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, 1997 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) (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, 1997, there were 3,453,824 outstanding common shares, with no par value, of the Registrant. 2 INDEX COBANCORP INC. AND SUBSIDIARIES PART I. FINANCIAL INFORMATION Item 1. Financial Statements Page Consolidated balance sheets -- March 31, 1997 and December 31, 1996 3 Consolidated statements of income -- Three months ended March 31, 1997 4 and 1996. Consolidated statements of cash flows -- Three months ended March 31, 1997 and 1996 5 Notes to consolidated financial statements -- March 31, 1997 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. OTHER INFORMATION 13 SIGNATURES 14 EXHIBITS N/A 3 COBANCORP INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) March 31, December 31, 1997 1996 ------------- ------------- ASSETS Cash and due from banks $ 37,793,481 $ 30,555,396 Investment securities available-for-sale 145,030,400 162,460,918 Investment securities held-to-maturity 24,817,716 26,324,836 (market value $25,224,297 and $26,847,437) Federal funds sold 0 4,300,000 Loans 412,591,307 340,454,390 Less allowance for loan losses 4,649,445 4,091,592 ------------- ------------- Net loans 407,941,862 336,362,798 Bank premises and equipment, net 20,516,209 18,787,316 Accrued income and prepaid expenses 6,814,617 4,840,787 Other assets 14,946,565 15,285,663 ------------- ------------- TOTAL ASSETS $ 657,860,850 $ 598,917,714 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Demand-noninterest bearing $ 81,724,474 $ 82,842,548 Demand-interest bearing 71,360,321 63,196,979 Savings and other time 413,402,919 368,706,984 ------------- ------------- Total deposits 566,487,714 514,746,511 Short-term funds 31,578,463 25,520,820 Other liabilities 5,299,181 4,005,766 ------------- ------------- Total liabilities 603,365,358 544,273,097 Shareholders' equity Capital stock, no par value 5,000,000 shares authorized 3,453,824 shares issued and outstanding 5,975,066 5,975,066 Capital surplus 18,553,553 18,553,553 Retained earnings 30,995,905 30,296,473 Net unrealized (losses) on available-for-sale investment securities (net of income tax) (1,029,032) (180,475) ------------- ------------- Total shareholders' equity 54,495,492 54,644,617 ------------- ------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 657,860,850 $ 598,917,714 ============= ============= See accompanying notes to consolidated financial statements. 4 COBANCORP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) MARCH 31, 1997 Three months ended March 31 1997 1996 ------------ ----------- INTEREST INCOME Loans (including fees) Taxable $ 8,282,762 $ 7,292,596 Tax-exempt 33,839 44,033 Investment securities Taxable 1,992,982 1,682,238 Tax-exempt 790,092 1,030,452 Federal funds sold 37,391 188,447 ------------ ----------- Total interest income 11,137,066 10,237,766 INTEREST EXPENSE Deposits 4,037,682 3,959,373 Short-term borrowed funds 201,698 165,619 ------------ ----------- Total interest expense 4,239,380 4,124,992 ------------ ----------- Net interest income 6,897,686 6,112,774 PROVISION FOR LOAN LOSSES 75,000 60,000 ------------ ----------- Net interest income after provision for loan losses 6,822,686 6,052,774 OTHER INCOME Service charges on deposit accounts 757,466 634,339 Trust fees 413,750 351,000 Other 315,435 227,715 Securities (losses) gains (13,231) 295,029 ------------ ----------- Total other income 1,473,420 1,508,083 OTHER EXPENSES Salaries, wages and benefits 2,894,654 2,642,161 Occupancy--net 641,703 429,031 Furniture and equipment 263,562 234,000 Taxes, other than income and payroll 156,734 180,911 FDIC insurance 22,975 20,742 Other 2,749,254 2,530,524 ------------ ----------- Total other expenses 6,728,882 6,037,369 ------------ ----------- Income before income taxes 1,567,224 1,523,488 INCOME TAX EXPENSE 280,642 238,000 ------------ ----------- NET INCOME $ 1,286,582 $ 1,285,488 ============ =========== NET INCOME PER SHARE $ 0.37 $ 0.37 DIVIDENDS PER SHARE $ 0.17 $ 0.1456 See accompanying notes to consolidated financial statements. 5 COBANCORP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three months Ended March 31, 1997 1996 ------------ ------------ OPERATING ACTIVITIES Net income $ 1,286,582 $ 1,285,488 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 75,000 60,000 Provision for depreciation and amortization 653,010 477,466 Accretion of discounts on purchased loans 15,145 (14,469) Amortization of premiums less accretion of discounts on held-to-maturity investment securities 37,345 40,238 Amortization of premiums less accretion of discounts on available-for-sale investment securities 11,136 (60,967) Realized securities losses (gains) on available-for-sale securities 13,231 (295,029) (Increase) in interest receivable (261,414) (544,253) (Decrease) increase in interest payable (296,900) 608,729 Decrease (increase) in other assets 480,837 (6,626,810) Increase in other liabilities 550,128 319,206 ------------ ------------ Net Cash Provided By (Used In) Operating Activities 2,564,100 (4,750,401) INVESTING AND LENDING ACTIVITIES Proceeds from sales of available-for-sale investment securities 19,021,446 19,869,045 Maturities of available-for-sale investment securities 1,485,928 855,420 Maturities of held-to-maturity investment securities 975,631 155,000 Purchases of available-for-sale investment securities (673,957) (83,941,810) Purchase of Jefferson Savings Bank (5,531,006) Net decrease in credit card receivables 206,722 230,963 Net (increase) in longer-term loans (14,818,672) (6,672,291) Purchases of premises and equipment, net of retirements (1,904,766) (2,489,370) ------------ ------------ Net Cash (Used In) Investing and Lending Activities (1,238,674) (71,993,043) DEPOSIT AND FINANCING ACTIVITIES Net (decrease) increase in demand deposits and savings accounts (1,328,200) 68,902,918 Net increase in certificates of deposit 1,368,486 25,412,212 Net increase (decrease) in short-term funds 2,557,644 (1,084,729) Net (decrease) in FHLB borrowings (500,000) Net increase in advances from borrowers for taxes and insurance 101,880 Cash dividends (587,150) (517,074) ------------ ------------ Net Cash Provided By Deposit and Financing Activities 1,612,660 92,713,327 ------------ ------------ Increase In Cash and Cash Equivalents 2,938,086 15,969,883 Cash and cash equivalents at beginning of period 34,855,395 29,511,296 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 37,793,481 $ 45,481,179 ============ ============ See accompanying notes to consolidated financial statements. 6 COBANCORP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 1997 NOTE A -- ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of CoBancorp Inc. (the "Corporation") and its wholly-owned subsidiaries, PREMIERBank & Trust ("Premier") and Jefferson Savings Bank ("Jefferson"). 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 1996 consolidated financial statements have been reclassified to conform to the 1997 presentation. NOTE B -- ACQUISITIONS On February 27, 1997, CoBancorp, Inc. acquired all of the outstanding shares of Jefferson Savings Bank, an Ohio-chartered savings association located in Jefferson, Ohio, for cash in the amount of $6,733,000, with additional consideration of $649,000 attributable to certain favorable tax benefits (confirmed by an I.R.S. Private Letter Ruling dated May 31, 1996). The transaction was accounted for under the purchase method of accounting. The preliminary purchase price allocation, which may be revised, resulted in a write-up of assets to estimated fair value of approximately $2,500,000. It is expected that an immaterial amount may be assigned to goodwill. Jefferson's results of operations are included in CoBancorp's consolidated results of operations since the date of acquisition. Pro forma results of operations have not been presented because the effect of the acquisition is not material to the consolidated results of operations. Jefferson, with assets of approximately $62 million, operates in three branch locations in Madison County, Ohio. Jefferson remains a separate savings association subsidiary of CoBancorp. NOTE C -- LOANS The Corporation applies the provision of FASB Statement No. 114, "Accounting by Creditors for Impairment of a Loan" (as amended by FASB Statement No. 118). At March 31, 1997, and December 31, 1996, there were no loans that were considered to be impaired under the Statement 114 criteria. 7 COBANCORP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 1997 NOTE D -- EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings Per Share," which is required to be adopted on December 31, 1997. At that time, the Corporation will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating basic earnings per share, the dilutive effect of stock options will be excluded. The impact on basic and fully diluted earnings per share, is not expected to be material for the first quarter ended March 31, 1997 and 1996. 8 COBANCORP INC. AND SUBSIDIARIES MARCH 31, 1997 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. In connection with any forward looking statements made by the Registrant, the following disclosure is made. Actual results could differ materially from any such forward looking statements for a variety of factors including sharp and/or rapid changes in interest rates, significant changes in the economy, or significant changes in accounting, tax or regulatory practices or requirements. EARNINGS RESULTS Net income remained relatively constant with a slight increase over the previous year. For the first three months of 1997, net income was $1,287,000, compared to $1,285,000 for the same period in 1996. Earnings per share were $0.37 for the first three months of 1997 and 1996, respectively. The changes affecting net income are explained in detail in the following sections. NET INTEREST INCOME The net interest margin on a fully taxable-equivalent basis was 5.30 percent for the first three months of 1997, compared to 5.15 percent one year ago. Net interest income for the first three months of 1997 amounted to $7,322,000, up significantly from $6,666,000 for the comparable period in 1996. 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 increase in fully-taxable equivalent net interest income of $656,000, or 9.8 percent, is due primarily to an increase in interest-earning assets. This increase was partially offset by an increase in interest-bearing liabilities. The Corporation also benefited from an increase in the overall yield on earning assets, while the cost on interest-bearing liabilities decreased slightly. Average interest-earning assets were $550,261,000 and $514,723,000 for the first three months of 1997 and 1996, respectively. Average interest-bearing liabilities for the same periods were $479,181,000 and $445,355,000, respectively. 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: 9 AVERAGE CONSOLIDATED BALANCE SHEETS AND SUMMARY OF NET INTEREST INCOME CHANGES (RATE/VOLUME VARIANCE) Three months ended 3/31/97 vs. 3/31/96 (in thousands of dollars) Change in | interest income/expense due to Avg. Bal. Current Avg. Bal. Old | -------------------------------------------- 3/31/97 rate 3/31/96 rate | Volume Rate Both TOTAL --------- ------- --------- ----- | ------ ---- ---- ----- | Taxable securities $120,538 6.62% $107,635 6.25% | $202 $100 $13 $315 Nontaxable securities 60,187 7.96% 76,319 8.18% | (330) (43) 9 (364) Federal funds sold & s/t funds 3,641 4.89% 10,975 6.79% | (125) (51) 32 (144) Taxable loans: | Real estate loans 162,479 7.86% 138,621 8.05% | 443 (67) 24 400 Commercial loans 150,704 9.55% 134,237 9.37% | 346 62 17 425 Installment loans 46,137 9.98% 40,864 10.04% | 119 (6) 1 114 Overdrafts 981 0.00% 527 0.00% | 0 0 0 0 Quickline loans 223 17.94% 159 16.35% | 3 1 0 4 Credit card loans 3,079 43.75% 2,841 42.34% | 22 10 4 36 Nontaxable loans: | IRBs 2,292 8.94% 2,545 10.49% | (7) (10) 1 (16) -------- -------- |------ ------ ------ ------ Total interest-earning assets 550,261 8.42% 514,723 8.36% | 673 (4) 101 770 | Noninterest-earning assets | Cash and due from banks 32,447 34,073 | Bank premises and equipment 19,427 12,433 | Other assets 20,061 19,111 | Less allowance for loan losses (4,336) (5,935) | -------- -------- | 67,599 59,682 | -------- -------- | Total assets $617,860 $574,405 | ======== ======== | | Interest-bearing transaction accts: | NOW/Advantage 50 70,187 1.60% 60,616 1.87% | 41 (40) (5) (4) Savings accounts: | Savings 141,142 2.21% 132,669 2.27% | 39 (19) (1) 19 IMMAs 19,967 1.98% 22,750 2.04% | (15) (3) 1 (17) Index 15,930 4.85% 7,053 4.81% 104 1 0 105 Time deposits: | Christmas/vacation club 699 4.01% 867 6.00% | (3) (4) 1 (6) CD under $100,000 138,199 5.30% 127,337 5.48% | 128 (55) (2) 71 CD over $100,000 (regular) 13,500 5.24% 14,143 5.42% | (11) (6) 1 (16) CD over $100,000 (public funds) 15,308 5.10% 24,072 5.48% | (122) (23) 6 (139) IRAs 36,952 5.67% 33,756 5.34% | 37 28 3 68 | Short-term borrowings: | FHLB advances 1,167 5.49% 0 0.00% | 0 0 16 16 Repurchase agreements 1,947 4.73% 2,776 4.79% | (10) 0 -1 (11) Fed funds purchased 4,206 5.78% 2,877 5.14% | 16 4 4 24 Notes payable TT&L 2,385 4.65% 1,702 5.35% | 9 (3) (1) 5 Sweep 17,593 1.71% 14,737 2.02% | 13 (11) (3) (1) -------- -------- |------ ------ ------ ------ Total interest-bearing liabilities 479,181 3.58% 445,355 3.71% | 226 (131) 19 114 |------ ------ ------ ------ Noninterest-bearing liabilities | Demand deposits 78,396 68,601 | Other liabilities 5,141 8,777 | Shareholders' equity 55,142 51,672 | -------- -------- | Total liabilities and | shareholders' equity $617,860 $574,405 | ======== ======== | | Net interest income 5.30% 5.15% | $447 $127 $82 $656 |============================================ YTD FTE net interest income (current year) $7,322 YTD FTE net interest income (prior year) 6,666 ------ Change in FTE net interest income $656 ====== Note: Jefferson's average balances and interest income are included for one month only. Presented on a fully taxable-equivalent basis, using year-to-date average balances. 10 NET NONINTEREST EXPENSES Total net noninterest expenses (total noninterest expense less total noninterest income) were $5,255,000 for the first three months of 1997, compared to $4,529,000 in the previous year, an increase of 16.0 percent. The increase in expenses is primarily the result of the acquisition of Jefferson as well as the addition of several new offices of Premier in the latter half of 1996. The increase in expenses has been partially offset by increased income from service charges on deposit accounts, which were $757,000 in the first quarter of 1997, compared to $634,000 for the same period last year. Securities transactions resulted in a $13,000 loss for the first three months of 1997, compared to a gain of $295,000 for the same period in 1996. Trust fees were up 17.9 percent in 1997 to $414,000, versus $351,000 for the comparable period in 1996. For the first three months of 1997, salaries, wages and benefits expense increased $252,000 over the same period for 1996. The Jefferson acquisition accounts for approximately 20 percent of the increase, while the balance is a combination of added staff for new offices and normal salary adjustments. Under the Deposit Insurance Act of 1996, the Corporation is assessed $.01296 annually for each $100 of its deposits insured by the FDIC in the Bank Insurance Fund ("BIF"). Additionally, Premier and Jefferson have approximately $87 million of deposits insured by the FDIC in the Savings Association Insurance Fund (SAIF). During 1997, the annual assessment rate for SAIF-insured deposits will be $0.0648 per $100. LOANS AND ALLOWANCE FOR LOAN LOSSES At March 31,1997, and December 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 uncollectable by management and charged against the allowance. Potential problem loans are those loans which are on the Bank's "watch list." These loans are, or could become, nonperforming. This "watch list" is reviewed monthly and adjusted for changing conditions. Loans on the watch list at March 31, 1997, totaled $7.2 million, or 2.0 percent of total outstanding loans. 11 At March 31, 1997, the allowance for loan losses as a percentage of loans was 1.13 percent and 1.20 percent at December 31, 1996. The provision for loan losses was $75,000 in the three months ended March 31, 1997, and $60,000 for the three months ended March 31, 1996. The following table contains information relative to loan loss experience for the three months ended March 31, 1997, and the year ended December 31, 1996. Three months ended Year ended March 31, 1997 December 31, 1996 ($000) ($000) -------------- ----------------- Allowance for loan losses at beginning of period $4,092 $ 5,850 Jefferson allowance 501 Loans charged off: Real estate 0 21 Installment 142 446 Credit card 35 82 Other 5 4 Commercial and collateral 2 163 ------ ------- 184 716 Recoveries on loans charged off: Real estate 107 5 Installment 33 311 Credit card 4 22 Other 0 1 Commercial and collateral 21 395 ------ ------- 165 733 Net charge-offs (recoveries) 19 (17) Provision for loan losses 75 (1,775) ------ ------- Allowance for loan losses at end of period $4,649 $ 4,092 ====== ======= Ratio of allowance for loan losses to total loans at end of period 1.13% 1.20% ====== ======= 12 NONPERFORMING LOANS Nonaccrual loans at March 31, 1997, totaled $3,092,000, compared to $1,707,000 at December 31, 1996. This increase includes $1,165,000 in nonaccruing loans acquired with Jefferson. The category of accruing loans past due 90 days or more totaled $155,000 at March 31, 1997 and $85,000 at December 31, 1996. The balance in the allowance for loan losses was $4,649,000 at March 31, 1997 compared to $4,092,000 at December 31, 1996. 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, 1997 December 31, 1996 ($000) ($000) -------------- ----------------- Accruing loans past due 90 days or more as to principal or interest: Loans secured by real estate $ 115 $ 0 Commercial and industrial 8 0 Loans to individuals 32 85 ------ ------ $ 155 $ 85 ====== ====== Nonaccrual loans: Loans secured by real estate $2,903 $1,537 Commercial and industrial 185 170 Loans to individuals 4 0 ------ ------ $3,092 $1,707 ====== ====== 13 CAPITAL At March 31 1997, Premier's and CoBancorp's risk-based capital ratios based on Federal Reserve Board guidelines were as follows: Well- PREMIERBank CoBancorp capitalized & Trust Inc. minimums ----------- --------- ----------- Tier 1 "core" capital to risk-weighted assets 10.99 % 12.21 % 6.00 % Total capital to risk-weighted assets 12.09 % 13.35 % 10.00 % Tier 1 leverage ratio 7.04 % 8.16 % 5.00 % These ratios substantially exceed the minimums which are in effect for banks and bank holding companies, and also exceed the percentages required to be considered "well-capitalized". At March 31, 1997, Jefferson Savings' regulatory capital ratios based on the Office of Thrift Supervision requirements were as follows: Well- Jefferson Required capitalized Savings Minimums Minimums --------- -------- ----------- Tangible Capital 11.89% 1.50% n/a Tier 1 "core" capital to risk-weighted assets 20.43% n/a 6.00% Core Capital 11.89% 3.00% 5.00% Risk-based capital to risk weighted assets 21.68% 8.00% 10.00% 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: 11 Earnings per Share 27 Financial Data Schedule (b) The registrant filed a Form 8-K relative to the acquisition of Jefferson Savings Bank on March 13, 1997. 14 COBANCORP INC. AND SUBSIDIARIES MARCH 31, 1997 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 15, 1997