1
EXHIBIT 13
(1996 ANNUAL REPORT TO SHAREHOLDERS)
31
2
FINANCIAL HIGHLIGHTS
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:
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.
1
3
FINANCIAL STATEMENTS
COBANCORP INC.
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------------------------
December 31
1996 1995
- -------------------------------------------------------------------------------------------------
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.
17
4
FINANCIAL STATEMENTS
COBANCORP INC.
CONSOLIDATED INCOME STATEMENTS
- -----------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
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.
18
5
COBANCORP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
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.
19
6
FINANCIAL STATEMENTS
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
- ------------------------------------------------------------------------------------------------------------------------------
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.
See accompanying notes to consolidated financial statements.
20
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:
Years
- ------------------------------------------------------------------------------
Buildings 10-40
Equipment and leasehold improvements 3-20
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
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
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
- -----------------------------------------------------------------------------------------------------------------------------------
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
=========== =========== =========== ===========
22
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.
AVAILABLE-FOR-SALE SECURITIES
- -------------------------------------------------------------------------------
ESTIMATED
COST FAIR VALUE
- --------------------------------------------------------------------------------
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
=========== ===========
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
The composition of the loan portfolio at December 31 was:
1996
- -------------------------------------------------------------------------------
ESTIMATED
CARRYING AMOUNT FAIR VALUE
- -------------------------------------------------------------------------------
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
============ ============
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.
Transactions in the allowance for loan losses were:
1996 1995 1994
- -------------------------------------------------------------------------------
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
=========== =========== ===========
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
10
NOTES TO FINANCIAL STATEMENTS
NOTE E -- BANK PREMISES AND EQUIPMENT
Premises and equipment at December 31 were:
1996 1995
- -------------------------------------------------------------------------------
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
============ ============
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.
1996
- -------------------------------------------------------------------------------
ESTIMATED
CARRYING AMOUNT FAIR VALUE
- -------------------------------------------------------------------------------
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
============ ============
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:
1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
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
========== ==========
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:
1996 1995 1994
- -------------------------------------------------------------------------------
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
=========== =========== ===========
The Corporation made income tax payments of approximately $1,550,000,
$1,525,000 and $975,000 during 1996, 1995 and 1994, respectively.
24
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:
1996 1995 1994
- -------------------------------------------------------------------------------
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
========= ========= =========
The funded status of the plan at December 31, 1996 and 1995 was as follows:
1996 1995
- -------------------------------------------------------------------------------
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
=========== ===========
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
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:
1996 1995
- --------------------------------------------------------------------------------
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
=========== ===========
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:
1996
- -------------------------------------------------------------------------------
Pro forma net income ................................... $7,089,912
Pro forma earnings per share:
Primary .............................................. $ 2.06
Fully diluted ........................................ $ 2.06
A summary of the Corporation's stock option activity, and related
information for the years ended December 31 follows:
1996 1995
- ------------------------------------------------------------------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
- ------------------------------------------------------------------------------------
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
26
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
BALANCE SHEETS (PARENT COMPANY ONLY)
DECEMBER 31
1996 1995
- -------------------------------------------------------------------------------
Assets
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 $51,102,480
=========== ===========
STATEMENTS OF INCOME (PARENT COMPANY ONLY)
YEARS ENDED DECEMBER 31
1996 1995 1994
- -----------------------------------------------------------------------------------------
Income
Dividends from
bank subsidiary ....................$ 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
============ ============ ============
STATEMENTS OF CASH FLOWS (PARENT COMPANY ONLY)
YEARS ENDED DECEMBER 31
1996 1995 1994
- -------------------------------------------------------------------------------------------------------
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
=========== =========== ===========
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
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.
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
- ---------------------------------------------------------------------------------------------------------------------------
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
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
15
QUARTERLY FINANCIAL INFORMATION
The following is a summary of unaudited quarterly results of operations for the
years 1996, 1995 and 1994:
- ---------------------------------------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH FULL YEAR
- ----------------------------------------------------------------------------------------------------------------------------------
1996
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.
29
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.
Trading Ranges of Common Stock
Bid Prices Dividends Per Share
- ----------------------------------------------------------------------------------------------------
1996 1995 1996 1995
- ----------------------------------------------------------------------------------------------------
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
======= =======
- -------------------------------------------------------------------------------
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