1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For quarter ended March 31, 1996 Commission file number: 0-13166 CoBancorp Inc. (Exact name of registrant as specified in its charter) Ohio 34-1465382 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 124 Middle Avenue, Elyria, Ohio 44035 (Address of principal executive offices) (Zip Code) (216) 329-8000 Registrant's telephone number, including area code Not applicable Former name, former address and former fiscal year, if changed since last report. 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. As of March 31, 1996, there were 3,447,160 outstanding common shares, with no par value, of the Registrant. 2 INDEX COBANCORP INC. PART I. FINANCIAL INFORMATION Item 1. Financial Statements Page Consolidated balance sheets -- March 31, 1996 and December 31, 1995 3 Consolidated statements of income -- Three months ended March 31, 1996 4 and 1995 Consolidated statements of cash flows -- Three months ended March 31, 1996 and 1995 5 Notes to consolidated financial statements -- March 31, 1996 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 PART II. OTHER INFORMATION 12 SIGNATURES 13 EXHIBITS N/A 3 COBANCORP INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) MARCH DECEMBER 31 1996 1995 ------------- ------------- ASSETS Cash and due from banks $ 29,581,179 $ 26,611,296 Investment securities available-for-sale 190,637,009 129,466,384 Investment securities held-to-maturity 29,753,145 29,948,383 Federal funds sold 15,900,000 2,900,000 Loans 327,105,125 320,508,725 Less allowance for loan losses 6,050,295 5,849,689 ------------- ------------- Net loans 321,054,830 314,659,036 Bank premises and equipment, net 13,787,782 11,640,337 Accrued income and prepaid expenses 5,190,116 4,228,757 Other assets 16,288,414 10,076,157 ------------- ------------- TOTAL ASSETS $ 622,192,475 $ 529,530,350 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Demand-noninterest bearing $ 83,477,332 $ 70,008,577 Demand-interest bearing 65,101,798 53,962,361 Savings and other time 397,870,093 328,163,756 ------------- ------------- Total deposits 546,449,223 452,134,694 Short-term funds 21,369,251 22,453,980 Other liabilities 4,089,535 3,839,195 Employee stock ownership plan obligation 430,260 430,260 ------------- ------------- TOTAL LIABILITIES 572,338,269 478,858,129 Shareholders' equity Capital stock, no par value 5,000,000 shares authorized 3,447,160 shares issued and outstanding at March 31, 1996 and December 31, 1995 5,896,098 5,896,098 Capital surplus 18,553,553 18,553,553 Retained earnings 26,105,272 25,337,492 Unrealized gain (loss) on available-for-sale investment securities (net of income tax) (270,457) 1,315,338 Employee stock ownership plan obligation (430,260) (430,260) ------------- ------------- TOTAL SHAREHOLDERS' EQUITY 49,854,206 50,672,221 ------------- ------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 622,192,475 $ 529,530,350 ============= ============= See accompanying notes to consolidated financial statements. 4 COBANCORP INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) MARCH 31, 1996 THREE MONTHS ENDED MARCH 31 1996 1995 ----------- ----------- INTEREST INCOME Loans (including fees) Taxable $ 7,292,596 $ 7,360,990 Tax-exempt 44,033 48,048 Investment securities Taxable 1,682,238 1,377,000 Tax-exempt 1,030,452 972,887 Federal funds sold 188,447 1,629 ----------- ----------- TOTAL INTEREST INCOME 10,237,766 9,760,554 INTEREST EXPENSE Deposits 3,959,373 3,351,152 Short-term borrowed funds 165,619 247,586 ----------- ----------- TOTAL INTEREST EXPENSE 4,124,992 3,598,738 ----------- ----------- NET INTEREST INCOME 6,112,774 6,161,816 PROVISION FOR LOAN LOSSES 60,000 60,000 ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,052,774 6,101,816 OTHER INCOME Service charges on deposit accounts 634,339 459,616 Trust fees 351,000 339,999 Other 227,715 208,443 Securities gains 295,029 (4,118) ----------- ----------- TOTAL OTHER INCOME 1,508,083 1,003,940 OTHER EXPENSES Salaries, wages and benefits 2,642,161 2,329,349 Occupancy--net 429,031 386,943 Furniture and equipment 234,000 172,500 Taxes, other than income and payroll 180,911 149,588 FDIC insurance 20,742 250,185 Other 2,530,524 2,046,834 ----------- ----------- TOTAL OTHER EXPENSES 6,037,369 5,335,399 ----------- ----------- INCOME BEFORE INCOME TAXES 1,523,488 1,770,357 INCOME TAX EXPENSE 238,000 310,000 ----------- ----------- NET INCOME $ 1,285,488 $ 1,460,357 =========== =========== NET INCOME PER SHARE $ 0.37 $ 0.43 DIVIDENDS PER SHARE $ 0.1500 $ 0.1359 See notes to consolidated financial statements. 5 COBANCORP INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) THREE MONTHS ENDED MARCH 31 1996 1995 ------------ ------------ OPERATING ACTIVITIES Net income $ 1,285,488 $ 1,460,357 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 60,000 60,000 Provision for depreciation and amortization 477,466 352,652 Accretion of discounts on purchased loans (14,469) (31,365) Amortization of premiums less accretion of discounts on held-to-maturity investment securities 40,238 (1,405) Amortization of premiums less accretion of discounts on available-for-sale investment securities (60,967) (90,543) Realized securities (gains) losses on available-for-sale securities (295,029) 4,118 (Increase) in interest receivable (544,253) (419,793) Increase (decrease) in interest payable 608,729 (59,723) (Increase) in other assets (6,626,810) (580,770) Increase in other liabilities 319,206 590,079 ------------ ------------ NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES (4,750,401) 1,283,607 INVESTING AND LENDING ACTIVITIES Proceeds from sales of available-for-sale investment securities 19,869,045 804,000 Maturities of available-for-sale investment securities 855,420 142,317 Maturities of held-to-maturity investment securities 155,000 310,000 Purchases of held-to-maturity investment securities 0 (1,724,854) Purchases of available-for-sale investment securities (83,941,810) (6,053,305) Net decrease in credit card receivables 230,963 315,560 Net (increase) in longer-term loans (6,672,291) (4,686,949) Purchases of premises and equipment, net of retirements (2,489,370) (362,352) ------------ ------------ NET CASH USED BY INVESTING ACTIVITIES (71,993,043) (11,255,583) DEPOSIT AND FINANCING ACTIVITIES Net increase (decrease) in demand deposits and savings accounts 68,902,918 (27,180,124) Net increase in certificates of deposit 25,412,212 25,346,740 Net (decrease) increase in short-term funds (1,084,729) 8,190,010 Cash dividends (517,074) (466,524) Dividend investment plan 0 133,599 Long-term incentive plan 0 259,442 ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 92,713,327 6,283,143 ------------ ------------ Increase (decrease) In Cash and Cash Equivalents 15,969,883 (3,688,833) Cash and cash equivalents at beginning of period 29,511,296 31,771,444 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 45,481,179 $ 28,082,611 ============ ============ See accompanying notes to consolidated financial statements. 6 COBANCORP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 1996 NOTE A -- ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of CoBancorp Inc. and its wholly-owned subsidiary, PREMIERBank & Trust. All material intercompany accounts and transactions have been eliminated. BASIS OF PRESENTATION: The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. It is the opinion of Management that all adjustments necessary for a fair presentation have been made and that all adjustments were of a normal recurring nature. CASH EQUIVALENTS: For purpose of the Statements of Cash Flows, cash equivalents include amounts due from banks and federal funds sold. Generally, federal funds are purchased and sold for periods of less than thirty days. RECLASSIFICATIONS: Certain amounts in the 1995 consolidated financial statements have been reclassified to conform to the 1996 presentation. NOTE B -- ACQUISITIONS On April 2, 1996, CoBancorp Inc. announced it had entered into a Letter of Agreement with Jefferson Savings Bank, whereby CoBancorp Inc. will purchase the Ohio-chartered savings and loan located in Dublin, Ohio . The transaction is subject to regulatory approval and is expected to close in the fourth quarter of 1996. NOTE C -- LOANS On January 1, 1995, the Corporation adopted FASB Statement No. 114, "Accounting by Creditors for Impairment of a Loan" (as amended by FASB Statement No. 118). Under this accounting standard, the allowance for loan losses includes an evaluation of certain loans that are identified under Statement No. 114 based on discounted cash flows using the loan's initial effective interest rate or the fair value of the collateral for certain loans which are collateral dependent. The adoption of this accounting standard had no material effect on the financial position or results of operations of the Corporation. At March 31, 1996, there were no loans that were considered to be impaired under the Statement 114 criteria. 7 COBANCORP INC. MARCH 31, 1996 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion focuses on information about CoBancorp Inc.'s financial condition and results of operations which is not otherwise apparent from the consolidated financial statements attached. EARNINGS RESULTS Net income decreased 12.0 percent to $1,285,000 for the first three months of 1996, from the $1,460,000 earned in the same period of 1995. Earnings per share were $0.37, as compared to $0.43 per share in the first three months of the prior year. The overall decrease in earnings is the result of a decrease in net interest income and an increase in net non-interest expense. These changes are explained in detail in the following sections. NET INTEREST INCOME The net interest margin on a fully taxable-equivalent basis was 5.15 percent for the first three months of 1996, compared to 5.48 percent one year ago. Net interest income for the first three months of 1996 amounted to $6,666,000 down slightly from $6,688,000 for the first quarter in 1995. These amounts reflect net interest income adjusted to a fully taxable-equivalent basis by recognizing the tax effect of interest earned on tax-exempt securities and loans. The decrease in fully-taxable equivalent net interest income of $22,000, or 0.3 percent, is attributable primarily to a decrease in the rates on interest-earning assets, an increase in interest-bearing liabilities and to higher interest rates on those liabilities. These factors were partially offset by an overall increase in earning assets which was greater than the increase in interest-bearing liabilities. Average interest-earning assets were $514,723,000 and $485,903,000 for the first three months of 1996 and 1995, respectively. Average interest-bearing liabilities for the same periods were $445,355,000 and $422,462,000. 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: 8 SUMMARY OF NET INTEREST INCOME CHANGES (RATE/VOLUME VARIANCE) THREE MONTHS ENDED 3/31/96 VS. 3/31/95 (IN THOUSANDS OF DOLLARS) | CHANGE IN |INTEREST INCOME/EXPENSE DUE TO CURRENT CURRENT OLD OLD |------------------------------ VOLUME RATE VOLUME RATE | VOLUME RATE BOTH TOTAL ------ ---- ------ ---- | ------ ---- ---- ----- | Taxable securities $ 107,635 6.25% $ 79,718 6.92% | $ 483 ($133) ($ 45) $ 305 Nontaxable securities 76,319 8.18% 73,162 8.06% | 64 23 0 87 Federal funds sold & s/t funds 10,975 6.79% 139 5.04% | 136 1 50 187 Taxable loans: | Real estate loans 138,621 8.05% 153,992 7.92% | (270) 49 (39) (260) Commercial loans 134,237 9.37% 134,736 9.20% | 23 58 (3) 78 Installment loans 40,864 10.04% 38,401 9.98% | 72 5 0 77 Overdrafts 527 0.00% 62 0.00% | 0 0 0 0 Quickline loans 159 16.35% 122 18.03% | 2 (1) 1 2 Credit card loans 2,841 42.34% 2,694 39.98% | 18 16 (2) 32 Nontaxable loans: | IRBs 2,545 10.49% 2,877 10.11% | (8) 3 0 (5) --------- --------- | ----- ----- ----- ----- TOTAL INTEREST-EARNING ASSETS 514,723 8.36% 485,903 8.49% | 520 21 (38) 503 | Noninterest-earning assets | Cash and due from banks 34,073 23,726 | Bank premises and equipment 12,433 10,647 | Other assets 19,111 15,119 | Less allowance for loan losses (5,935) (5,631) | --------- --------- | 59,682 43,861 | --------- --------- | Total assets $ 574,405 $ 529,764 | ========= ========= | | Interest-bearing transaction accts: | NOW/Advantage 50 60,616 1.87% 51,325 2.05% | 50 (24) (4) 22 Savings accounts: | Savings 139,722 2.40% 140,282 2.32% | 6 27 0 33 IMMAs 22,750 2.04% 26,987 2.16% | (21) (8) 0 (29) Time deposits: | Christmas/vacation club 867 5.88% 960 3.96% | (1) 5 0 4 CD under $100,000 127,337 5.48% 96,176 4.54% | 364 226 73 663 CD over $100,000 (regular) 14,143 5.42% 10,477 5.27% | 50 4 1 55 CD over $100,000 (public funds) 24,072 5.48% 38,453 5.93% | (206) (42) 15 (233) IRAs 33,756 5.34% 30,903 4.73% | 38 47 4 89 Short-term borrowings: | Repurchase agreements 2,776 4.79% 2,430 5.14% | 5 (2) 0 3 Fed funds purchased 2,877 5.14% 6,411 6.05% | (52) (15) 7 (60) Notes payable TT&L 1,702 5.41% 2,702 5.59% | (14) (1) 0 (15) Sweep 14,737 2.02% 15,356 2.16% | (2) (5) 0 (7) --------- --------- | ----- ----- ----- ----- TOTAL INTEREST-BEARING LIABILITIES 445,355 3.71% 422,462 3.45% | 217 212 96 525 | ----- ----- ----- ----- | Noninterest-bearing liabilities | Demand deposits 68,601 60,698 | Other liabilities 8,777 4,352 | Shareholders' equity 51,672 42,252 | --------- --------- | Total liabilities and | shareholders' equity $ 574,405 $ 529,764 | ========= ========= | | NET INTEREST INCOME 5.15% 5.48% | $ 303 ($191) ($134) ($ 22) ===== ===== ===== ===== YTD FTE net interest income (current year) $6,666 YTD FTE net interest income (prior year) 6,688 ------ Change in FTE net interest income ($22) ====== Presented on a fully taxable-equivalent basis, using year-to-date average balances. 9 NET NONINTEREST EXPENSES Total net noninterest expense (total noninterest expense less total noninterest income) has increased to $4,529,000 for the first three months of 1996, compared to $4,331,000 the previous year. The increase in expenses has been offset by increased income from service charges on deposit accounts and other fees of $175,000 or 38.0% as compared to the same period last year. This increase in income was the result of a comphrehensive review of the Bank's pricing structure. Securities gains represented $295,000 in income for the first three months of 1996, compared to a loss of $4,000 for the first quarter of 1995. For the first three months of 1996, salaries, wages and benefits expense increased $313,000 over the same period for 1995. However, during this time the Bank added fourteen new branches and approximately 54 new employees. (Eleven branches were acquired in February of 1996). During the first quarter of 1995, the Federal Deposit Insurance Corporation (FDIC) rates on Bank Insurance Fund (BIF) insured deposits were $0.23 per $100 of insured deposits. As of year-end 1995, the Federal Deposit Insurance Corporation reduced rates on Bank Insurance Fund (BIF) insured deposits to zero for well capitalized institutions such as PREMIERBank and Trust. This resulted in a decrease in FDIC insurance expense of $230,000 in the first quarter of 1996. The Bank has approximately $37 million of deposits insured by the FDIC in the Savings Association Insurance Fund (SAIF). These deposits were acquired from Savings and Loan institutions and continue to be assessed $0.23 per $100 of insured deposits. LOANS AND ALLOWANCE FOR LOAN LOSSES On January 1, 1995, the Corporation adopted FASB Statement No. 114, "Accounting by Creditors for Impairment of a Loan" (as amended by FASB Statement No. 118). Under this accounting standard, the allowance for loan losses includes an evaluation of certain loans that are identified under Statement No. 114 based on discounted cash flows using the loan's initial effective interest rate or the fair value of the collateral for certain loans which are collateral dependent. The adoption of this accounting standard had no material effect on the financial position or results of operations of the Corporation. At March 31, 1996, there were no loans that were considered to be impaired under Statement 114. The allowance for loan losses, therefore, included no allocation for such loans. In determining the adequacy of the allowance for loan losses, management evaluates past loan loss experience, present and anticipated economic conditions and the credit worthiness of its borrowers. 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. Potential problem loans are those loans which are on the Bank's "watch list." These loans exhibit characteristics that could cause the loans to become nonperforming or require restructuring in the future. This "watch list" is reviewed monthly and adjusted for changing conditions. Loans on the watch list at March 31, 1996, totaled $2.9 million or 0.9 percent of total outstanding loans. At March 31, 1996, the allowance for loan losses as a percentage of loans was 1.85 percent and 1.68 percent at the same date in 1995. The provision for loan losses was $60,000 in the three months ended March 31, 1996, and March 31, 1995. 10 The following table contains information relative to loan loss experience for the three months ended March 31, 1995, and the year ended December 31, 1995. Three months ended Year ended March 31, 1996 December 31, 1995 ($000) ($000) ------------------ ----------------- Allowance for loan losses at beginning of period $ 5,850 $ 5,617 Loans charged off: Real estate 21 2 Installment 111 510 Credit card 13 85 Other 1 4 Commercial and collateral 6 27 ------- ------- 152 628 Recoveries on loans charged off: Real estate 1 3 Installment 111 318 Credit card 8 16 Other 1 2 Commercial and collateral 171 342 ------- ------- 292 681 Net charge-offs (recoveries) (140) (53) Provision for loan losses 60 180 ======= ======= Allowance for loan losses at end of period $ 6,050 $ 5,850 ======= ======= Ratio of allowance for loan losses to total loans at end of period 1.85% 1.83% ======= ======= 11 NONPERFORMING LOANS Nonaccrual loans at March 31, 1996, totaled $291,000, compared to $859,000 at December 31, 1995. The category of accruing loans past due 90 days or more totaled $62,000 at March 31, 1996 and $106,000 at December 31, 1995. The balance in the allowance for loan losses was $6,050,000 at March 31, 1996 compared to $5,850,000 at December 31, 1995. Except for installment and credit cards, loans on which interest and/or principal is 90 days or more past due are placed on nonaccrual status and any previously accrued but uncollected interest is reversed from income. 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 are charged off and previously accrued but uncollected interest is reversed from income. The following table summarizes nonaccrual and past due loans (in thousands of dollars). March 31, 1996 December 31, 1995 ($000) ($000) -------------- ----------------- Accruing loans past due 90 days or more as to principal or interest: Loans secured by real estate $ 29 $ 35 Commercial and industrial 3 0 Loans to individuals 30 71 ----- ----- $ 62 $ 106 ===== ===== Nonaccrual loans: Loans secured by real estate $ 175 $ 783 Commercial and industrial 116 76 ----- ----- $ 291 $ 859 ===== ===== 12 CAPITAL At March 31, 1996, PREMIERBank and Trust's risk-based capital ratios based on Federal Reserve Board guidelines were as follows: PREMIERBank Well-capitalized & Trust minimums Tier 1 "core" capital to risk-weighted assets 11.85 % 6.00 % Total capital to risk-weighted assets 13.54 % 10.00 % Tier 1 leverage ratio 7.53 % 5.00 % These ratios substantially exceed the minimums which are in effect for banks after the end of 1992, and also exceed the percentages required to be considered "well-capitalized". Return on average assets was 1.01 percent for the first three months of 1996, compared to 1.10 percent for the same period in 1995. PART II. OTHER INFORMATION Except as set forth below, the items of Part II are inapplicable or the answers thereto are negative and, accordingly, no reference is made to said items in this report. Item 4--Submission of matters to a vote of security holders None. Item 6--Exhibits and Reports on Form 8-K (a) Exhibits: 27 Financial Data Schedule (b) The registrant filed a report on Form 8-K on March 4, 1996, regarding the acquisition of eleven branches from Bank One, Cleveland. 13 COBANCORP INC. MARCH 31, 1996 SIGNATURES Pursuant to the requirements 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. (Registrant) /s/ Timothy W. Esson Timothy W. Esson Executive Vice President and Chief Financial Officer May 14, 1996