 13, which is incorporated herein by reference.
DIVIDENDS
CoBancorp Inc.'s dividend policy balances shareholders' return with the
need to retain an adequate capital level to support future growth opportunities.
Dividend payout has ranged from 25.5 to 31.3 percent of earnings over the last
five years. Dividends declared in 1996 were $0.63 per share, compared to the
$0.58 of dividends declared in 1995. Dividends for 1994 were $0.51 per share.
FINANCIAL REPORTING AND CHANGING PRICES
Although inflation can have a significant effect on the financial
condition and operating results of banks, it is difficult to measure the impact
as neither the timing nor the magnitude of interest rate changes necessarily
coincide with changes in the consumer price index or any other index of
inflation.
Inflation can impact the growth of total assets and result in a need to
increase capital at a faster than normal rate in order to maintain an
appropriate equity to assets ratio. This can result in a smaller proportion of
earnings paid out in the form of dividends.
The results of operations can also be affected by the impact of
inflation on current interest rates. Intermediate to long-term interest rates
tend to increase in an inflationary environment, thereby affecting the market
value of long-term fixed rate assets. Higher short-term rates tend to increase
funding costs. In addition, noninterest expenses are more directly impacted by
current inflation rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the consolidated financial statements and related
notes in the Registrant's 1996 Annual Report to Shareholders, included in this
filing as Exhibit 13, and incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the Corporation's Proxy Statement dated March 14,
1997, and to information on page 8 of Part I of this report, for the information
required by Items 10 through 13, and which information is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (2) Financial Statements and Schedules
The following consolidated financial statements appear in the Registrant's 1996
Annual Report to Shareholders, which financial statements are included in this
filing as Exhibit 13, and are incorporated herein by reference:
Consolidated Balance Sheets at December 31, 1996 and 1995
Consolidated Statements of Income for the Years Ended December
31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity for the Years
Ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
Report of Independent Auditors
Quarterly Financial Information
Consolidated Financial Highlights
Schedules I and II are not required under the related instructions or are
inapplicable and, therefore, have been omitted.
(3) LISTING OF EXHIBITS
<TABLE>
<CAPTION>
REG. S-K
EXHIBIT PAGE
NUMBER EXHIBIT HEREOF
------ ------- ------
<S> <C> <C>
3 Second Amended and Restated Articles of Incorporation and Code N/A
of Regulations of CoBancorp Inc. (filed as Exhibit 3 to the
Form 10-Q of the Registrant for the quarter ended June 30,
1995, and incorporated herein by reference)
10a Executive Supplemental Income Agreement (filed as Exhibit 10 N/A
to the Form 10-K of the Registrant for the year ended
December 31, 1985, incorporated herein by reference)
10b Directors Deferred Income Plan (filed as Exhibit 10b to the N/A
Form 10-K of the Registrant for the year ended December
31, 1986, incorporated herein by reference)
10d Employment Agreement Among LCB Bancorp, Inc., Lorain County N/A
Bank and John S. Kreighbaum (filed as Exhibit 10d to the
Form 10-K of the Registrant for the year ended December 31,
1990, incorporated herein by reference)
</TABLE>
27
<PAGE> 28
<TABLE>
<CAPTION>
REG. S-K
EXHIBIT PAGE
NUMBER EXHIBIT HEREOF
------ ------- ------
<S> <C> <C>
10k LCB Bancorp, Inc. 1992 Long-Term Incentive Plan (filed as N/A
Exhibit 10k to the Form 10-K of the Registrant for the year
ended December 31, 1992, and incorporated herein by
reference)
10l Employment Agreement Dated December 31, 1993, Among CoBancorp N/A
Inc., PREMIERBank & Trust and Timothy W. Esson (filed as
Exhibit 10l to the Form 10-K of the Registrant for the year
ended December 31, 1993, and incorporated herein by
reference)
10o Agreement for Information Technology Services Between
Electronic Data Systems Corporation and CoBancorp, Inc., dated
February 15, 1995 with Addenda (filed as Exhibit 10o to the
Form 10-K of the Registrant for the year ended December 31,
1995, incorporated herein by reference)
10p Data Processing Services Agreement Between M & I Data Services
and PremierBank and Trust, dated July 3, 1996, with Addenda.
13 1996 Annual Report to Shareholders
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule
</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.
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<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 28, 1997 By: Timothy W. Esson
Executive Vice President & Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report on Form 10-K has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY WITH REGISTRANT DATE
- --------- ------------------------ ----
<S> <C> <C>
John S. Kreighbaum Chairman, President and Chief March 28, 1997
Executive Officer, Director
Timothy W. Esson Executive Vice President March 28, 1997
and Treasurer, Director
Theodore S. Altfeld Director March 28, 1997
Robert S. Cook Director March 28, 1997
Michael B. Duffin Director March 28, 1997
Thomas E. Haywood Director March 28, 1997
Larry D. Jones Director March 28, 1997
Thomas R. Miklich Director March 28, 1997
Richard J. Stewart Director March 28, 1997
</TABLE>
29
<PAGE> 1
EXHIBIT 10p
DATA PROCESSING SERVICES AGREEMENT
THIS DATA PROCESSING SERVICES AGREEMENT is made as of this 3rd day of
July, (the "Agreement") by and between M&I Data Services, a division of the
Marshall & Isley Corporation, a Wisconsin corporation ("M&I") and PremierBank &
Trust, an Ohio corporation, (the "Customer").
RECITALS
WHEREAS, M&I provides data processing services to customers located
across the country; and
WHEREAS, M&l desires to provide data processing services to Customer,
and Customer desires to have M&I provide it with such services.
NOW, ThEREFORE, in consideration of the recitals and for the good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. SERVICES. M&I shall provide Customer with the data processing
services requested by Customer utilizing the version of the banking system
software made available from time to time by M&I through the M&I Service Bureau
(the "Services"). The functionality of the software and a further description of
the Services is set forth in the User ManuaIs, copies of which will be provided,
or made available, to Customer. Customer shall purchase the data processing
services indicated on Exhibit A and Exhibit A-I from M&I. Unless otherwise
agreed in writing between M&I and Customer, and subject to the other provisions
of the Agreement, M&I shall make the On-line Services available to Customer,
subject to normal downtime and maintenance, at times indicated on the M&I
On-line Availability Schedule, as modified from time to time.
2. FEES AND TAXES. Customer agrees to pay for the Services received
hereunder as follows:
a. AMOUNT OF FEES. Commencing on the Conversion Date (as defined in
Section 3) and on the first day of each month thereafter through the end of the
term of this Agreement, Customer shall pay M&I a fixed monthly fee of
forty-seven thousand four hundred sixty-three dollars ($47,463) per month (the
"Fixed Monthly Fee") for the Services described on Exhibit A (provided however,
commencing with the February 1997 invoice, and each month thereafter through
March 1998, M&I will provide Customer a credit of fifteen thousand dollars
($15,000) against Monthly Processing charges. For Services requested by Customer
in addition to those on Exhibit A, Customer shall pay in accordance with M&I's
then-current standard published prices. The Fixed Monthly Fee will be adjusted
in accordance with the provisions of Exhibit B. Customer also agrees to pay all
communication costs, telecommunication charges, printline charges and other
output costs. For Customer requested applications, not contemplated by this
Agreement, Customer shall preapprove and pay all start-up fees, pass-through
charges, out-of-pocket expenses, conversion expenses and fees, workshop fees,
training fees, as well as, late
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<PAGE> 2
fees or charges billed as miscellaneous on Customer's invoice (the
"Miscellaneous Fees"). The M&I standard published prices as of the date of this
Agreement are set forth on the fee schedule attached as Exhibit C.
b. DISCOUNT. M&I shall provide Customer with a ten percent (10%)discount
on Services not included in the Fixed Monthly Fee and which are a part of M&I's
19% standard published price list (exclusive of EFT Services, STAR View, and CFI
Laserpro Maintenance which shall not be discounted, and Management Data
Warehouse which shall be discounted in accordance with the special provisions
contained in Exhibit A4) excluding communication costs, telecommunication
charges, printline charges and other output costs, start-up fees, pass-through
charges, out-of-pocket expenses, conversion expenses and fees, workshop fees,
training fees, late fees, or charges billed as Miscellaneous on the Customer's
invoice. The discount shall be in effect for the term of the Agreement
c. PRICE ADJUSTMENTS. M&I standard published charges are set forth on
the fee schedule attached as Exhibit B. M&I may modify its standard published
charges for Services not included in the Fixed Monthly Fee from time to time
(the "Price Change Date"). M&I agrees to provide Customer with thirty (30) days'
written notice of any price increases prior to effectiveness of the price
increase. During each twelve (12) month period ending on the Price Change Date
(or such shorter period from the date this Agreement becomes effective to the
first Price Change Date), Customer shall receive a credit if the increase in the
standard published charges used to compute Customer's invoice causes a total
increase of more than the lesser of five percent (5%) or the increase in the
Consumer Price Index (CH, all items-U), as published by the U.S. Department of
Labor or any successor index (based on comparing the same mix of volume and
services, as described below). The Services and associated volumes (excluding
any credits or Miscellaneous Fees) on the three (3) most recent Customers'
invoices preceding the announcement of any price adjustment shall be used to
calculate the percentage change (the "Adjustment Period"). If during the first
year of this Agreement, three (3) invoices are not available, the volumes
processed during the prior month, or to be processed during the current month,
if the conversion occurs during the month prior to the Price Change Date, shall
be used to compute the percentage change. If the net increase exceeds the annual
ceiling, the dollar difference will be credited to the Customer on each month's
invoice (the "Price Adjustment Credit"). For example, if the price increase is
announced in January, M&I will apply the increased prices to the volumes and
Services invoiced to Customer during the months of October, November, and
December. The total of the three (3) months, computed based on the actual
invoices and recomputed using the increased prices, is then compared. The amount
by which the difference exceeds the annual ceiling is divided by three; the
result is the Price Adjustment Credit to be applied against Customer's invoice
until the next price increase. If, for example, the total monthly charges for
October, November, and December were fifty thousand dollars) ($50,000), a ten
percent (10%) cap would limit the recomputed fees to fifty-five thousand dollars
($55,000). If the recomputed fees are fifty-five thousand dollars ($55,000) or
less, the Customer receives no Price Adjustment Credit If the recomputed fees
were fifty-eight thousand dollars ($58,000), the Customer would receive a Price
Adjustment Credit of one thousand dollars ($1,000) per month on each subsequent
monthly invoice until the next price increase.
2
<PAGE> 3
d. ADDITIONAL CHARGES. In addition to the charges described above or set
forth in Exhibit C, Customer agrees to pay for any manufacturers, sales, use,
excise, personal property, or any other tax or charge, or duty or assessment
levied or assessed by any governmental authority upon or as a result of the
execution or performance of any service pursuant to this Agreement or materials
furnished with respect to the Agreement, except those taxes based on M&I's net
income, franchise, or personal property.
e. TERMS OF PAYMENT. Customer shall pay the Fixed Monthly Fee on the
first day of the month in which the Services are to be performed. Any other
amounts due hereunder shall be paid within thirty (30) days of invoice, unless
otherwise provided herein. To effect the payment, Customer hereby authorizes M&I
to initiate debit entries from and, if necessary, initiate credit entries and
adjustments to Customer's account at the depository designated in the ACH
Authorization Agreement. Debit entries for the Fixed Monthly Fee will be made on
the first day of each month for which Services will be rendered under the
Agreement In the event that a payment day is a nonbusiness day, entries will be
made on the first preceding business day. Customer shall authorize, on the
attached ACH Authorization Agreement, debits from and credits to its account for
payment for Services received under the Agreement. The Customer shall also pay
any collection fees and reasonable attorneys' fees incurred by M&I in collecting
payment of the charges and any other amounts for which Customer is liable under
the terms and conditions of this Agreement, except for amounts disputed in good
faith in accordance with the provisions of the following paragraph.
Should Customer reasonably and in good faith dispute any fees so billed,
Customer may withhold payment for the disputed amount provided Customer notifies
M&I of such disagreements or objections within the prescribed thirty (30) day
period; however, the Fixed Monthly Fee and any undisputed amounts shall be
promptly paid as described above. The parties agree to promptly attempt to
resolve the dispute, and further agree if the disputed invoice is not resolved
within sixty (60) days of the invoice date, the chief executive officers of the
parties shall meet to resolve the dispute.
f. MODIFICATION OF TERMS AND PRICING. If Customer is in default and M&I
elects to continue to perform the Services, Customer agrees to pay M&I all
unamortized conversion expenses in advance of M&I performing any additional
Services. In addition, Customer agrees that all charges for Services shall be
computed using M&I's then-current standard published prices, paid in advance as
determined by M&I. At M&I's option, such Services shall be provided on a
month-to-month basis.
3. TERM.
a. INITIAL TERM. This Agreement shall be effective upon execution by
both parties, and both parties will promptly undertake the conversion activities
necessary to process Customer's data. M&I currently anticipates, subject to
Customer's timely and satisfactory completion of its responsibilities described
in the M&I Conversion Manual and in the Conversion Schedule to be established by
M&I, and agreed to by Customer, that all conversion activities will be completed
on ________________(the "Conversion Date"). A copy of the anticipated conversion
progress plan is attached as Exhibit D. The term of this Agreement shall
continue for a period of ninety-six (96) months from the Conversion Date.
3
<PAGE> 4
b. RENEWAL OBLIGATIONS. During any renewal term, or for any Services
provided after the end of the initial term, whether or not the Agreement is
renewed, Customer agrees that the terms of this Agreement shall continue to
apply, except that all charges for Services shall be computed using M&I's
then-current standard published prices paid in advance as determined by M&I. At
M&I's option, such Services shall be provided by M&I on a month-to-month basis.
4. Future branches, subsidiaries, or affiliates shall not be required to
receive data processing services hereunder. In the event Customer desires any
such entity to receive Services hereunder, this Agreement shall be amended in
writing by the parties.
5. CONFIDENTIALITY AND OWNERSHIP. Both parties will, to the extent and
in accordance with their policies used to protect their own information of
similar importance, use their best efforts to refrain from and prevent the use
of or disclosure of any confidential information of the other party, disclosed
or obtained by such party while performing its obligations under this Agreement,
except when such use or disclosure is for the purpose of providing the Services.
Neither party will have an obligation of confidentiality with regard to any
information insofar as the same: (1) was known to such party prior to
disclosure; (2) is or becomes publicly available other than as a result of a
breach of this Agreement; or (3) is disclosed to such party by a third party
not subject to an obligation of confidentiality. Nor shall the obligation of
confidentiality occur where disclosure is made pursuant to: (1) any law of the
United States or any state thereof; (2) the order of any court or governmental
agency; or (3) the rules and regulations of any governmental agency, except that
both parties agree to provide notice to the other prior to such disclosure if
permitted to do so by the applicable court or governmental agency. In the event
of a breach of this Section of the Agreement by either party, the breaching
party shall give prompt notice to the other of such breach.
Customer may reproduce and distribute any or all M&I's documentation,
including User Manuals, solely for its own internal use. Customer recognizes,
however, that such documentation may be copyrighted, trademarked, patented, or
otherwise protected by M&I. Customer will not undertake to reproduce for
distribution or distribute such documentation to any other third party. Any
modifications made to such documentation by Customer for the purpose of
customization are acknowledged to be solely at the risk of Customer, and M&I
shall not be liable to Customer for any inaccuracies arising therefrom. The
distribution of modified documentation is subject to the same restrictions and
shall further contain an acknowledgement of M&I's copyright and other protected
proprietary interests in such documentation.
6. PROGRAMMING. M&I reserves the right to determine the programming
(whether hardware or software) utilized with the equipment used in fulfilling
its duties under this Agreement. All programs (including ideas and know-how and
concepts) developed by M&I are and remain its sole property.
7. EQUIPMENT. Customer shall obtain and maintain at its own expense such
data processing and communications equipment as may be necessary or appropriate
to facilitate the proper use and receipt of the Services. Customer shall pay all
installation, monthly, and other charges relating to the installation and use of
communications lines in connection with the Services. M&I shall not be
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<PAGE> 5
responsible for the continued availability of the communications lines used by
Customer in accessing the Services. M&I shall be responsible for the reliability
monitoring of the communications lines used by Customer in accessing the
Services. M&I agrees to monitor communication lines and diagnostic modems with
diagnostic systems capable of locating communication breakdowns for the purpose
of advising Customer or Customer's vendor for corrective action.
8. SUPPLIES. Customer shall pay for all supplies used in connection with
the Services. All forms, supplies, or materials used in processing Customer's
items and input data shall meet M&I's specifications.
9. SYSTEMS MODIFICATION; AMENDMENT OF SERVICES. M&I may modify, amend,
enhance, update, or provide the appropriate replacement for any of the Services,
the software used to provide the Services, or any element of its systems at any
time to: (a) improve the Services or (b) facilitate the continued economic
provisions of the Service. M&I may, at any time, withdraw any of the Services
upon providing one hundred eighty (180) days' prior written notice to Customer
provided, however, there shall be no material reduction in the functionality of
the core elements of M&I's Integrated Banking System software (Deposit System,
Loan System, Customer Information System). M&I may also terminate any of the
Services immediately upon any regulatory, legislative, or judicial determination
that providing such Services is inconsistent with applicable law or regulation
or upon imposition by any such authority of restrictions or conditions which
would detract from the economic or other benefits to M&I or Customer to any
element of the Services.
10. DISASTER RECOVERY. M&I maintains, and shall continue to maintain
throughout the term of this Agreement, off-site disaster recovery capabilities
which permit M&I to recover from a disaster and continue providing Services to
Customers within a commercially reasonable period. An executive summary of the
current disaster recovery plan, which may change from time to time, is available
upon request from M&I at no charge. M&I's current summary is attached as Exhibit
E. During the term of this Agreement, M&I will not modify its disaster recovery
plan to provide for longer targeted recovery times than those contained in the
Summary attached as Exhibit E. M&I's goal is to recover from a disaster within
the targeted recovery times stated in the Summary. M&I shall test the operation
and effectiveness of its disaster recovery plan at least annually. M&I
maintains, and shall continue to maintain throughout the term of this Agreement,
a backup power supply system to guard against electrical outages. M&I agrees to
provide Customer at no additional charge an analysis of Customer's disaster
recovery plan to assure compatibility with M&I's
11. EVENTS OF DEFAULT.It shall be an Event of Default on the part of the
Customer if: (a) Customer is insolvent, or a receiver or conservator shall be
appointed with respect to the Customer; or (b)Customer shall fail to pay any sum
due M&I within the prescribed time, except for any sums subject to a reasonable,
good faith dispute as provided for in Section 2(e) herein; or (c) if the
Customer shall fail to perform any of its other covenants or obligations under
this Agreement where the failure of Customer to perform has a material adverse
impact on M&I. It shall be an Event of Default on the part of M&I: (a) M&I is
insolvent, or a receiver or conservator shall be appointed with respect to M&I;
or (b) if M&I shall fail to perform any of its obligations under this Agreement
where the failure of M&I to perform has a material adverse impact on Customer
and is material to the
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<PAGE> 6
provision of the Services, except for those obligations under Section 20 of this
Agreement as to which the Agreement provides specific remedies for M&I's failure
to perform unless such failure to meet the standard in Section 20 creates a
material adverse impact on Customer. The defaulting party shall have ten (10)
days from the date of receipt of notice from the nondefaulting party of
nonpayment or nonperformance to cure such an Event of Default, before the
nondefaulting party may exercise any remedies it may have as a result of the
Event of Default.
12. REMEDIES UPON DEFAULT: LIMITATION OF LIABILITIES. If an Event of
Default occurs on the part of the Customer, and is not cured within the ten (10)
day period prescribed in Section 11, M&I may (a) terminate this Agreement; (b)
terminate access to its central processing unit by the Customer; and (c) declare
all amounts payable under this Agreement to be immediately due payable and file
suit for or otherwise obtain payment from the Customer of any fees or other sums
due it pursuant to this Agreement, plus any actual damages to its equipment or
systems caused by the Customer's actions, failures to act, equipment, systems,
or communication facilities. If an Event of Default occurs on the part of M&I,
and is not cured within the ten (10) day period prescribed in Section 11, the
Customer may only: (a) terminate this Agreement without payment of any buyout,
deconversion charge, or penalty and (b) file suit or otherwise obtain payment of
an aggregate amount of fees paid by the Customer to M&I hereunder during the six
(6) months immediately preceding the Event of Default; except that M&I's
liability with respect to termination as a result of M&I's gross negligence or
willful failure to perform shall be eighteen (18) months. Either party may also
seek equitable remedies, including, without limitation, specific performance and
injunctive relief, for a breach of Section 5 of this Agreement. M&I and the
Customer agree that these damage provisions are reasonable in light of all
present predictable circumstances (including expectable actual damages in that
the fees to be charged by M&I hereunder do not include amounts sufficient to
insure against greater claims). M&I and Customer expressly waive all claims for
additional, incidental, consequential, compensatory, or punitive damages and
agree that the remedies set forth in this Agreement shall be the sole and
exclusive remedies of the parties. No lawsuit or other action may be brought by
either party hereto or on any claim or controversy based upon or arising in any
way out of this Agreement after one (1) year from the date of the occurrence
allegedly giving rise to the action, except for nonpayment of sums due to M&I by
Customer. M&I agrees that except in the case of an Event of Default relating to
a breach by the Customer of its confidentiality obligations under Section 5 of
this Agreement, M&I will not exercise its remedy to terminate Customer's access
to the M&I central processing unit so long as: (a) Customer is current m the
payment of all amounts due M&I as reflected on M&I's last invoice to Customer;
and (b)only exercise such remedy after providing Customer with sixty (60) days'
prior written notice.
13. TERMINATION.
a. END OF INITIAL TERM. This Agreement shall automatically be
extended at the end of the initial ninety-six (96) month term for an additional
eighteen (18) month renewal term, unless the Customer gives M&I at least one
hundred eighty (180) days' prior written notice of its intent to terminate,
which notice may be given during the initial term of the Agreement.
b. RENEWAL TERM. During the renewal term, this Agreement shall be
automatically extended for an additional one (1) month on each monthly
anniversary date so that the term shall always be not less than one (1) month
less
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than eighteen (18) months, unless either party gives written notice to the other
party of intent to terminate, in which event the automatic monthly renewals will
end and the Agreement will terminate at the end of the unexpired portion of the
term in existence on the date notice to terminate is given.
c. TERMINATION UPON DEFAULT. This Agreement may also terminate upon
an Event of Default and failure to cure beyond applicable cure periods at the
option of the nondefaulting party as set forth in Section 12 hereof.
d. TERMINATION BY CUSTOMER. Customer may terminate this Agreement at
any time, and without cause, by giving M&I at least one hundred eighty (180)
days' prior written notice and paying M&I the then-applicable buyout amount set
forth in Section 21.
14. REGULATORY ASSURANCES. M&I and Customer acknowledge and agree that
the performance of these Services will be subject to regulation and examination
by Customer's regulatory agencies to the same extent as if such Services were
being performed by Customer. Upon request, M&I agrees to provide any appropriate
assurances to such agency and agrees to subject itself to any required
examination or regulation. Customer agrees to reimburse M&I for reasonable costs
actually incurred due to any such examination or regulation that is performed
solely for the purpose of examining data processing services used by Customer
unless such examination is as a result of such agency's concern with M&I's
ability to adequately perform data processing services.
a. NOTICE REQUIREMENTS. The Customer shall be responsible for
complying with all regulatory notice provisions to any applicable governmental
agency, which shall include providing timely and adequate notice to the Chief
Examiner of the Federal Home Loan Bank Board, the Office of Thrift Supervision,
the Office of the Comptroller of the Currency, The Federal Deposit Insurance
Corporation, the Federal Reserve Board, or their successors, as applicable
(collectively, the "Federal Agency"), as of the effective date of Services under
this Agreement, identifying those records to which this Agreement shall apply
and the location at which such Services are to be performed.
b. EXAMINATION OF RECORDS. The parties agree that the records
maintained and produced under this Agreement shall, at all times, be available
for examination and audit by governmental agencies having jurisdiction over the
Customer's business, including (without limitation) the Federal Agency. The
Director of Examinations of the Federal Agency or his designated representative
shall have the right to ask for and to receive directly from M&I any reports,
summaries, or information contained in or derived from data in the possession of
M&I related to the Customer. M&I shall notify Customer (prior to delivery of
such information) of any formal request by an authorized governmental agency to
examine Customer's records maintained by M&I, if M&I is permitted to make such a
disclosure to Customer under applicable law or regulations. Customer agrees that
M&I is authorized to provide all such described records when formally required
to do so by this authorized governmental agency.
By entering into this Agreement M&I agrees that the appropriate
Federal Agency shall have the authority established under the Bank Service
Corporation Act, 12 U.S.C. 1867(c) to regulate and examine the performance of
services hereunder.
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c. FIDELITY BONDS. Throughout the term of the Agreement, M&I shall
maintain fidelity bond coverage for M&I and its employees.
d. NOTICE OF CHANGES. Customer shall give to the Director of
Examinations of the Federal Agency at least thirty (30) days' notice of the
termination of this Agreement or of any material changes in the Services to be
provided hereunder.
e. INSURANCE. Throughout the term of this Agreement, M&I shall
maintain insurance coverage (or shall be self-insured) for losses from fire,
disaster, and other causes contributing to interruption of the Services. The
proceeds of such insurance shall be payable to M&I. Nothing in this Agreement
shall be construed as to permit Customer to receive any of such proceeds, or to
be named as an additional loss payee under any insurance policy.
f. FINANCIAL INFORMATION. Upon request, Customer agrees to provide
M&I with a copy of the call report filed with the Federal Agency, and to provide
such additional financial information as to its creditors or others as M&I may
reasonably request. M&I agrees to provide Customer a copy of M&I's annual
audited report.
15. TRANSPORTATION AND/OR TRANSMISSION OF DATA. The responsibility and
expense for transportation and/or transmission of and risk of loss of data and
media to and from M&I's datacenters shall be borne by Customer. M&I will notify
Customer of the time by which Customer's data and media must be delivered to M&I
for processing for M&I to provide Customer's processed data within the time
period indicated by M&I.
16. RESPONSIBILITY.
a. GENERAL. M&I agrees to perform the Services in a commercially
reasonable manner, which is similar to the services provided to other M&I
customers, including member banks of the Marshall and Ilsley Corporation, and no
other or higher degree of care. Except as otherwise described herein, M&I
assumes no other obligation as to performance or quality of the Services
provided, all other risks of error being expressly assumed by Customer. M&I
shall not be responsible for loss or damage due to delays in processing or in
the delivery of processed data as a result of any of the causes excused by
Section 19 hereof. M&I WILL IN NO EVENT BE LIABLE FOR ANY INDIRECT, INCIDENTAL,
OR CONSEQUENTIAL DAMAGES INCURRED BY CUSTOMER INCLUDING, BUT NOT LIMITED TO,
LOST PROFITS OR BUSINESS OPERATION LOSS, REGARDLESS OF WHETHER M&I WAS ADVISED
OF THE POSSIBLE OCCURRENCE OF SUCH DAMAGES.
b. RELIANCE ON DATA SUPPLIED. M&I will process items and data and
perform those Services described in this Agreement on the basis of information
furnished by Customer. M&I shall be entitled to rely upon and act in accordance
with any instructions, guidelines, or information provided to M&I by any person
or persons who may be designated from time to time in writing to M&I by Customer
and M&I will incur no liability in doing so. If any error results from incorrect
input supplied by Customer, Customer shall be responsible for discovering and
reporting such error and supplying the data necessary to correct such error to
M&I for processing at the earliest possible time. Customer will indemnify and
hold M&I harmless from any cost, claim, damage, or liability (including
attorneys' fees)
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<PAGE> 9
whatsoever arising out of such data, information or instructions, or any
inaccuracy or inadequacy therein. Customer assumes all risk of loss, delay, and
miscommunication in the transportation or transmission by electronic means of
data and information from any terminal or remote unit unless the same is caused
by or attributable to any act or omission on M&I's part, which act or omission
does not meet the standard of care in Section 16(a), or was caused by or
attributable to any gross negligence or willful failure on M&I's part to comply
with its obligations under this Agreement.
c. DATA BACKUP. Customer shall maintain adequate records including
microfilm images of items being transported to M&I for at least ten (10)
business days' backup on magnetic tape or other electronic media where
transactions are being transmitted to M&I, from which reconstruction of lost or
damaged items or data can be made. Customer assumes all responsibility and
liability for any loss or damage resulting from failure to maintain such
records.
d. AUDIT. M&I shall cause a third-party review of its data processing
systems and Services to be conducted annually by its independent auditors. M&I
shall provide Customer one copy of the report resulting from such review.
e. REGULATORY COMPLIANCE. Customer is responsible for determining that
the Services performed on its behalf, any forms which are used with its
customers, and all records it retains, comply with all applicable laws. When
used properly by Customer, M&I's systems and software used to provide the
Services will provide Customer with information necessary to comply with Federal
law applicable to the transactions or accounts processed by M&I. Should Customer
need information from the Services M&I provides in order to comply with
applicable state laws and regulations, Customer's sole remedy, and M&I's sole
obligation shall be for M&I to provide the ability to process the information
requested from the Customer as promptly as is commercially practicable. M&I
agrees that with respect to changes required as a result of changes in state
law, such changes shall be undertaken as a priority project based on the
regulatory deadline imposed for compliance at no additional cost to Customer.
f. BALANCING AND CONTROLS. On a daily basis, Customer shall review all
input and output, controls, reports, and documentation, to ensure the integrity
of data processed by M&I. In addition, Customer shall, on a daily basis, check
exception reports to verify that all file maintenance entries and nondollar
transactions were correctly entered. Customer is responsible for initiating
timely remedial action to correct any improperly processed data which these
reviews would disclose.
g. SERVICE DEFICIENCIES. If Customer is aware that a defect exists in a
Service, Customer shall be responsible for making whatever appropriate
adjustments may thereafter be necessary until M&I corrects the defect and, if
requested by Customer, M&I will, at M&I's expense, assist Customer in making
such corrections through the most cost-effective means, whether manual, by
system reruns, or program modifications. M&I will make every effort to correct
any known material defect as soon as commercially reasonable at M&I's expense.
17. OWNERSHIP OF DATA. Customer is the owner of all of its data supplied by
Customer to M&I for processing hereunder. Customer acknowledges that it has no
rights in any of the software, systems documentation, guidelines,
procedures, and
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<PAGE> 10
similar related materials or any modifications thereof except with respect to
M&I's use of the same during the term of this Agreement to process data. Upon
termination of this Agreement, M&I shall provide Customer with all copies of
Customer's data in a format that is being used by M&I at that time for
processing such data. Prior to the release of the Customer's data: (a) all
amounts owed under this Agreement by Customer to M&I shall be current and paid
in full except for those sums subject to a reasonable, good faith dispute as
provided for in Section 2(e) herein, and (b) Customer shall pay M&I its
"Estimated Deconversion Expenses" as described below. Customer agrees to pay M&I
for M&I's work in providing such data at M&I's rates then in effect for computer
and personnel time, supplies, and other items as required, and Customer further
agrees to pay M&I for any and all charges associated with the deconversion of
Customer's data based on M&I's then-current charges for such Services. M&I shall
make a good faith estimate of all of such costs, expenses, and charges which
shall be paid by Customer in advance (the "Estimated Deconversion Expenses").
The difference, if any, between the actual expenses and the prepaid Estimated
Deconversion Expenses shall be promptly paid or refunded, as appropriate, after
determination.
18. WARRANTIES. M&I represents and warrants that:
a. CAPABILITY OF COMPUTER SYSTEMS AND SOFTWARE. M&I's computer systems
(hardware and software) are capable of performing the Services in accordance
with the provisions of this Agreement. The software used to provide the Services
will operate substantially in accordance with the specifications and
documentation for the software as modified from time to time to incorporate
enhancements or modifications of the software to provide the Services.
b. OUALITY OF SERVICE. The reports and Services made available to
Customer shall be in substantial conformity with the User Manuals, as amended
from time to time, copies of which have been, or will be, provided to Customer.
c. PROPERTY RIGHTS. M&I has the right to provide the Services hereunder,
using all computer software required for that purpose. M&I will indemnify,
defend, and hold Customer harmless against any and all claims that the M&I
proprietary software used to provide the Services hereunder or the Services
infringe a U.S. patent or copyright and M&I will pay resulting costs, damages,
and attorneys' fees awarded, provided that:
(i) Customer promptly notifies M&I in writing of the claim; and
(ii) M&I has sole control of the defense and all related settlement
negotiations.
If such claim has occurred, or in M&I's opinion is likely to occur,
Customer agrees to permit M&I, at M&I's option and expense, either to procure
for Customer the right to continue receiving the Services using the software or
replace or modify the same with a substantially comparable product so that they
become noninfringing. If neither of the foregoing alternatives is reasonably
available, Customer's sole remedy shall be for Customer to terminate the
Agreement without payment of any buyout amount or deconversion expense; provided
however that M&I shall be obligated to use reasonable efforts to mitigate the
adverse consequences to Customer of any such claim.
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<PAGE> 11
d. ORGANIZATION AND APPROVALS. M&I is a validly organized corporate
entity with valid authority to enter into this Agreement This Agreement has been
duly authorized by all necessary corporate action.
e. DISCLAIMER OF WARRANTIES. EXCEPT AS DESCRIBED IN THIS AGREEMENT,
M&I DISCLAIMS ALL OTHER WARRANTIES, WHETHER WRITTEN, ORAL, EXPRESSED OR IMPLIED
INCLUDING, WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, ANY WARRANTY OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
19. FORCE MAJEURE. M&I shall not be liable to Customer if M&I's
fulfillment or performance of any terms or provisions of this Agreement is
delayed or prevented by revolution or other civil disorders, wars, acts of
enemies, strikes, electrical availability failure, labor disputes, fires,
floods, acts of God, federal, state, or municipal action, statute, ordinance or
regulation, or, without limiting the foregoing, any other causes not within its
reasonable control, and which by the exercise of reasonable diligence it is
unable to prevent, whether of the class of causes hereinbefore enumerated or
not.
20. DATA SERVICES RELIABILITY AND RESPONSIVENESS. Subject to the
nonoccurrence of a force majeure and the performance of Customer's obligations
described in this Agreement, M&I agrees that the services will be provided in
accordance with the following standard.
a. ATMs will be on-line for balance verification and transaction
authorization to the M&I host computer at least 95% of the processing time each
month (excluding scheduled down time for balancing or normal maintenance),
provided Customer's network is available. Should the M&I host computer be
unavailable, the M&I Tandem computer would engage the Stand-in mode in
accordance with limits set by Customer. Customer shall be notified at least one
week in advance of any scheduled Tandem downtime.
b. On a monthly basis, M&I will ensure that its on-line computing
facilities are available for the processing of Customer's on-line transactions
at a minimum of ninety-six percent (96%) of the time, as prescribed by Customer,
measured over a calendar month at the point of departure from M&I's
communications controller.
c. M&I will process transactions in an average of 2.5 seconds for
teller transactions and in an average of 3.5 seconds for bank operations CRT
transactions as measured over a calendar month, from the time the transaction is
sent by Customer's controller or gateway to the time the processed data is
returned to Customer's controller or gateway.
d. M&I will initiate deposit and loan batch processing and have bank
operations reports available for transmission to Customer or make the processed
items and reports available within six (6) hours (fifteen (15) hours at year
end) after receiving all input data from Customer's controller, and with such
performance being missed not more than two (2) processing days per calendar
month. In the event such performance is missed for two (2) days in each of three
(3) consecutive months, the presents of the parties shall meet to discuss
resolution of such failed performance. M&I will ensure that its on-line
computing facilities are
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available for the processing of Customer's on-line transactions at a minimum of
ninety-six percent (96%) of the time, as prescribed by Customer, measured over a
calendar month at the point of departure from M&I's communications controller.
e. Customer service is perceived as a significant benefit from M&I.
M&I will provide Customer responses to questions as follows: (1) average
response within 2 hours of calling the M&I Support Center; and (2) a resolution
on average of 48 hours.
f. In the event of human error on the part of M&I which could be
expected to create an impact on Customer or Customer's customers, M&I agrees to:
(1) notify Customer of the error within 4 hours during normal business hours;
(2) develop and implement a plan of action to be shared with Customer within 8
hours during normal business hours; (3) resolve the error to limit Customer
impact as soon as commercially reasonable. In the event Customer is not
satisfied with the methodology or time frame identified by M&I for resolution,
Customer may escalate the issue for a review by senior management personnel. If
this escalation process has not resolved the issue, the presidents of the
parties shall meet to develop a mutually satisfactory solution.
g. M&I shall notify Customer of any errors in the M&I software or
operating procedures, when detected by or reported to M&I, that appear to impact
Customer. Such notification shall include a plan for correction of the error.
h. M&I will provide Customer 2 weeks notice of any changes in
routine operating procedures. Changes falling into this category include but are
not limited to: (1) persons to notify in event of problem; (2) form of
communications; (3) change in processing or contact location; (4) hours of
service; etc.
i. M&I will notify Customer, in writing, of any enhancements or new
releases of the M&I software not less than I week prior (or such longer period
as may be appropriate due to the scope of modification) to implementation of
such changes. M&I shall make available to Customer, in accordance with the
published curriculum, training adequate on all such changes not less than I week
(or such longer period, as appropriate) prior to implementation. Training
usually is only required should the changes be large system upgrades requiring
additional training or should Customer elect to use the new functionality.
Training for major releases will be announced at least thirty (30) days prior to
implementation. Customer shall not use any such changed release until after such
training has been received. M&I will determine if training is necessary and
notify Customer of the scheduling.
Should M&I not be able to achieve the above stated objectives, M&I may
recommend network or equipment upgrades over which Customer has control and
Customer shall be responsible for making such changes or accepting the response
time that is achieved. Customer will notify M&I in writing if these levels of
performance are not achieved, and M&I shall have ninety (90) days to meet these
performance standards. If after ninety (90) days the performance standard still
has not been met, the Customer's sole remedy shall be to either (i) terminate
the agreement without penalty upon giving M&I written notice within thirty (30)
days after the expiration of the ninety (90) day cure period, or (ii) accept
such deficient levels which M&I does achieve. M&I assumes no other liability,
express or implied, with respect to its obligations set forth in this paragraph.
M&I agrees that, as of the date of the Agreement, Customer's network
configuration is adequate to meet the performance standard stated herein.
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21. CONTRACT BUYOUT.
a. Customer may terminate this Agreement at any time by giving M&I
at least one hundred eighty (180) days' prior written notice and paying M&I a
percentage of the total estimated remaining unpaid monthly processing fees
according to the schedule following this Section. For the purpose of this
computation, total estimated remaining unpaid monthly processing fees shall be
equal to the mean average of the total monthly fees paid in the three (3) months
preceding the termination notice, multiplied by the number of months remaining
in the Agreement.
If Termination Occurs
During Months Buyout Percentage
------------- -----------------
1-24 60%
25-48 50%
49-60 30%
61 and thereafter 25%
b. The contract buyout amount set forth above shall be paid prior to
the deconversion of any affected accounts. The contract buyout amount shall be
paid by Customer regardless of the form by which the termination occurs (except
as a result of an incurred Event of Default on the part of M&I), including but
not limited to, sale of assets or stock, assumption of liabilities, merger,
consolidation, absorption, liquidation, or termination as a result of an Event
of Default on the part of Customer (as described in Section 11 of this
Agreement).
22. IRS FILING. Customer has complied with all laws, regulations,
procedures, and requirements in attempting to secure correct tax identification
numbers (TINs) for Customer's payees and agrees to attest to this compliance by
an affidavit provided annually. Customer authorizes M&I to act as Customer's
agent and sign on Customer's behalf the Affidavit required by the Internal
Revenue Service on Form 4804, or any successor form.
Customer acknowledges that M&I's execution of the Form 4804 Affidavit on
Customer's behalf does not relieve Customer of responsibility to provide
accurate TINs or liability for any penalties which may be assessed for failure
to comply with TIN requirements. Customer agrees to hold M&I harmless from any
liabilities, claims, expenses, penalties, or damages (including attorneys' fees)
which may be assessed or incurred as a result of the failure to comply with TIN
requirements.
23. EXPENSE REIMBURSEMENTS. Customer agrees to reimburse M&I for all
conversion-related and out-of-pocket expenses (travel, lodging, meals, long
distance telephone calls, and printing and copying charges) reasonably incurred
in connection with the conversion of Customer's accounts to the M&I system and
further detailed on Exhibit B. The reimbursement of such expenses is in addition
to conversion charges which may arise after the conversion, or with respect to
accounts which are not currently customer accounts which are to be converted to
the M&I system. M&I shall estimate such expenses m advance, and Customer shall
pay such expenses in three (3) equal payments as follows: first, upon execution
of this Agreement; second, upon delivery by M&I of conversion test reports; and
final, on the Conversion Date. M&I shall provide Customer with a summary invoice
of actual expenses, and any adjustments shall be paid upon delivery of the
invoice.
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24. CONVERSION OBLIGATIONS. Both parties agree to make a good faith
effort to convert Customer's data in a timely fashion and to perform the
conversion in accordance with the responsibilities set forth in the M&I
Conversion Manual, the Conversion Schedule, and this Agreement. Customer agrees
to maintain an adequate staff of persons who are knowledgeable with the systems
currently used by Customer to process data. Customer further agrees to provide
such Services and perform such obligations as are contemplated by the M&I
Conversion Manual and the Conversion Schedule, and as necessary for Customer to
timely and adequately perform its obligations herein and therein. Customer shall
pay or reimburse M&I for all out-of-pocket expenses and on a time-and-materials
basis for any of its personnel, or any independent contractors, who perform
conversion or related services (including items identified as Customer
Responsibilities in the Conversion Manual) for Customer. Customer further agrees
to cooperate fully with all reasonable requests of M&I necessary to effect the
conversion in a timely and efficient manner. Customer agrees to reimburse M&I
for all conversion charges whether for the initial conversion, or for the
subsequent conversion of additional accounts as they are incurred or for the
conversion of products not identified in the Proposal.
25. USE OF THE SERVICES. (a) Customer assumes exclusive responsibility
for the consequences of any instructions Customer may give M&I, for Customer's
failure to properly access the Services in the manner prescribed by M&I, and for
Customer's failure to supply accurate input information; (b)Customer agrees that
it will use the Services in accordance with such reasonable policies as may be
established by M&I from time to time as set forth in any materials furnished by
M&I to Customer; (c) Customer agrees that, except as otherwise permitted by M&I,
Customer will use the Services only for its own internal business purposes and
will not sell or otherwise provide, directly or indirectly, any of the Services
or any portion thereof to any third party; and (d) Customer agrees and
represents that (1) this Agreement has been approved by its board of directors,
or that the officer executing this Agreement has been specifically authorized by
Customer's board of directors to execute this Agreement, (2) the performance of
this Agreement by the Customer will not affect the safety or soundness of the
Customer or any of its affiliates, and (3) this Agreement, and the obligations
evidenced hereby, will be properly reflected on the books and records of the
Customer, and the Customer will provide evidence of the same to M&I upon
request.
26. FINDER'S FEES.) If Customer introduces a lead to M&I, which M&I was
not previously working, and Customer assists M&I by introducing the prospect to
M&I, followed by Customer assistance and involvement in the selling process (not
limited to Customer site visits, referrals, presentations, etc.) for the purpose
of selling M&I Services, and the financial institution signs a processing
agreement with M&I, M&I will credit Customer an amount equal to one (1) month's
processing fees, which may be used to offset data processing fees for Services
(excluding Miscellaneous Fees) provided M&I agrees in advance to pay such
compensation to Customer. The finder's fee, as described above, shall be based
upon and payable after the first month's use of the ordinary Services following
the completion of all conversions of the new financial institution as proposed.
The credit shall not exceed twenty-five thousand dollars ($25,000) for any
individual bank, or more than twenty-five thousand dollars ($25,000) for any
group of banks or bank holding company.
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27. MISCELLANEOUS.
a. AMENDMENT. This Agreement, including the Schedules hereto, may be
amended only by an instrument in writing executed by the parties or their
permitted assignees.
b. ASSIGNMENT. This Agreement may not be assigned by either party
without the prior written consent of the other party, which such consent shall
not be unreasonably withheld, provided that M&I may freely assign this Agreement
to any company that is directly or indirectly (1) in control of M&I, (2) under
the control of M&I, or (3) under common control with M&I, provided that, in such
event, M&I shall remain primarily liable.
c. SECTION HEADINGS. Section headings are for reference purposes
only and shall not affect the interpretation or meaning of this Agreement.
d. NOTICES. Any notice under this Agreement will be deemed given
when delivered by hand, by a nationally recognized overnight courier service, or
when mailed by United States mail, first class postage prepaid and addressed to
the recipient part at its address set forth in this Agreement, to the attention
of the Chief Executive Officer in the case of the Customer and to the attention
of the Division President in the case of M&I.
e. NO WAIVER OF PERFORMANCE. Failure by either party at any time to
require performance by the other party to claim a breach of any provision of
this Agreement will not be construed as a waiver of any right accruing under
this Agreement, nor affect any subsequent breach, nor affect the effectiveness
of this Agreement or any part hereof, nor prejudice either party as regards any
subsequent action.
f. ENTIRE AGREEMENT: Conflicting Provisions. This Agreement,
together with the Schedules hereto, constitutes the entire agreement between the
Customer and M&I with respect to the subject matter hereof. There are no
restrictions, promises, warranties, covenants, or undertakings other than those
expressly set forth herein and therein. This Agreement supersedes all prior
negotiations, agreements, and undertakings between the parties with respect to
such subject matter. In the event of any conflict between the terms of the main
body of this Agreement and any of the Schedules hereto, the terms of the main
body of this Agreement shall govern.
g. ENFORCEABILITY. The invalidity or enforceability of any provision
hereof shall not affect or impair any other provisions.
h. SCOPE OF AGREEMENT. If the scope of any of the provisions of the
Agreement is too broad in any respect whatsoever to permit enforcement to its
full extent, then such provisions shall be enforced to the maximum extent
permitted by law and the parties hereto consent and agree that such scope may be
judicially modified accordingly and that the whole of such provisions of this
Agreement shall not thereby fail, but that the scope of such provisions shall be
curtailed only to the extent necessary to conform to law.
i. CONFIDENTIALITY OF TERMS. Customer agrees that neither it, its
directors, officers, employees, or agents will disclose this Agreement, or any
of the terms or provisions of this Agreement, to any other party, except as
consistent with applicable regulation or law.
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j. ACCOUNT MANAGEMENT. M&I shall designate an individual to be
liaison with or representative to Customer under the Agreement. Customer shall
have the right to demand from time to time that the representative be replaced
for cause, with cause being determined solely by Customer reasonably and in good
faith. The M&I representative shall be available to meet with Customer's
management as may reasonably be requested from time to time by Customer, and
he or she shall, at M&I's sole cost and expense, visit Customer's offices no
less frequently than quarterly in order to meet with management of Customer,
monitor system operation and the like. Unless M&I willfully fails to abide by
the terms of this Section of the Agreement, a breach of this Section will not be
construed as an Event of Default on the part of M&I.
THE REMAINDER OF ThIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK
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IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed in their names as of the date first above written.
M&I DATA SERVICES, A DIVISION OF THE
MARSHALL & ILSLEY CORPORATION
("M&I")
4900 W. Brown Deer Road
Brown Deer, WI 53223
By: /s/ Patrick C.Foy
--------------------------------
Name: Patrick C.Foy
Title: President, Outsourcing Business Group
By: /s/ Thomas R. Mazera
--------------------------------
Name: Thomas R. Mazera
Title: Vice President
PREMIERBANK & TRUST ("Customer")
124 Middle Avenue
Elyria, OH 44035
By: /s/ John S. Kreighbaum
--------------------------------
Name: John S. Kreighbaum
Title: Chief Executive Officer
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<PAGE> 18
AUTHORIZATION AGREEMENT
The undersigned ("Customer") hereby authorizes M&I Data Services, a
division of the Marshall & Ilsley Corporation ("M&I") to initiate debit entries
and to initiate, if necessary, credit entries and adjustments for any excess
debit entries or debit entries made in error, to Customer's account indicated
below and the depository named below, to debit and/or credit the same such
account.
This authority is to remain in full force and effect for the period coinciding
with the term (and any renewals thereto of the Data Processing Services
Agreement made the ___________ day of July 1996, and any addenda thereto (the
"Agreement"), pursuant to the terms and conditions specified in the Agreement.
DEPOSITORY NAME: ______________________
ADDRESS: ______________________
CITY/STATE/ZIP: ______________________
TELEPHONE NUMBER: ______________________
ROUTING TRANSIT NUMBER: ______________________
ACCOUNT NUMBER: ______________________
M&I DATA SERVICES, A DIVISION OF THE
MARSHALL & ILSLEY CORPORATION
("M&I")
By: /s/ Patrick C.Foy
--------------------------------
Name: Patrick C.Foy
Title: President, Outsourcing Business Group
By: /s/ Thomas R. Mazera
--------------------------------
Name: Thomas R. Mazera
Title: Vice President
PREMIERBANK & TRUST ("Customer")
124 Middle Avenue
Elyria, OH 44035
By: /s/ John S. Kreighbaum
--------------------------------
Name: John S. Kreighbaum
Title: Chief Executive Officer
<PAGE> 19
SCHEDULE
M&I ON-LINE AVAILABILITY
The following is a list of standard hours of availability by each on-line
service. All times are CST/CDT.
- - Cardholder
(CRT Maintenance)
Monday-Thursday 7:00 a.m.-6:45 p.m.
Friday 7:00 a.m.-9:30 p.m.
Saturday 7:00 a.m.-4:30 p.m.
- - CIS & Deposit System
(Maintenance and Dollar Transactions)
Monday-Thursday 7:00 a.m -6:45 p.m.*
Friday 7:00 a.m.-9:30 p.m.*
Saturday 7:00 a.m.-4:30 p.m.
- - Data Entry
(Account Reconciliation System)
Monday-Friday 7:00 a.m.-10:00 p.m.
- - Data Entry
(Financial Control)
Monday-Thursday 7:00 a.m.- 11:00 p.m.
Friday 7:00 a.m.- 12:00 Midnight
Saturday 7:00 a.m.-4:30 p.m.
- - Decision Management System
Monday-Thursday 7:00 a.m.-6:45 p.m.
Friday 7:00 a.m.-9:30 p.m.
Saturday 7:00 a.m.-4:30 p.m.
- - Data Entry
Monday-Friday 7:00 a.m.-5:00 p.m.
- - Financial Control On-line
Monday-Friday 7:00 a.m.-8:00 p.m.
Saturday 7:00 a.m.-4:30 p.m.
<PAGE> 20
- - Loan System
(CRT Maintenance)
Monday-Thursday 7:00 a.m.-6:15 p.m.
Friday 7:00 a.m.-8:30 p.m.
Saturday 7:00 a.m.-4:30 p.m.
- - Management Information Service
Monday-Thursday 7:00 a.m.-6:45 p.m.
Friday 7:00 a.m.-9:30 p.m.
Saturday 7:00 a.m.-4:30 p.m.
(Except Money Market Info.)
- - Teller Terminals
Monday-Thursday 7:00 a.m.-7:00 p.m.
Friday 7:00 a.m.-9:30 p.m.
Saturday 7:00 a.m.-4:30 p.m.
* CIS access to loan data is based on Loan System hours of availability. West
Coast availability for CIS, Loans, and Deposits for Monday-Friday is
8:00 a.m.-10:00 p.m., CST/CDT.
<PAGE> 21
BACKROOM AND ITEM PROCESSING ADDENDUM TO
DATA PROCESSING SERVICES AGREEMENT
THIS ADDENDUM, to the Data Processing Services Agreement (the "Agreement")
dated September 12, 1996) is made as of the same day by and between the
undersigned parties, does hereby alter, amend, and modify the Agreement and
supersedes and takes precedence over any conflicting provisions contained in the
Agreement.
FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency of which
are hereby acknowledged, the undersigned parties agree as follows:
A. For purposes of this Addendum, the following terms shall have the
definitions indicated:
1. Business. "Business" shall mean the Backroom and Item Processing
Services provided by M&I from the Facility and its related business operations
conducted at the Facility, but shall exclude services and operations provided at
M&I's other facilities.
2. Facility. "Facility" shall mean the facility operated by M&I in
or near Elyria, Ohio, owned or leased by Customer, at which the Backroom and
Items Processing Services under the Addendum are provided Customer. Customer is
responsible for related utilities and maintenance of the facility.
3. Independent Appraiser. "Independent Appraiser" shall mean a duly
qualified and experienced appraiser which has no substantial relationship,
direct or indirect, with either M&I or Customer or any affiliate thereof.
4. Option. "Option" shall mean the option of Customer to purchase
all, but not less than all, the Business and Physical Assets from M&I, as
created by this Addendum.
5. Physical Assets. "Physical Assets" shall mean the computers,
machinery, equipment, parts, fixtures, supplies, furniture, vehicles, inventory
and other items of tangible personal property owned by M&I and used at the
Facility.
B. M&I shall perform for Customer those certain Backroom and Item
Processing Services described in the attached Exhibit A for which Customer
agrees to pay M&I in accordance with the Schedule attached hereto as Exhibit B.
C. The term "Services" in the Agreement shall include the Backroom and Item
Processing Services except for the provisions of Sections 2a, 3a, 3b, and 24,
and Exhibits A and B to the Agreement where the term Services will not include
the Backroom and Item Processing Services described in the attached Exhibit A.
D. Representatives from M&I and Customer will meet quarterly, or at
mutually agreed intervals, to conduct cost and performance reviews of services
provided to Customer. Customer will expect and be responsible for fluctuating
charges related to seasonal volume changes, standard variations in billing
periods, bulk inventory purchases, and other standard service dynamics. Such
charges will be adjusted quarterly as necessary. Both parties will be
1
<PAGE> 22
responsible for quarterly reconciliation to "Cost Plus Charge" schedule.
Frequencies of adjustments and reconciliations will be reviewed and modified, as
mutually agreed, after one year. M&I will review with Customer strategic
initiatives and maintenance activities that directly impact Customer through
services and/or charges. Customer agrees that such activities and dynamics are
expected and are an integral part of conducting business.
E. This Addendum shall be effective upon execution by both parties, and
both parties will promptly undertake the conversion activities necessary to
process Customer's data with respect to item processing services. The term of
this Addendum shall continue for a period of sixty (60) months from the date M&I
begins processing Customer's data hereunder (the "Initial Term").
F. Not less than twelve (12) months prior to the end of the Initial Term,
M&I agrees that it will present a proposal to Customer for a new long-term
Agreement, and the parties agree to negotiate the terms of such agreement in
good faith. In the event the parties are unable to reach agreement on the term
of such agreement by one hundred eighty (180) days' prior to the end of the
Initial Term, this Agreement shall automatically be extended at the end of the
initial sixty (60) month term for one additional six (6) month renewal term on
the same terms and conditions as the initial term.
G. In the event that, pursuant to the provisions of Section F of this
Addendum, Customer elects to terminate this Addendum at the end of the Initial
Term (or any replacement addendum relating thereto) and, at the time notice of
termination is given, the services provided by M&I hereunder to Customer and its
affiliates at or from the Facility represent in excess of seventy percent (70%)
of the revenue of such services performed at or from the Facility, Customer
shall reimburse M&I for, and hold M&I harmless from, any costs, expenses or
other liabilities incurred by M&I as a result of downsizing the services
provided at the Facility, including those outlined below.
1. Costs, expenses or other liabilities specifically include:
severance and termination costs and expenses relating to employees who are laid
off or terminated in connection with any resultant downsizing and in accordance
with M&I's standard severance policy, costs of early termination of a facility
usage) and costs of a move to a facility more appropriately sized for the
resultant operation; and, costs incurred with respect to the necessary reduction
of volume of equipment relating to the downsizing, including losses on the sale
of equipment and costs for termination of equipment leases.
2. The loss or profit on the sale of equipment shall be determined
by calculating the difference between the net book value as shown on the books
and records of M&I (Book Value) and the actual net proceeds of the sale, based
upon competitive bid process and final review by both parties, if the equipment
is retained by M&I, the fair market value (Market Value) of the equipment as of
the termination date. A loss will be defined as the Book Value exceeding the net
sale proceeds or the Market Value; a profit will be defined as the net sale
proceeds or the Market Value exceeding the Book Value. Market Value will be
determined by an Independent Appraiser selected by the parties. In the event the
parties are unable to agree on a single Independent Appraiser within ten (10)
business days following notice of termination, each party shall select an
Independent Appraiser within ten (10) business days, and the two Independent
Appraisers so chosen shall promptly select a third Independent Appraiser. The
Market Value shall be the average of the appraised values determined by each of
the three
2
<PAGE> 23
Independent Appraisers so chosen, and shall be determinative. Any profit
resulting from the sale of equipment shall offset any losses on the sale of
equipment.
3. The estimated amounts of such costs, expenses and other
liabilities shall be presented to Customer for review at least one hundred
eighty (180) days prior to the end of the Initial Term and prior to execution of
any employee severance, lease termination, or sale transaction. If such
estimated amounts do not meet with Customer's approval, Customer may exercise
its option under Section H of this Addendum.
4. Following approval by Customer, the amounts of such costs and
expenses shall be promptly paid, in accordance with the payment provisions of
the Agreement, by Customer to M&I from time to time upon presentation of a
written invoice (or invoices) and corresponding supporting documentation by M&I.
H. At any time after the first twelve (12) months of the Initial Term,
Customer may notify M&I of its intent to purchase the Business and Physical
Assets from M&I ("Notification"), provided the Backroom and Item Processing
Services provided by M&I to Customer and its affiliates performed at the
Facility at the time of Notification represent in excess of seventy percent
(70%) of the revenue of the Business. Customer's Option to purchase may be
exercised upon the following terms and conditions.
1. Notice of Customer's intent to exercise such Option shall be
given in writing to M&I not sooner than twelve (12) months from the start of the
Initial Term, nor later than one hundred eighty (180) days prior to the end of
the Initial Term. In no event shall notice be given subsequent to one hundred
eighty (180) days prior to the end of the Initial Term, at which date the
Option shall expire unless a notice by Customer to exercise the Option has been
duly given prior thereto. Within thirty (30) days of Notification, M&I shall
propose a purchase price for the Business and Physical Assets and Customer shall
undertake any due-diligence study deemed reasonably necessary. The parties shall
then negotiate in good faith for a period of thirty (30) days on a purchase
price.
2. Pursuant to the Option, Customer may purchase all, but not less
than all, of the Physical Assets and the Business. In connection therewith,
Customer shall assume all of M&I's continuing obligations relating to the
Business, including obligations under Customer contracts, lease obligations
relating to any leased equipment located therein, and the like. Customer shall
indemnify and hold M&I harmless from any failure of Customer to fully perform
such obligations.
3. The price at which such Option shall be determined as follows;
a. In the event the parties agree within 60 days of notice of
exercise of the Option on the purchase price, then the price shall
be as agreed between the parties.
b. In the event the parties are not able to agree on price or
other significant terms and conditions, Customer may cancel its
intent to purchase or ask for an independently appraised value. If
Customer requests an Independently Appraised value, then Customer
shall have a binding obligation to complete the transaction
contemplated hereby, as follows. The parties shall select an
3
<PAGE> 24
Independent Appraiser to determine the terms and conditions upon
which such purchase shall be made.
c. In the event the parties are unable to agree on a single
Independent Appraiser within ten (10) business days, each party
shall select an Independent Appraiser within ten (10) business days,
and the two Independent Appraisers so chosen shall promptly select a
third Independent Appraiser. The purchase price shall be the average
of the appraised values determined by each of the three Independent
Appraisers so chosen, and shall be determinative.
d. The principle to be used in the determination of the price
by the parties, or the Independent Appraiser(s), shall be 110% of
the sum of (i) the fair market value, or book value, which ever is
greater, of Physical Assets plus (ii) the going concern value of the
Business to a third party. Such amounts shall be determined as of
the expected closing date, and shall not include any reduction in
value of the Physical Assets or Business as a result of the
termination of arrangements with Customer, although no going concern
value shall be assigned to M&I's Business with Customer. No
reduction shall be made for the obligations assumed by Customer in
the transaction.
4. The purchase price shall be paid in cash at closing. The closing
shall occur on a date agreed by the parties or, if the parties are unable to
agree, on the date upon which this Addendum is terminated. At the closing, each
party shall deliver to the other such bills of sale (in similar form to those
pursuant to which the Customer is conveying assets to M&I hereunder), assumption
agreements and other documents as may be appropriate to effect the transactions
contemplated hereby.
5. The business and the Physical Assets shall be conveyed on an as
is, where is basis, and M&I makes, and shall make, no representations or
warranties whatsoever with respect to the Physical Assets or Business to be
conveyed, including merchantability, condition. assignability or fitness for any
purpose.
6. Customer shall be solely responsible for securing any and all
third party consents necessary with respect to the exercise of the Option,
including consents relating to Customer contracts, facility service contracts,
leases or other matters. If any Customer contract requires Customer's consent to
any assignment to Customer, and such Customer does not consent to the
assignment, the particular Customer contract shall not be included in the
Business purchased by Customer hereunder, but may be subcontracted by M&I to
Customer under paragraph 8 below. Customer shall be solely responsible for any
costs related to obtaining any and all intellectual property use rights, and no
such rights are included in the transactions contemplated by the Option. M&I
agrees to assist Customer, at Customer's expense, in obtaining such use rights.
7. Except as otherwise specifically provided herein, each party
shall bear its own costs and expenses with respect to exercise of the Option and
the transactions thereby contemplated, except that the parties shall jointly
bear the expense of the Independent Appraiser chose pursuant to Section H (3b)
hereof, or, the case with a third Independent Appraiser as in Section H (3c)
hereof, each party shall be responsible for the fees and expenses of the
4
<PAGE> 25
Independent Appraiser chosen by the party, and the parties shall each bear
one-half of the fees and expenses of the third Independent Appraiser so chosen.
8. Following the completion of the transactions contemplated by the
Option, Customer agrees that it will act as M&I's subcontractor to provide, on
behalf of M&I Customers, Backroom and Item Processing Services of the types
conducted by M&I at the Facility prior to exercise in the Option. Such
subcontracting shall be on terms and conditions substantially similar to those
offered by M&I for similar services at the Facility prior to exercise of the
Option.
Attached are the following:
- Exhibit A - Item Processing and Backroom Services.
- Exhibit B - Backroom and Item Processing Cost Plus Schedule.
- Exhibit C - Estimated Backroom and Item Processing Cost Plus
Charges. (Based on volumes provided by Customer)
I. Customer agrees that M&I, as a part of conducting business, will
actively seek and contract M&I's services to its existing and potentially new
customers.
1. As part of securing new business, additional investments may be
required. M&I agrees to change the Customer's "cost plus" basis to a "unit cost
plus" basis utilizing the new business cost structure in the determination of a
"unit cost". M&I agrees to limit adjustments to the Customer's "unit cost plus"
basis, caused by additional business, by not more than plus or minus five (5)
percent. These adjustments will be limited to additional business having a
direct impact on the cost structure and services provided to Customer. "Unit
costs" will be annually reviewed and adjusted as necessary with prior
notification of ninety (90) days to Customer.
2. As part of a reduction in business, M&I agrees to limit
adjustments to the Customer's "unit cost plus" schedule by not more than plus
or minus five (5) percent. These adjustments will be limited to reduced business
having a direct impact on the cost structure and services provided to Customer.
J. Except as modified by this Addendum, all other terms, and conditions
contained in the Agreement shall remain in full force and effect.
5
<PAGE> 26
IN WITNESS WHEREOF, the undersigned parties have duly executed this
Addendum in a manner appropriate to each.
M&I DATA SERVICES, A DIVISION PREMIER BANK AND
OF THE MARSHALL & ILSLEY TRUST ("Customer")
CORPORATION ("M&I")
Name: By: /s/ Patrick C. Foy By: /s/ Dennis K. Miller
---------------------- ------------------------
Name: Patrick C. Foy Name: Dennis K. Miller
Title: President, Title: Senior Vice President
Outsourcing Business Group
By: /s/ Thomas R. Mezera
----------------------
Name: Thomas R. Mezera
Title: Vice President
6
<PAGE> 27
M&I DATA SERVICES
SALESPARTNER AND PCTELLER SOFTWARE LICENSE AGREEMENT
THIS AGREEMENT is entered into this 28th day of October, 1996, by and
between M&I Data Services, a division of the Marshall & Ilsley Corporation, a
Wisconsin corporation, ("M&I"), located at 770 North Water Street, Milwaukee,
Wisconsin 53202 and Premier Bank and Trust, located at 124 Middle Avenue,
Elyria, Ohio 44036-2001 (the "Customer").
RECITALS
WHEREAS, M&I has developed branch automation and teller software for use
with personal computers; and
WHEREAS, Customer wishes to obtain a license to use such software for its
own internal purposes.
NOW, THEREFORE, for and in consideration of the mutual agreements contained
herein, M&I hereby grants Customer the right and license to use the Salespartner
and PCTeller Software (as described herein) subject to the ongoing satisfaction
by Customer of the following terms and conditions:
1. SALESPARTNER AND PCTELLER SOFTWARE. For purposes of this Agreement, the
term Salespartner and PCTeller Software (together referred to as the "Software")
shall mean branch automation and teller software systems delivered to the
Customer in machine-readable code (object code) only, together with related user
documentation provided by M&I and identified in Exhibit A.
2. SCOPE OF LICENSE. Subject to the terms and conditions of this Agreement,
M&I hereby grants to Customer a nonexclusive, nontransferable, and perpetual
license to use the Software for its own internal business purposes and solely
accessible by the personal computers listed in Exhibit A. Customer acknowledges
and agrees that the Software is licensed for use with the version of the bank
system software made available from time to time by M&I through the M&I Service
Bureau (the "Service Bureau Software"). Customer further acknowledges and
agrees that the interfacing of the Software to other mainframe banking
applications and providing ongoing maintenance for such interface, if any, is
outside the scope of this Agreement. M&I acknowledges and agrees that the
license granted herein shall continue in full force and effect in the event that
the Customer no longer utilizes the Service Bureau Software, provided that
Customer complies at all times with the terms and conditions of this Agreement.
Customer understands that this License does not include the operating system
which is necessary to utilize the Software.
3. LICENSE FEE. Customer shall pay to M&I a one-time License Fee as set
forth in Exhibit A. Such fee shall be based upon the number of personal computer
workstations that are authorized to access the Software, as listed in Exhibit A.
The License Fee shall include Training and Conversion Support as described in
Section 5. M&I agrees that Customer may install and use the Software, under the
license granted hereby, on additional personal computer workstations or
equipment other than those listed in Exhibit A ("Additional Computers") and
authorizes such Additional Computers to access the Software provided that
Customer notifies M&I prior to usage and Customer pays an additional License
Fee(s), based upon increased access computed in accordance with M&I's
then-current price schedule, within thirty (30) days after Customer's receipt of
an invoice from M&I for such fees. Customer agrees that if it installs or uses
the Software on additional personal computer workstations or equipment, other
than those listed in Exhibit A, without notifying M&I prior to usage and paying
such additional License Fee(s), M&I shall, in addition to any other remedies it
may have, have the right to terminate the license
<PAGE> 28
granted herein, or for increased PCTeller Software access, charge an additional
PCTeller License Fee, or for increased Salespartner Software access, charge an
additional Salespartner License Fee and maintenance fees commencing from
Salespartner Delivery Date, as described in Section 4; such fees to be based
upon the increased access computed in accordance with M&I's then-current price
schedule. Customer shall also pay all applicable taxes, duties, and charges
(including, but not limited to, sales, use, excise, and personal property taxes
imposed on Customer) now or hereafter levied, assessed, or charged against the
Software while licensed to Customer as a consequence of this Agreement, except
where such taxes, duties, or charges are based upon the income of M&I.
4. DELIVERY.
(a) PCTELLER DELIVERY. M&I shall deliver on magnetic diskette to Customer,
at the time of conversion to PCTeller, one machine-readable copy of the PCTeller
Software. Delivery shall be deemed to have occurred upon Customer's receipt of
the PCTeller Software at the time of conversion ("PCTeller Delivery Date").
(b) SALESPARTNER DELIVERY. M&I shall deliver on magnetic diskette to
Customer, at the beginning of Salespartner training session as described in
Section 5, one machine-readable copy of the Salespartner Software. Delivery
shall be deemed to have occurred upon Customer's receipt of the Salespartner
Software at the beginning of the Salespartner training session ("Salespartner
Delivery Date").
5. TRAINING AND CONVERSION SUPPORT.
(a) PCTELLER SUPPORT. M&I shall provide a two-day teller analysis session
to determine teller transaction requirements and a three-day teller training
class for a maximum of two employees of Customer to familiarize the Customer's
trainers with the features and functions of the PCTeller Software. The sessions
shall be held at the M&I Datacenter located in Brown Deer, Wisconsin, at dates
and times established by M&I. M&I shall also be on-site at the time of
conversion as defined in the Data Processing Services Agreement by and between
Customer and M&I (the "Data Processing Services Agreement"), to assist with the
conversion to the PCTeller Software. M&I reserves the right to change the
content and duration of the analysis and training sessions and the duration of
on-site support, provided that any changes which materially diminish the
duration of the analysis sessions, training sessions, or on-site support shall
require Customer's consent. Customer shall be responsible for all travel,
lodging, and related costs and expenses incurred by attendees. Customer agrees
to reimburse M&I for reasonable travel and lodging expenses for Training and
Conversion Support rendered to Customer outside of M&I offices, according to the
terms of the Data Processing Services Agreement.
(b) SALESPARTNER SUPPORT. M&I shall provide initial services to Customer to
customize Salespartner to support deposit, consumer and commercial loan products
and associated forms as defined by Customer and agreed to by M&I. Such services
shall be limited to a maximum of 650 hours, after which Customer will be billed
at the then-current hourly rate. The specific services to be performed will be
determined after an initial analysis of Customer's requirements. Customer agrees
to reimburse M&I for reasonable travel, lodging and related expenses for
Customization Services rendered to Customer outside of M&I offices, according to
the terms of the Data Processing Services Agreement. M&I shall also provide a
four-day class for a maximum of two employees of Customer to familiarize
Customer's employees with the Salespartner maintenance functions. The class
shall be held at the M&I Datacenter, located in Brown Deer, Wisconsin, at dates
and times established by M&I. M&I reserves the right to change the content and
duration of the sessions and classes, provided that any change which materially
diminishes the duration of a session or class shall require Customer's consent.
Customer shall be responsible for all travel, lodging, and related costs and
expenses incurred by attendees.
6. INSTALLATION. M&I shall have no obligation to install the Software on
Customer's Personal Computer(s), and Customer agrees to install and maintain all
Software on their Personal Computer(s) unless Customer purchases Bundled
Hardware and Support Services, in which case installation services shall be
defined and attached to this Agreement.
<PAGE> 29
7. ACCEPTANCE. This Agreement shall be deemed to have been accepted by
the Customer as of the date when M&I and Customer have both executed this
Agreement. The Software shall be deemed to have been accepted by Customer upon
delivery by M&I.
8. DOCUMENTATION. Customer shall receive, at no additional charge, user
documentation as defined in Exhibit A, as part of the Software. Additional sets
of documentation requested by the Customer will be billed to Customer at M&I's
then-current price for such documentation.
9. MAINTENANCE AND ENHANCEMENTS FOR PCTELLER.
(a) MAINTENANCE SERVICES AND ENHANCEMENTS. For so long as the Customer is
receiving services under the Data Processing Services Agreement, M&I agrees to
provide to Customer maintenance services and enhancements for the PCTeller
Software as described below ("PCTeller Maintenance Services"). PCTeller
Maintenance Services shall be provided to Customer's primary location only, as
designated in Exhibit A. The PCTeller Maintenance Services are the following:
(i) M&I shall correct all PCTeller Software errors which cause the
PCTeller Software not to be in substantial compliance with its user
documentation and shall use its best efforts to correct all other
PCTeller Software errors upon discovery and proper notification by the
Customer of the existence of any error; proper notification being
deemed given only if the Customer substantially complies with M&I's
error notification procedures in effect at that time. If, after
investigation of the reported error, it is determined that the error
is beyond M&I's responsibility, including, but not limited to, errors
resulting from modifications made by the Customer, the Customer agrees
to pay for M&I's efforts in investigating and/or resolving the error
at M&I's then-current rates for such services, plus reasonable
expenses incurred by M&I.
(ii) M&I shall provide phone support with regard to the use and operation
of the PCTeller Software during M&I's regular business hours and, at
all other times, an emergency phone number to be used at the
Customer's discretion to secure necessary phone support with regard to
emergency situations.
(iii) M&I shall use its best efforts in developing future releases and
upgrades of the PCTeller Software and accompanying documentation. M&I
shall deliver to Customer one copy of any future releases and upgrades
(with Customer having the right to make and use additional copies
pursuant to Section 14 of this Agreement) and shall deliver
accompanying documentation, if any, in a quantity specified in Exhibit
A. If M&I does develop future releases and upgrades which replace or
supersede any other version of the PCTeller Software then in use by
Customer, M&I agrees to provide maintenance services as set forth
above for the new updated version, as well as the next most previous
version.
(b) MAINTENANCE FEE. The fee for PCTeller Maintenance Services shall be
incorporated in the On-line Teller rates published in the M&I Customer price
list and shall be paid by Customer pursuant to the Data Processing Services
Agreement. Such fees will be included in the Customer's monthly data processing
invoice. On-line Teller rates may be adjusted by M&I in accordance with the Data
Processing Services Agreement. Customer agrees to reimburse M&I for
time-and-material expenses, including reasonable travel and lodging expenses,
for PCTeller Maintenance Services rendered to Customer outside of M&I's offices
at Customer's request when such PCTeller Maintenance Services could have been
performed at M&I's offices, as determined solely by M&I.
(c) TERMINATION OF MAINTENANCE. If Customer discontinues receiving services
under the Data Processing Services Agreement, then the PCTeller Maintenance
Services shall also terminate on the date of such discontinuance; provided,
however, Customer shall have the right to continue to use the PCTeller Software
pursuant to the terms and conditions of this Agreement.
<PAGE> 30
10. MAINTENANCE AND ENHANCEMENTS FOR SALESPARTNER.
(a) MAINTENANCE SERVICES AND ENHANCEMENTS. While maintenance services
are available for Salespartner Software to M&I licensees, M&I agrees to provide
to Customer maintenance services and enhancements for the Salespartner Software
as described below ("Salespartner Maintenance Services"). Salespartner
Maintenance Services shall be provided to Customer's primary location only, as
designated in Exhibit A. Salespartner Maintenance Services are the following:
(i) M&I shall correct all Salespartner Software errors which
cause the Salespartner Software not to be in substantial
compliance with its user documentation and shall use its
best efforts to correct all other Salespartner Software
errors upon discovery and proper notification by the
Customer of the existence of any error; proper notification
being deemed given only if the Customer substantially
complies with M&I's error notification procedures in effect
at that time. If, after investigation of the reported error,
it is determined that the error is beyond M&I's
responsibility, including but not limited to, errors
resulting from modifications made by the Customer, the
Customer agrees to pay for M&I's efforts in investigating
and/or resolving the error at M&I's then-current rates for
such services, plus reasonable expenses incurred by M&I.
(ii) M&I shall provide phone support with regard to the use and
operation of the Salespartner Software during M&I's regular
business hours and, at all other times, an emergency phone
number to be used at the Customer's discretion to secure
necessary phone support with regard to emergency situations.
(iii) M&I shall use its best efforts in developing future releases
and upgrades of the Salespartner Software and accompanying
documentation. M&I shall deliver to Customer one copy of any
future releases and upgrades (with Customer having the right
to make and use additional copies pursuant to Section 14 of
this Agreement) and shall deliver accompanying
documentation, if any, in the quantity specified in Exhibit
A; provided that the Customer has continuously paid the
monthly maintenance fee included on the Customer's monthly
data processing invoice. If M&I does develop future releases
and upgrades which replace or supersede any other version of
the Salespartner Software then in use by the Customer, M&I
agrees to provide maintenance services as set forth above
for the new updated version, as well as the next most
previous version.
(b) . MAINTENANCE FEE. Customer shall pay to M&I, beginning ninety (90)
days following the Salespartner Delivery Date, a monthly maintenance fee listed
in Exhibit A for the Salespartner Maintenance Services, such fee to be based
upon the number of personal computer workstations authorized to access the
Salespartner Software (as listed in Exhibit A) and M&I's then-current price
schedule. The Salespartner monthly maintenance fee will be included on the
Customer's monthly data processing invoice, and Customer agrees to pay the
invoice according to the payment terms of the current Data Processing Services
Agreement with M&I. The Salespartner monthly maintenance fee may be adjusted by
M&I in accordance with the terms of the Data Processing Services Agreement.
Customer agrees to reimburse M&I for time-and-material expenses, including
reasonable travel and lodging expenses, for Salespartner Maintenance Services
rendered to Customer outside of M&I offices at Customer's request when such
Salespartner Maintenance Services could have been performed at M&I's offices, as
determined solely by M&I.
(c) TERMINATION OF MAINTENANCE. Salespartner Maintenance Services shall
remain in full force and effect unless terminated in accordance with the
following provisions:
(i) The Customer may terminate Salespartner Maintenance Services
by providing M&I with written notice of Customer's intent to
terminate such services not less
<PAGE> 31
than sixty (60) days prior to the desired date of
termination. Salespartner Maintenance Services shall then
terminate at the end of the month in which the requested
date of termination falls.
(ii) The Customer may request reinstatement of Salespartner
Maintenance Services by notifying M&I of the Customer's
desire to reinstate. M&I may consent to reinstatement, which
consent shall not be unreasonably withheld, provided that
Customer has paid to M&I the Salespartner monthly
maintenance fee for all months in the intervening time
between the month-ending date of termination and the first
of the month of reinstatement, in which case Salespartner
Maintenance Services shall again be and remain in full force
and effect.
(iii) If the Customer fails to pay M&I the Salespartner monthly
maintenance fee for two consecutive months or if Customer no
longer utilizes the Service Bureau Software, M&I may
terminate the Salespartner Maintenance Services. Termination
of the Salespartner Maintenance Services by M&I shall not
preclude any other legal remedy M&I may have against the
Customer.
11. USE RIGHTS. Customer represents and warrants that it will use the
Software solely on those computer(s) described in Exhibit A, except as provided
for in Section 14, and that it will only process information and data for
itself, its subsidiaries, parent corporation, and subsidiaries of its parent
corporation, and that it will not directly or indirectly permit any other person
or entity to have access to or use of the Software, and that it will not use the
Software to provide data processing services on a shared resource or service
bureau basis to any other person, company, or financial institution.
12. NOTIFICATION OF UNAUTHORIZED USE. Customer agrees to notify M&I
promptly of any circumstances known to Customer surrounding any unauthorized
possession or use of any part of the Software, or any other information or
documentation made available pursuant to this Agreement to anyone other than
persons properly authorized by Customer to have such possession or use.
13. OWNERSHIP AND CONFIDENTIALITY. Customer acknowledges and agrees that
the Software, including all authorized and unauthorized copies, are proprietary
to and valuable trade secrets of M&I, and Customer shall maintain their
confidential nature. Customer agrees that the Software shall be used only in
accordance with this Agreement, and Customer shall not assign (except as
provided for in Section 20), sell, lease, market, transfer, or reproduce (except
as provided in Section 14) the Software or any modification thereto to or for
others. Customer shall limit access to the Software to Customer's employees or
third parties, when such persons (1) are performing services for the Customer,
related to the Customer's authorized use of the Software; and (2) have a valid
need to know or use the Software; provided that Customer shall advise such
persons of the Customer's confidentiality obligations and establish procedures
designed to prevent unauthorized use and access. Customer shall exercise all
reasonable precautions to prevent access to the Software by persons not
authorized by terms of this Agreement. Customer shall store the Software in a
secure place at all times it is not being used. In addition, Customer shall take
reasonable and appropriate measures to prevent copying, distribution, reverse
engineering, and reverse compiling of the Software. Customer recognizes that the
Software may be patented, copyrighted, trademarked, or otherwise protected by
M&I and Customer will not undertake to patent, copyright, trademark, or
otherwise apply for a proprietary grant or right with respect to the Software.
14. REPRODUCTION. Customer shall have the right to install and use the
Software on each personal computer that is included in the License Fee and
appears on Exhibit A, and in case of a disaster rendering the personal computer
workstations or equipment unusable, on an equal number of personal computer
workstations or equipment. Customer shall also have the right from time to time
to install and use additional copies of the Software as required to perform
disaster recovery testing. All additional
<PAGE> 32
copies, whether for recovering from a disaster or performing disaster recovery
testing, are subject to the terms and conditions of this Agreement. Customer
may also reproduce the Software for backup or archival purposes only;
provided, however, such reproduction shall (1) be solely for the use of the
Customer, (2) conspicuously display the information shown in Exhibit B, and (3)
be subject to the restrictions set forth in this Agreement.
15. MODIFICATIONS. Customer acknowledges and agrees that it shall not make
any modifications to the Software object code. M&I shall not be liable to the
Customer in warranty or otherwise for modifications made to the Software object
code by someone other than M&I. Under no circumstances shall Customer sell,
distribute, or license modifications of the Software. Nothing herein will
prevent M&I from developing and distributing its own modifications to the
Software. Customer shall have the right to modify the Software as described in
the user documentation provided with the Software.
16. WARRANTY. THE FOLLOWING LIMITED WARRANTIES ARE IN LIEU OF ALL OTHER
WARRANTIES, EXPRESS OR IMPLIED, WRITTEN OR ORAL, INCLUDING BUT NOT LIMITED TO,
THE WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
(a) M&I warrants that it is the exclusive owner of the copyrights and all
other rights in the Software and that it has all the rights necessary
in order to grant the licenses specified under this Agreement. In the
event of any claim by any third party with respect to any of the
Software or documentation that such Software or documentation violates
or infringes any United States copyright or patent, M&I shall defend
Customer against such claim and shall pay all court awarded damages,
losses, liabilities, claims, and expenses (including reasonable
attorneys' fees) incurred by Customer in such actions which are
attributable to such claim; provided however, that notice of a claim
by the Customer under this Section is received by M&I within two (2)
years of the termination of PCTeller Maintenance Services or
Salespartner Maintenance Services, as applicable to such claim, that
M&I is notified within ten (10) calendar days in writing of any suit
or claim against the Customer, that the Customer permits M&I to defend
said claim of infringement and gives M&I all reasonable and available
information, assistance, and authority to enable M&I to do so, and
provided further that Customer fully observes all the terms and
conditions of this Agreement. M&I shall not be responsible for any
compromise made without its consent. Following notice of a claim or of
a threatened claim, M&I may, without obligation to do so, procure for
the Customer the right to continue to use the Software within the
terms of this Agreement, or, without obligation to do so, may modify
the Software in a manner that does not materially and adversely impact
on their functionality so that further use becomes noninfringing, or,
without obligation to do so, pay Customer an amount equal to the
License Fee minus 1/60 of such License Fee times the number of months
the Customer has used the Software under the Agreement. In the event
that the Customer's use of the Software within the terms of this
Agreement is held by a court of last resort to constitute an
infringement of a United States patent or copyright and such further
use or distribution is enjoined, M&I shall, at its option and expense,
(i) procure for the Customer the right to continue using the Software
within the terms of this Agreement, or (ii) modify the Software in a
manner that does not materially impact on their functionality so that
further use becomes noninfringing; provided that M&I shall have no
obligation to incur direct costs in connection with exercising either
or both of the foregoing options in excess of the limitation of
liability under Section 17 of this Agreement. Additionally, M&I shall
have no obligation with respect to any such infringement where the
infringement would have been avoided but for modifications made to the
Software by the Customer. The foregoing states M&I's entire
obligation, and the Customer's exclusive remedy, with respect to
infringement.
<PAGE> 33
(b) M&I warrants that the Software, when run in the operating environment
specified in the user documentation provided with the Software, shall
operate in substantial compliance with such user documentation.
Customer acknowledges and agrees that its sole remedy under this
warranty is for M&I to correct all PCTeller Software errors which
cause the PCTeller Software not to be in substantial compliance with
its related user documentation and to use its best efforts to correct
all other PCTeller Software errors that are brought to its attention
by the Customer during the term of this Agreement and the Data
Processing Agreement and to correct all Salespartner Software errors
which cause the Salespartner Software not to be in substantial
compliance with its related user documentation and to use its best
efforts to correct all other Salespartner Software errors that are
brought to its attention by the Customer during the ninety (90) days
following the Salespartner Delivery Date, and thereafter while
Customer subscribes for Salespartner Maintenance Services as described
bed in Section 10. Customer hereby acknowledges that, except for those
limited warranties specified in this Section, the Software is provided
in an "AS IS" condition and is without warranty of any kind, either
express or implied, written or oral.
17. LIMITATION OF LIABILITY. M&I's liability for damages to Customer for
any cause whatsoever, whether in contract or in tort, including negligence (but
other than pursuant to Section 16(a) of this Agreement with respect to
court-awarded damages and defense costs and expenses as a result of an
infringement action which shall not be subject to any limit), shall be limited
to the License Fee paid for the Software. In no event shall either party be
liable for damages caused by the other party's failure to perform its
obligations under this Agreement or for any lost profits, lost savings or
incidental or consequential damages, even if the nonperforming party has been
advised of the possibility of such damages.
18. AUTHORIZATION. Customer agrees and represents that it has obtained all
necessary corporate approvals to enter into this Agreement, that the performance
of this Agreement by the Customer will not affect the safety or soundness of the
Customer or any of its affiliates, and that this Agreement and the obligations
evidenced hereby will be properly reflected on the books and records of the
Customer.
19. TERMINATION. In the event that either party fails in any material
respect, to perform its material obligations under this Agreement and receives
written notice from the other party informing it of the breach and requiring it
to cure such breach; then, should the defaulting party fail to cure its breach
within a 30-day period following the written notice (or such reasonable period
if this breach, by its nature, cannot be cured within 30 days), the other party
shall have the right to terminate this Agreement. Upon termination of this
Agreement, Customer shall (1) immediately cease using the Software; (2) erase
the same from the storage in each computer in which it has been installed; (3)
certify to M&I in writing that Customer has taken the action described in
clauses (1) and (2) above; and (4) at the option of M&I, either return to M&I or
destroy all physical embodiments of the Software and backup copies made thereof.
20. ASSIGNMENT. Except for the use rights granted in Section 11, neither
party may assign, sublicense, or otherwise transfer any or all of its rights and
obligations under this Agreement without the other party's prior written
consent, which shall not be unreasonably withheld, and any assignment without
such prior written consent shall be void and of no effect. Notwithstanding the
foregoing, either party may assign this Agreement to any company that is: (1)
directly or indirectly in control of such party, (2) under the control of such
party, or (3) under common control with such party.
21. NOTICES. Notices to be given or submitted by either party to the other
under the terms of this Agreement shall be sufficiently given if made in writing
and hand-delivered or sent by certified or registered mail, postage prepaid and
addressed to the president of the notified party, to the address shown above or
to such other address as the notified party shall so designate in writing to the
other party at least twenty (20) days prior to notification.
22. ENTIRE AGREEMENT. This Agreement, the Exhibits, and the Addendum (if
any) attached hereto supersede all previous agreements and understandings of any
nature whatsoever, verbal or written,
<PAGE> 34
and constitute the entire understanding between the parties with respect to the
subject matter hereof. All oral or written representations, warranties,
agreements, and other inducements relating to this Agreement and its subject
matter made prior to the execution and delivery hereof have been included herein
or, to the extent not included herein, shall be deemed to have been fully
performed and discharged or deliberately omitted. No provision of this Agreement
may be waived, modified, or superseded as against M&I or Customer, except by
written instrument signed by an authorized officer of each party, expressly
stating that it is intended to operate as such.
23. GOVERNING LAW. This Agreement shall be governed, interpreted,
construed, and enforced in accordance with the internal laws of the State of
Wisconsin, United States of America.
24. SEVERABILITY. If any provision, clause, part, or the application of
this Agreement is held invalid, the remainder of this Agreement or the
application of such provision, clause, or part under other circumstances shall
not be affected.
<PAGE> 35
25. MISCELLANEOUS. Time is of the essence. No claim, regardless of form,
arising out of this Agreement may be brought by Customer more than two (2) years
after the events giving rise to the claim for relief occurred. The obligations
of confidentiality and non-use after termination shall survive termination.
THE PARTIES HERETO ACKNOWLEDGE THAT EACH HAS READ THIS AGREEMENT,
UNDERSTANDS IT, AND AGREES TO BE BOUND BY ITS TERMS AND CONDITIONS, AS STATED
HEREIN.
IN WITNESS WHEREOF, the parties hereto through their duly authorized
officers and agents have hereby executed this Agreement on the date before
written.
PREMIER BANK AND TRUST M&I DATA SERVICES
(CUSTOMER) (M&I)
By: /s/ John S. Kreighbaum By: /s/ Alfred D. Dominick
------------------------ ------------------------
Name: John S. Kreighbaum Name: Alfred S. Dominick, Jr.
------------------------ ------------------------
Title: Chief Executive Officer Title: Executive Vice President
------------------------ ------------------------
By: By: /s/ Peter J. Van Sistine
------------------------ ------------------------
Name: Name: Peter J. Van Sistine
------------------------ ------------------------
Title: Title: Vice President
------------------------ ------------------------
<PAGE> 1
EXHIBIT 13
(1996 ANNUAL REPORT TO SHAREHOLDERS)
31
<PAGE> 2
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CONSOLIDATED FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------------------------------------------------------
DOLLARS IN THOUSANDS, FOR THE YEAR ENDED DECEMBER 31
EXCEPT PER SHARE AMOUNTS 1996 1995 1994 1993 1992 1991 1990
- --------------------------------------------------------------------------------------------------------------------------------
Per common share:
<S> <C> <C> <C> <C> <C> <C> <C>
Net income .................... $ 2.07 $ 1.86 $ 1.68 $ 1.56 $ 1.31 $ 0.98 $ 0.55
Cash dividends ............. 0.63 0.58 0.51 0.40 0.33 0.24 0.27
Book value ................. 15.82 14.70 12.02 11.80 10.22 9.14 8.33
Interest income ............... $ 43,181 $ 39,829 $ 35,357 $ 34,729 $ 35,035 $ 36,156 $ 37,571
Interest expense .............. 16,799 15,795 11,528 12,609 14,448 18,297 21,376
--------- --------- --------- --------- --------- --------- ---------
Net interest income ........... 26,382 24,034 23,829 22,120 20,587 17,859 16,195
Provision for loan losses ..... (1,775) 180 208 920 2,800 2,500 3,350
--------- --------- --------- --------- --------- --------- ---------
Net interest income after
provision for loan
losses ...................... 28,157 23,854 23,621 21,200 17,787 15,359 12,845
Other income .................. 6,430 4,719 4,411 4,468 4,044 3,108 2,763
Other expense ................. (25,792) (21,059) (21,090) (19,287) (16,323) (14,452) (14,095)
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes .... 8,795 7,514 6,942 6,381 5,508 4,015 1,513
Federal income tax (expense)
credit ...................... (1,663) (1,112) (1,256) (1,100) (1,130) (761) 320
--------- --------- --------- --------- --------- --------- ---------
Net income .................... $ 7,132 $ 6,402 $ 5,686 $ 5,281 $ 4,378 $ 3,254 $ 1,833
========= ========= ========= ========= ========= ========= =========
- --------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data at
December 31
Total assets ............... $ 598,918 $ 529,530 $ 531,727 $ 491,801 $ 463,124 $ 408,750 $ 406,013
Total investment securities 188,786 159,415 149,807 152,934 172,767 144,360 121,035
Total loans ................ 340,454 320,509 330,133 288,649 246,405 223,295 239,247
Total deposits ............. 514,747 452,135 465,837 427,586 402,110 354,878 332,936
Shareholders' equity ....... 54,645 50,672 40,982 39,733 34,162 30,407 27,575
- --------------------------------------------------------------------------------------------------------------------------------
Key Ratios
Return on average assets ... 1.20% 1.20% 1.15% 1.10% 1.01% 0.81% 0.46%
Return on average equity ... 13.81% 13.98% 14.28% 14.60% 13.76% 11.30% 6.67%
Total equity to assets ..... 9.12% 9.57% 7.71% 8.08% 7.38% 7.44% 6.79%
Tier 1 risk-based capital .. 13.74% 14.87% 13.04% 13.34% 13.39% 12.78% 11.94%
Total capital (risk-based) . 14.88% 16.12% 14.29% 14.60% 14.65% 14.04% 13.20%
Non-performing loans
to total assets .......... 0.30% 0.18% 0.08% 0.29% 0.55% 1.19% 1.69%
Net charge-offs
to total loans ........... (0.00)% (0.02)% (0.06)% 0.28% 0.68% 1.36% 0.52%
Delinquencies to total loans 1.14% 0.54% 0.44% 0.95% 1.85% 3.99% 6.06%
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.
</TABLE>
1
<PAGE> 3
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
COBANCORP INC.
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------------------------
December 31
1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks ........................................ $ 30,555,396 $ 26,611,296
Investment securities available-for-sale ....................... 162,460,918 129,466,384
Investment securities held-to-maturity ......................... 26,324,836 29,948,383
Federal funds sold ............................................. 4,300,000 2,900,000
Loans .......................................................... 340,454,390 320,508,725
Less allowance for loan losses ................................. 4,091,592 5,849,689
------------- -------------
Net loans ................................................... 336,362,798 314,659,036
Bank premises and equipment, net ............................... 18,787,316 11,640,337
Accrued income and prepaid expenses ............................ 4,840,787 4,228,757
Other assets ................................................... 15,285,663 10,076,157
------------- -------------
Total Assets ............................................ $ 598,917,714 $ 529,530,350
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Demand-noninterest bearing ................................ $ 82,842,548 $ 70,008,577
Demand-interest bearing ................................... 63,196,979 53,962,361
Savings and other time .................................... 368,706,984 328,163,756
------------- -------------
Total deposits .......................................... 514,746,511 452,134,694
Short-term funds ............................................ 25,520,820 22,453,980
Other liabilities ........................................... 4,005,766 3,839,195
Employee stock ownership plan obligation .................... 0 430,260
------------- -------------
Total liabilities ....................................... 544,273,097 478,858,129
Shareholders' equity
Capital stock, no par value, 5,000,000 shares
authorized 3,453,824 shares issued and outstanding
(3,447,160 in 1995)........................................ 5,975,066 5,896,098
Capital surplus ............................................. 18,553,553 18,553,553
Retained earnings ........................................... 30,296,473 25,337,492
Unrealized gain (loss) on available-for-sale investment
securities (net of income tax) ............................ (180,475) 1,315,338
Employee stock ownership plan obligation .................... 0 (430,260)
------------- -------------
Total shareholders' equity ............................... 54,644,617 50,672,221
------------- -------------
Total Liabilities and Shareholders' Equity .............. $ 598,917,714 $ 529,530,350
============= =============
See accompanying notes to consolidated financial statements.
</TABLE>
17
<PAGE> 4
FINANCIAL STATEMENTS
COBANCORP INC.
<TABLE>
<CAPTION>
CONSOLIDATED INCOME STATEMENTS
- -----------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income
Loans (including fees)
Taxable ........................................................... $ 30,286,754 $ 29,669,860 $ 27,108,064
Tax-exempt ........................................................ 124,400 190,612 160,825
Investment securities
Taxable ........................................................... 8,829,554 5,789,178 4,405,702
Tax-exempt ........................................................ 3,552,320 4,012,945 3,580,522
Federal funds sold and other short-term funds ....................... 387,834 166,290 101,532
------------ ------------ ------------
Total interest income ........................................... 43,180,862 39,828,885 35,356,645
Interest Expense
Deposits ............................................................ 16,165,718 14,963,571 10,891,503
Short-term funds .................................................... 633,159 831,670 636,854
------------ ------------ ------------
Total interest expense .......................................... 16,798,877 15,795,241 11,528,357
------------ ------------ ------------
Net interest income ........................................... 26,381,985 24,033,644 23,828,288
Provision for Loan and Real Estate Losses .............................. (1,775,000) 180,000 208,333
------------ ------------ ------------
Net interest income after provision for
loan and real estate losses ................................. 28,156,985 23,853,644 23,619,955
Other Income
Service charges on deposit accounts ................................. 2,938,593 1,994,693 1,820,807
Trust fees .......................................................... 1,424,000 1,360,000 1,234,037
Other ............................................................... 1,658,683 1,080,559 902,351
Security gains ...................................................... 409,341 284,274 454,219
------------ ------------ ------------
Total other income .............................................. 6,430,617 4,719,526 4,411,414
Other Expenses
Salaries, wages and benefits ........................................ 11,206,299 9,541,034 9,301,485
Occupancy-net ....................................................... 1,928,293 1,501,004 1,406,883
Furniture and equipment ............................................. 872,443 764,318 615,305
Taxes, other than income and payroll ................................ 672,876 599,523 584,121
FDIC insurance ...................................................... 253,707 559,675 965,612
Other ............................................................... 10,858,592 8,093,662 8,216,267
------------ ------------ ------------
Total other expenses ............................................ 25,792,210 21,059,216 21,089,673
------------ ------------ ------------
Income before income taxes .................................... 8,795,392 7,513,954 6,941,696
Income Tax Expense (Benefit)
Current ............................................................. 1,309,000 1,298,000 1,511,000
Deferred ............................................................ 354,000 (186,000) (255,000)
------------ ------------ ------------
Total income tax expense ........................................ 1,663,000 1,112,000 1,256,000
------------ ------------ ------------
Net Income .................................................... $ 7,132,392 $ 6,401,954 $ 5,685,696
============ ============ ============
Net Income Per Share (amounts reflect a
three percent stock dividend in 1995 and a
four-for-three stock split in 1994) ......................... $ 2.07 $ 1.86 $ 1.68
============ ============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
18
<PAGE> 5
<TABLE>
<CAPTION>
COBANCORP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income ............................................................. $ 7,132,391 $ 6,401,954 $ 5,685,696
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan and real estate losses .......................... (1,775,000) 180,000 208,333
Provision for depreciation and amortization ........................ 1,886,644 1,433,910 1,211,917
Accretion of discounts on purchased loans .......................... (101,688) (103,702) (491,577)
Amortization of premiums, less accretion of discounts on
investment securities ............................................ 194,700 (347,707) (12,508)
(Increase) decrease in refundable taxes ............................ (141,886) (212,340) 243,723
Realized securities gains on available-for-sale securities ......... (409,341) (284,274) (454,219)
Provision (credit) for deferred income taxes ....................... 354,000 (186,000) (255,000)
(Increase) in interest receivable .................................. (475,779) (340,943) (560,812)
Increase in interest payable ....................................... 324,642 95,686 210,877
(Increase) in other assets ......................................... (5,936,365) (212,947) (347,184)
Increase in other liabilities ...................................... 485,507 290,567 50,087
------------- ------------- -------------
Net Cash Provided By Operating Activities ........................ 1,537,825 6,714,204 5,489,333
Investing and Lending Activities
Proceeds from sales of available-for-sale investment securities ........ 64,300,477 32,727,163 38,295,166
Maturities of available-for-sale investment securities ................. 12,012,171 8,481,652 17,255,095
Maturities of held-to-maturity investment securities ................... 3,441,897 7,387,123 3,725,331
Purchases of available-for-sale investment securities .................. (111,177,268) (40,793,428) (42,374,244)
Purchases of held-to-maturity investment securities .................... 0 (10,371,621) (19,209,616)
Net (increase) decrease in credit card receivables ..................... (232,055) (101,434) 45,390
Net (increase) decrease in longer-term loans ........................... (19,595,020) 9,882,205 (40,855,489)
Purchases of premises and equipment, net of retirements ................ (8,528,141) (2,217,265) (1,031,599)
------------- ------------- -------------
Net Cash (Used) Provided By Investing Activities ................. (59,777,939) 4,994,395 (44,149,966)
Deposit and Financing Activities
Net increase (decrease) in demand deposits and savings accounts ........ 57,131,927 (35,513,764) 7,587,826
Net increase in certificates of deposit ................................ 5,479,890 21,811,582 30,663,432
Net increase in short-term funds ....................................... 3,066,840 1,096,752 1,112,200
Cash dividends ......................................................... (2,173,411) (2,003,182) (1,745,427)
Dividend investment plan ............................................... 0 380,423 446,715
Long-term incentive plan ............................................... 78,968 259,442 315,843
------------- ------------- -------------
Net Cash Provided (Used) By Financing Activities ................. 63,584,214 (13,968,747) 38,380,589
------------- ------------- -------------
Increase (Decrease) In Cash and Cash Equivalents ................. 5,344,100 (2,260,148) (280,044)
Cash and cash equivalents at beginning of year ............................ 29,511,296 31,771,444 32,051,488
------------- ------------- -------------
Cash and Cash Equivalents at End of Year ......................... $ 34,855,396 $ 29,511,296 $ 31,771,444
============= ============= =============
See accompanying notes to consolidated financial statements.
</TABLE>
19
<PAGE> 6
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
COBANCORP INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1996, UNREALIZED
1995 AND 1994 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, 1994 .............. $ 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 investment 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 investment 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
Net income ........................... 7,132,392 7,132,392
Cash dividends-$0.63 per share ....... (2,173,411) (2,173,411)
Reduction in employee stock
ownership plan obligation .......... 430,260 430,260
Shares issued (6,664) under
long-term incentive plan ........... 78,968 78,968
Adjustment to unrealized gains
(losses) on available-for-sale
securities, net of tax ............. (1,495,813) (1,495,813)
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 ............ $ 5,975,066 $18,553,553 $30,296,473 $ (180,475) $ 0 $ 54,644,617
=========== =========== =========== =========== =========== ============
<FN>
*Restated for a three percent stock dividend in 1995 and a four-for-three stock
split in 1994.
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE> 7
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1996, 1995 and 1994
COBANCORP INC.
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). 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 36
branch offices in 8 counties in Northeast and North Central Ohio. 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 lives, generally ten to fifteen 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 or credited 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."
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.
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.
21
<PAGE> 8
NOTES TO FINANCIAL STATEMENTS
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.
STOCK-BASED COMPENSATION: The Corporation accounts for the CoBancorp Inc.
Long-Term Incentive Plan under the provisions of Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees." Additional pro
forma disclosures required by Financial Accounting Standards Board (FASB)
Statement No. 123, "Accounting and Disclosure of Stock-Based Compensation" are
discussed in Note O.
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.
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS
OF LIABILITIES: FASB Statement No. 125 requires an entity to recognize the
financial and servicing assets it controls and the liabilities it has incurred
and to derecognize financial assets when control has been surrendered in
accordance with the criteria provided in the statement. The Corporation will
apply the new standards prospectively to transfers beginning in the first
quarter of 1997. Based on current circumstances, the Corporation believes the
application of the new rules will not have a material impact on the financial
statements.
RECLASSIFICATIONS: Certain amounts in the 1995 and 1994 financial statements
have been reclassified to conform to the 1996 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 years
ended December 31, 1996 and 1995 was $2,247,000 for both years.
NOTE C -- INVESTMENT SECURITIES
<TABLE>
<CAPTION>
The following is a summary of available-for-sale and held-to-maturity
securities:
DECEMBER 31, 1996 AVAILABLE-FOR-SALE SECURITIES
- -----------------------------------------------------------------------------------------------------------------------------------
GROSS UNREALIZED GROSS UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S. Government agencies ........... $ 57,423,276 $ 158,760 $ 747,913 $ 56,834,123
Collateralized mortgage-backed securities .................. 67,699,905 210,377 1,064,952 66,845,330
States of the U.S. and political subdivisions .............. 34,923,960 1,254,101 83,290 36,094,771
Other ...................................................... 2,687,223 4,394 4,923 2,686,694
------------ ------------ ------------ ------------
$162,734,364 $ 1,627,632 $ 1,901,078 $162,460,918
============ ============ ============ ============
HELD-TO-MATURITY SECURITIES
- -----------------------------------------------------------------------------------------------------------------------------------
GROSS UNREALIZED GROSS UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
States of the U.S. and political subdivisions .............. $26,324,836 $ 570,795 $ 48,194 $26,847,437
============ ============ ============ ============
DECEMBER 31, 1995 AVAILABLE-FOR-SALE SECURITIES
- -----------------------------------------------------------------------------------------------------------------------------------
GROSS UNREALIZED GROSS UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
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
============ ============ ============ ============
HELD-TO-MATURITY SECURITIES
- -----------------------------------------------------------------------------------------------------------------------------------
GROSS UNREALIZED GROSS UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
States of the U.S. and political subdivisions ............ $29,948,383 $ 874,470 $ 86,004 $30,736,849
=========== =========== =========== ===========
</TABLE>
22
<PAGE> 9
On November 15, 1995, the FASB staff issued "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.
Gross proceeds from sales of investment securities during 1996, 1995 and
1994 were $64,300,477, $32,727,163 and $38,295,166, respectively. For the same
periods, gross gains of $589,964, $345,715 and $615,066 and gross losses of
$180,624, $61,441 and $160,847 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 $(1,495,813) in
1996, $4,228,376 in 1995 and ($3,895,116) in 1994.
The amortized cost and estimated fair value of debt and marketable equity
securities at December 31, 1996, 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 ................ $ 72,513,841 $ 71,581,412
Due in 1 to 5 years .................. 52,201,673 52,144,592
Due in 5 to 10 years ................. 27,387,926 28,109,912
Due after 10 years ................... 10,630,924 10,625,002
------------ ------------
$162,734,364 $162,460,918
============ ============
HELD-TO-MATURITY SECURITIES
- ---------------------------------------------------------------------------------------------------------------------------
ESTIMATED
COST FAIR VALUE
- ---------------------------------------------------------------------------------------------------------------------------
Due in 1 year or less .................. $ 7,171,391 $ 7,247,668
Due in 1 to 5 years .................... 17,965,627 18,385,376
Due in 5 to 10 years ................... 1,187,818 1,214,393
----------- -----------
$26,324,836 $26,847,437
=========== ===========
</TABLE>
At December 31, 1996 and 1995, investment securities with a carrying value
of approximately $87,822,534 and $100,685,315, respectively, were pledged as
collateral to secure public deposits and for other purposes.
Note D -- Loans
<TABLE>
<CAPTION>
The composition of the loan portfolio at December 31 was:
1996
- -------------------------------------------------------------------------------
ESTIMATED
CARRYING AMOUNT FAIR VALUE
- -------------------------------------------------------------------------------
<S> <C> <C>
Real Estate ............................ $145,466,930 $144,083,189
Installment ............................ 45,600,114 44,948,195
Commercial and collateral .............. 146,166,900 141,450,264
All other .............................. 3,220,446 3,220,446
------------ ------------
$340,454,390 $333,702,094
============ ============
1995
- -------------------------------------------------------------------------------
ESTIMATED
CARRYING AMOUNT FAIR VALUE
- -------------------------------------------------------------------------------
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>
Included in commercial and collateral loans for 1996 and 1995 are
$2,349,839 and $2,588,807, respectively, of tax-exempt industrial revenue
development bonds.
<TABLE>
<CAPTION>
Transactions in the allowance for loan losses were:
1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1 ........... $ 5,849,689 $ 5,616,859 $ 5,226,401
Provision for loan losses ...... (1,775,000) 180,000 208,333
Recoveries on loans
charged off .................. 733,188 680,655 614,195
----------- ----------- -----------
4,807,877 6,477,514 6,048,929
Loans charged off .............. (716,285) (627,825) (432,070)
----------- ----------- -----------
Balance at December 31 ......... $ 4,091,592 $ 5,849,689 $ 5,616,859
=========== =========== ===========
</TABLE>
At December 31, 1996 and 1995, nonperforming loans were $1,792,785 and
$964,986, respectively. The Corporation had no other real estate owned.
Management continually reviews the adequacy of the allowance for loan
losses. During the fourth quarter of 1996, based on asset quality, a three-year
history of net recoveries, and an evaluation of the level of the allowance as
compared to outstanding loans, management reduced the allowance by $1,775,000.
Management believes the allowance as of December 31, 1996 is adequate to cover
potential loan losses.
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 the Bank's
charge-off or income recognition policies. At December 31, 1996 and 1995, the
Bank did not have any impaired loans outstanding.
23
<PAGE> 10
NOTES TO FINANCIAL STATEMENTS
NOTE E -- BANK PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
Premises and equipment at December 31 were:
1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Land and improvements .................. $ 3,334,859 $ 2,214,358
Buildings .............................. 14,708,969 9,492,718
Equipment and leasehold
improvements ......................... 15,073,391 12,484,913
Construction in progress ............... 0 717,423
------------ ------------
33,117,219 24,909,412
Less accumulated depreciation
and amortization .................... (14,329,903) (13,269,075)
------------ ------------
$ 18,787,316 $ 11,640,337
============ ============
</TABLE>
NOTE F - DEPOSITS
Time certificates of deposit with balances of $100,000 or more, principally
public and corporate funds, were $27,288,742 and $42,842,392 at December 31,
1996 and 1995, respectively. Interest expense on these deposits amounted to
$1,723,692, $3,402,732 and $810,522 for 1996, 1995 and 1994, respectively.
Total interest paid on deposits in 1996, 1995 and 1994 was $16,798,877,
$14,877,688 and $10,678,550, 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>
1996
- -------------------------------------------------------------------------------
ESTIMATED
CARRYING AMOUNT FAIR VALUE
- -------------------------------------------------------------------------------
<S> <C> <C>
Demand - noninterest bearing ............. $ 82,842,548 $ 82,842,548
Demand - interest bearing ................ 63,196,979 63,196,979
Savings .................................. 178,665,023 178,665,023
Certificates of deposit .................. 154,184,686 149,552,157
IRAs ..................................... 35,857,275 34,583,938
------------ ------------
$514,746,511 $508,840,645
============ ============
1995
- --------------------------------------------------------------------------------
ESTIMATED
CARRYING AMOUNT FAIR VALUE
- --------------------------------------------------------------------------------
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
============ ============
</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.
In April 1994, the Corporation introduced a new dividend investment 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, a total of 17,278 shares 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, 1996, approximately $7,233,564 was available to the subsidiary bank
for the payment of dividends without prior regulatory approval.
NOTE I -- INCOME TAXES
Significant components of the Corporation's deferred tax assets and
liabilities as of December 31, are as follows:
<TABLE>
<CAPTION>
1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Assets:
Net unrealized loss on
available-for-sale securities ................ $ 92,792
Provision for Loan Losses ..................... 863,216 $1,310,134
Deferred Compensation ......................... 690,853 576,383
AMT Credit .................................... 257,110 200,314
Other ......................................... 122,275 21,763
---------- ----------
2,026,246 2,108,594
Deferred Tax Liabilities:
Tax over Book Depreciation .................... 358,385 348,560
Net unrealized gain on
available-for-sale securities ................ 677,598
Pension Costs ................................. 224,908 203,690
Prepaid Expenses .............................. 126,033 88,170
FHLB Stock Dividends .......................... 85,884
Other ......................................... 109,773 118,152
---------- ----------
904,983 1,436,170
---------- ----------
Net deferred tax asset ....................... $1,121,263 $ 672,424
========== ==========
</TABLE>
The reasons for the difference between tax expense based on the statutory
rate of 34 percent in 1996, 1995 and 1994 and the effective tax rates were:
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax expense at
statutory rates ................ $ 2,990,000 $ 2,555,000 $ 2,360,000
Reduction in taxes resulting from:
Tax-exempt interest ........... (1,250,000) (1,274,000) (1,272,000)
Other ......................... (77,000) (169,000) 168,000
----------- ----------- -----------
$ 1,663,000 $ 1,112,000 $ 1,256,000
=========== =========== ===========
</TABLE>
The Corporation made income tax payments of approximately $1,550,000,
$1,525,000 and $975,000 during 1996, 1995 and 1994, respectively.
24
<PAGE> 11
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 1996 and 1995,
the Corporation's pension contribution was $241,222 and $217,282, respectively.
A summary of the components of pension expense is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost benefits earned
during the period ................. $ 239,492 $ 219,506 $ 229,680
Interest cost on projected
benefit obligation .............. 211,199 185,495 192,763
Return on plan assets ............. (230,513) (200,715) (226,203)
Net amortization
and deferral .................... (41,363) (24,286) (43,104)
--------- --------- ---------
Net pension expense ............... $ 178,815 $ 180,000 $ 153,136
========= ========= =========
</TABLE>
The funded status of the plan at December 31, 1996 and 1995 was as follows:
<TABLE>
<CAPTION>
1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of
accumulated benefit obligation
Vested ................................. $ 2,378,206 $ 2,237,967
Nonvested .............................. 224,636 176,328
----------- -----------
$ 2,602,842 $ 2,414,295
=========== ===========
Actuarial present value of
projected benefit obligation ........... $(3,440,487) $(3,027,399)
Plan assets at fair value ................ 3,616,862 3,046,861
----------- -----------
Plan assets in excess of
projected benefit obligation ........... 176,375 19,462
Unrecognized transition asset,
net of amortization .................... (558,201) (651,235)
Unrecognized net loss .................... 1,043,370 1,230,860
----------- -----------
Net pension asset included
in other assets ........................ $ 661,544 $ 599,087
=========== ===========
</TABLE>
The long-term rate of return used to determine the expected return on plan
assets included in net pension expense is seven percent. The projected benefit
obligation was determined using an assumed discount rate of seven percent, and
an annual compensation increase of five percent. At December 31, 1996 and 1995,
plan assets consisted primarily of money market, equity and fixed income funds.
In December 1996, the Board of Directors approved the termination of the
defined benefit plan, and approved the development and implementation of an
alternative employee benefit structure. As a result of the termination, all
participants will become fully vested in the existing plan. Management
anticipates actual termination will take place during 1997.
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 remaining balance of the loan was paid in full in 1996. Interest incurred on
the loan obligation was $22,480, $54,926 and $61,104 in 1996, 1995 and 1994,
respectively.
Funds for servicing the loan agreement were 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 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 had 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
reviewed by the Board of Directors and are expensed in the year the contribution
is approved. These contributions were $345,000, $291,350 and $165,375 in 1996,
1995 and 1994, respectively.
Dividends received for shares owned by the ESOP amounted to $151,200,
$149,613 and $146,453 in 1996, 1995 and 1994, 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, 1996 and 1995, the Bank had loans
outstanding to related parties of approximately $5,800,853 and $6,320,616,
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.
25
<PAGE> 12
NOTES TO FINANCIAL STATEMENT
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, 1996 and 1995 was:
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Real estate ............................ $20,711,000 $17,195,000
Commercial and collateral .............. 49,885,000 33,538,000
All other .............................. 20,420,000 15,651,000
----------- -----------
$91,016,000 $66,384,000
=========== ===========
</TABLE>
Most of the Bank's business activity is with customers located within the
Bank's defined market area. As of December 31, 1996, 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 had a term of
seven years and renewal provisions for successive terms of seven years each. The
agreement provided for payment of a monthly charge based on the number of
application and transaction accounts maintained. These payments were partially
offset by amounts received by the Corporation for the use of certain facilities
by the processor. The amount included in "other expenses" in connection with the
service agreement was $1,539,505 for 1996, $1,261,213 for 1995 and $1,276,647
for 1994.
During 1996, the Corporation entered into an agreement with a new provider
of data processing services. Under the new service agreement, effective on
February 1, 1997, minimum annual base charges will be $389,000. The term of this
agreement is eight years. Management does not believe that any additional
payments will be required under the previous agreement.
Additionally, in 1995 the Corporation entered into an agreement to lease
certain equipment from a different company. The agreement has an original term
of seven years. The annual lease fee in connection with this agreement is
approximately $355,000.
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. All options granted have 10 year
terms and vest and become fully exercisable at the end of one year of continued
employment. 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.
In 1995, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 123, "Accounting and Disclosure of Stock-Based Compensation." The
statement is effective for fiscal years beginning after December 15, 1995. As
permitted by FASB Statement No. 123, the Corporation has elected to account for
the Plan under the provisions of Accounting Principles Board (APB) Opinion No.
25, "Accounting for Stock Issued to Employees." Under APB 25, because the
exercise price of the Corporation's employee stock options equals the market
price on the underlying stock on the date of grant, no compensation expense is
recognized.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Corporation had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1996: risk-free interest rate of 6.58%; dividend yield of 3.0%;
a volatility factor of the expected market price of the Corporation's common
stock of 20.6%; and a weighted-average expected life of the options of five
years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of subjective assumptions including the expected stock price volatility.
Because the Corporation's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The
Corporation's pro forma information follows:
<TABLE>
<CAPTION>
1996
- -------------------------------------------------------------------------------
<S> <C>
Pro forma net income ................................... $7,089,912
Pro forma earnings per share:
Primary .............................................. $ 2.06
Fully diluted ........................................ $ 2.06
</TABLE>
A summary of the Corporation's stock option activity, and related
information for the years ended December 31 follows:
<TABLE>
<CAPTION>
1996 1995
- ------------------------------------------------------------------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at
beginning of year ............. 120,708 $ 15.87 141,892 $15.33
Granted ......................... 15,000 19.69
Exercised ....................... (6,664) 11.85 (21,184) 12.25
------- -------
Outstanding at
end of year ................... 129,044 16.52 120,708 15.87
======= =======
Exercisable at
end of year ................... 114,044 16.11 120,708 15.87
Weighted-average
fair value of
options granted
during the year ............... $ 4.32 n/a
</TABLE>
26
<PAGE> 13
Exercise prices for options outstanding as of December 31, 1996 ranged
from $11.85 to $22.09. The weighted-average contractual life of those options is
6.6 years.
NOTE P -- COBANCORP INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION
<TABLE>
<CAPTION>
BALANCE SHEETS (PARENT COMPANY ONLY)
DECEMBER 31
1996 1995
- -------------------------------------------------------------------------------
Assets
<S> <C> <C>
Cash ......................................... $ 7,397,366 $ 288
Investment securities
available-for-sale .......................... 238,944
----------- -----------
Investment in bank subsidiary ................ 46,771,239 50,886,687
Other assets ................................. 237,068 215,505
----------- -----------
Total Assets ................................... $54,644,617 $51,102,480
=========== ===========
Liabilities and Shareholders'
Equity........................................
Liabilities
Employee stock ownership
plan obligation ............................. $ 430,260
-----------
Total Liabilities .............................. 430,260
Shareholders' Equity ........................... $54,644,617 50,672,220
----------- -----------
Total Liabilities and
Shareholders' Equity ......................... $54,644,617 $51,102,480
=========== ===========
</TABLE>
STATEMENTS OF INCOME (PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1996 1995 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Income
Dividends from
bank subsidiary ....................$ 9,837,415 $ 1,340,089 $ 1,366,365
Other income ........................ 186,063 75,885 1,000
------------ ------------ ------------
Total income .................... 10,023,478 1,415,974 1,367,365
Expenses .............................. 271,735 259,644 288,960
------------ ------------ ------------
Income Before Equity
in Undistributed Net
Income of Bank
Subsidiary .......................... 9,751,743 1,156,330 1,078,405
Equity in Undistributed
Net Income of Bank
Subsidiary .......................... (2,619,351) 5,245,624 4,607,291
------------ ------------ ------------
Net Income ............................$ 7,132,392 $ 6,401,954 $ 5,685,696
============ ============ ============
</TABLE>
STATEMENTS OF CASH FLOWS (PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1996 1995 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net Income ................................. $ 9,751,743 $ 1,156,330 $ 1,078,405
Provision for
depreciation .............................. 1,180
(Increase) in other assets ................. (21,323) (16,075) (9,999)
----------- ----------- -----------
Net Cash Provided by
Operating Activities .................... 9,731,600 1,140,255 1,068,406
Investing Activities
Purchases of available-
for-sale securities ....................... (239,473)
Purchases of equipment ..................... (1,240)
----------- ----------- -----------
Net Cash Used by
Investing Activities .................... (240,713)
Financing Activities
Cash Dividends ............................. (2,172,777) (2,003,182) (1,745,427)
Dividend Investment Plan ................... 380,423 446,715
Long-term Incentive Plan ................... 78,968 259,441 315,843
----------- ----------- -----------
Net Cash Used by
Financing Activities .................... (2,093,809) (1,363,318)
----------- ----------- -----------
Increase (Decrease)
in Cash and Cash
Equivalents ............................ 7,397,078 (223,063) 85,537
Cash and cash equivalents
at beginning of year ....................... 288 223,351 137,814
Cash and Cash ----------- ----------- -----------
Equivalents at
End of Year ............................. $ 7,397,366 $ 288 $ 223,351
=========== =========== ===========
</TABLE>
NOTE Q - REGULATORY MATTERS
CoBancorp Inc. and PremierBank & Trust are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure
capital adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the following table) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1996, that the Bank meets all capital adequacy requirements to which it is
subject.
27
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
As of December 31, 1996, the most recent notification from the Federal
Reserve Bank categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
the Bank must maintain minimum total risk-based, Tier I risk based and Tier I
leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the institution's
category.
The Corporation's and Bank's actual capital amounts and ratios are also
presented in the table.
<TABLE>
<CAPTION>
MINIMUMS TO BE WELL
MINIMUMS FOR CAPITAL CAPITALIZED UNDER PROMPT
ACTUAL ADEQUACY PURPOSES CORRECTIVE ACTION PROVISIONS
- ---------------------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1996: AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital to Risk Weighted Assets:
Consolidated $53,185,000 14.88% $28,959,000 8.0% $35,743,000 10.0%
PremierBank & Trust 45,308,000 12.46 29,064,000 8.0 36,330,000 10.0
Tier I Capital to Risk Weighted Assets:
Consolidated 49,093,000 13.74 14,297,000 4.0 21,446,000 6.0
PremierBank & Trust 41,216,000 11.34 14,532,000 4.0 21,798,000 6.0
Tier I Capital to Average Assets:
Consolidated 49,093,000 8.31 23,640,000 4.0 29,550,000 5.0
PremierBank & Trust 41,216,000 6.98 23,633,000 4.0 29,541,000 5.0
</TABLE>
NOTE R -- ACQUISITIONS
In February, 1996, PremierBank & Trust acquired eleven branches in Lorain
County from Bank One. The transaction included the acquisition of approximately
$110,000,000 in deposits, as well as certain property and equipment.
In April of 1996, CoBancorp Inc. announced it had entered into an agreement
to acquire Jefferson Savings Bank, an Ohio-chartered savings and loan
headquartered in West Jefferson, Ohio. Jefferson has total assets of
approximately $62,000,000. Cash in the amount of $6,733,000 will be paid, with
additional consideration of $649,000 attributable to certain favorable tax
benefits (confirmed by an IRS Private Letter Ruling dated May 31, 1996). The
transaction, which will be accounted for as a purchase, is expected to close on
February 28, 1997.
NOTE S -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information is contained on page 29.
28
<PAGE> 15
QUARTERLY FINANCIAL INFORMATION
The following is a summary of unaudited quarterly results of operations for the
years 1996, 1995 and 1994:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH FULL YEAR
- ----------------------------------------------------------------------------------------------------------------------------------
1996
<S> <C> <C> <C> <C> <C>
Interest income ............................... $ 10,237,766 $ 11,062,294 $ 10,893,080 $ 10,987,722 $ 43,180,862
Interest expense .............................. 4,124,992 4,340,014 4,227,981 4,105,890 16,798,877
Net interest income ........................... 6,112,774 6,722,280 6,665,099 6,881,832 26,381,985
Provision for loan losses ..................... 60,000 40,000 0 (1,875,000)(a) (1,775,000)
Security gains (losses) ....................... 295,029 4,565 (5,304) 115,051 409,341
Net overhead .................................. 4,824,315 4,879,524 5,067,879(b) 4,999,216 19,770,934
Income before income taxes .................... 1,523,488 1,807,321 1,591,916(b) 3,872,667 8,795,392
Net income .................................... 1,285,488 1,634,321 1,309,200(b) 2,903,383 7,132,392
Net income per common share ................... 0.373 0.474 0.380 (b) 0.843 2.07
Dividends paid per common share ............... 0.1500 0.1600 0.1600 0.1600 0.6300
- ----------------------------------------------------------------------------------------------------------------------------------
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 (losses) ....................... (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
(a) Includes a reduction of the Allowance for Loan Losses of $1,775,000, as discussed in Note D
(b) Reflects adjustment to reverse pre-tax gain on credit card sale of $486,129 originally reported in Other Income
All share and per-share amounts have been adjusted for a three percent stock
dividend in 1995 and a four-for-three stock split in 1994.
</TABLE>
29
<PAGE> 16
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 3,453,824 shares outstanding,
held among approximately 1,671 shareholders of record as of December 31, 1996.
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.
<TABLE>
<CAPTION>
Trading Ranges of Common Stock
Bid Prices Dividends Per Share
- ----------------------------------------------------------------------------------------------------
1996 1995 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $18.63 $20.50 $20.87 $24.27 $0.1500 $0.1359
Second Quarter 18.25 20.63 18.45 23.54 0.1600 0.1456
Third Quarter 18.75 20.00 18.45 22.00 0.1600 0.1456
Fourth Quarter 19.13 23.50 17.75 22.00 0.1600 0.1500
------- -------
$0.6300 $0.5771
======= =======
</TABLE>
- -------------------------------------------------------------------------------
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, 1996 and 1995 and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Cleveland, Ohio
January 21, 1997
30
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME STATE OF INCORPORATION
- ---- ----------------------
<S> <C>
PREMIERBank & Trust Ohio
</TABLE>
<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 21, 1997, with respect to the
consolidated financial statements of CoBancorp Inc. incorporated by reference
in the Annual Report (Form 10-K) for the year ended December 31, 1996.
Ernst & Young, LLP
Cleveland, Ohio
March 24, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF COBANCORP INC. AND SUBSIDIARIES AS OF DECEMBER 31,
1996, AND THE RELATED STATEMENTS OF INCOME, CASH FLOWS AND SHAREHOLDERS' EQUITY
FOR THE TWELVE MONTHS 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-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 28,318
<INT-BEARING-DEPOSITS> 2,237
<FED-FUNDS-SOLD> 4,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 162,461
<INVESTMENTS-CARRYING> 26,325
<INVESTMENTS-MARKET> 26,847
<LOANS> 340,454
<ALLOWANCE> 4,092
<TOTAL-ASSETS> 598,918
<DEPOSITS> 514,746
<SHORT-TERM> 25,521
<LIABILITIES-OTHER> 4,006
<LONG-TERM> 0
<COMMON> 5,975
0
0
<OTHER-SE> 48,670
<TOTAL-LIABILITIES-AND-EQUITY> 598,918
<INTEREST-LOAN> 30,411
<INTEREST-INVEST> 12,382
<INTEREST-OTHER> 388
<INTEREST-TOTAL> 43,181
<INTEREST-DEPOSIT> 16,166
<INTEREST-EXPENSE> 16,799
<INTEREST-INCOME-NET> 26,382
<LOAN-LOSSES> (1,775)
<SECURITIES-GAINS> 409
<EXPENSE-OTHER> 25,792
<INCOME-PRETAX> 8,795
<INCOME-PRE-EXTRAORDINARY> 8,795
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,132
<EPS-PRIMARY> 2.07
<EPS-DILUTED> 2.07
<YIELD-ACTUAL> 5.24
<LOANS-NON> 1,707
<LOANS-PAST> 85
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,850
<CHARGE-OFFS> 716
<RECOVERIES> 733
<ALLOWANCE-CLOSE> (1,775)
<ALLOWANCE-DOMESTIC> 4,055
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 37
</TABLE>
