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, 1995 Commission file number: 0-13166 CoBancorp Inc. (Exact name of registrant as specified in its charter) Ohio 34-1465382 (State or other jurisidiction of (IRS Employer incorporation or organization) Identification No.) 124 Middle Avenue, Elyria, Ohio 44035 (Address of principal executive offices) (Zip Code) (216) 329-8000 Registrant's telephone number, including area code Not applicable Former name, former address and former fiscal year, if changed since last report. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. As of March 31, 1995, there were 3,336,249 outstanding common shares, with no par value, of the Registrant. page 1 of 13 INDEX COBANCORP INC. PART I. FINANCIAL INFORMATION Item 1. Financial Statements Page Consolidated balance sheets--March 31, 1995 and December 31, 1994 3 Consolidated statements of income--Three months ended March 31, 1995 and 1994 4 Consolidated statements of cash flows--Three months ended March 31, 1995 and 1994 5 Notes to consolidated financial statements-- March 31, 1995 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 PART II. OTHER INFORMATION 12 SIGNATURES 13 -2- PART I. FINANCIAL INFORMATION COBANCORP INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) MARCH 31, 1995 March 31 December 31 1995 1994 ASSETS Cash and due from banks $ 28,082,611 $ 29,271,444 Investment securities (market value $158,529,000 at March 31, 1995 and $147,128,000 at December 31, 1994) 158,520,027 149,807,048 Federal funds sold 0 2,500,000 Loans 334,467,242 330,132,961 Less allowance for loan losses 5,608,385 5,616,859 ------------ ------------ Net loans 328,858,857 324,516,102 Bank premises and equipment 10,662,630 10,585,653 Accrued income and prepaid expenses 5,060,844 3,980,626 Other assets 10,204,027 11,066,084 ------------ ------------ TOTAL ASSETS $541,388,996 $531,726,957 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Demand--noninterest bearing $ 61,682,838 $ 69,649,373 Demand--interest bearing 53,112,429 55,965,771 Savings and other time 349,208,226 340,221,731 ------------ ------------ Total deposits 464,003,493 465,836,875 Short-term funds 29,547,238 21,357,228 Other liabilities 3,227,741 2,770,882 Employee stock ownership plan obligation 692,760 780,260 ------------ ------------ Total liabilities 497,471,232 490,745,245 Shareholders' equity Capital stock, without par value 5,000,000 shares authorized 3,336,249 shares outstanding 3,310,011 at December 31, 1994 5,649,273 5,182,737 Capital surplus 16,623,320 16,623,320 Retained earnings 23,862,786 22,868,953 Unrealized gain (loss) on available-for- sale investment securities (net of tax) (1,524,855) (2,913,038) Employee stock ownership plan obligation (692,760) (780,260) ------------ ------------ Total shareholders' equity 43,917,764 40,981,712 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $541,388,996 $531,726,957 ============ ============ <FN> See notes to consolidated financial statements. -3- COBANCORP INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) MARCH 31, 1995 Three months ended March 31 1995 1994 Interest Income Loans (including fees) Taxable $7,360,991 $6,187,532 Tax-exempt 48,047 40,194 Investment securities Taxable 1,377,000 1,289,233 Tax exempt 972,888 853,856 Federal funds sold 1,628 23,589 ---------- ---------- Total interest income 9,760,554 8,394,404 Interest Expense Deposits 3,351,153 2,625,936 Short-term funds 247,585 116,995 ---------- ---------- Total interest expense 3,598,738 2,742,931 ---------- ---------- Net interest income 6,161,816 5,651,473 Provision for Loan and Real Estate Losses 60,000 125,000 ---------- ---------- Net interest income after provision for loan and real estate losses 6,101,816 5,526,473 Other Income Service charges on deposit accounts 459,615 401,766 Trust fees 340,000 324,999 Other 208,442 130,923 Securities gains (losses) (4,118) 291,131 ---------- ---------- Total other income 1,003,939 1,148,819 Other Expenses Salaries, wages and benefits 2,329,349 2,313,056 Occupancy--net 386,942 358,196 Furniture and equipment 172,500 136,700 Taxes, other than income and payroll 149,587 156,308 FDIC insurance 250,185 239,196 Other 2,046,835 2,004,845 ---------- ---------- Total other expenses 5,335,398 5,208,301 ---------- ---------- Income before income taxes 1,770,357 1,466,991 Income Tax Expense 310,000 250,000 ---------- ---------- Net Income $1,460,357 $1,216,991 ========== ========== Net Income Per Share $0.44 $0.36 ===== ===== <FN> See notes to consolidated financial statements. -4- COBANCORP INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) MARCH 31, 1995 Three months ended March 31 1995 1994 Operating Activities Net income $ 1,460,357 $ 1,216,991 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan and real estate losses 60,000 125,000 Provision for depreciation and amortization 352,652 279,699 Accretion of discounts on purchased loans (31,365) Amortization of premiums less accretion of discounts on securities (91,948) 1,156 Realized securities losses (gains) 4,118 (291,131) (Increase) in interest receivable (419,793) (304,889) (Decrease) in interest payable (59,723) (20,327) (Increase) in other assets (580,770) (709,030) Increase in other liabilities 590,079 127,011 ----------- ----------- Net Cash Provided by Operating Activities 1,283,607 424,480 Investing Activities Proceeds from sales of investment securities 804,000 12,406,524 Paydowns and maturities of investment securities 452,317 7,490,121 Purchases of investment securities (7,778,159) (10,829,323) Net decrease in credit card receivables 315,560 211,011 Net (increase) in longer-term loans (4,686,949) (9,021,544) Purchases of premises and equipment, net of retirement (362,352) (363,913) ----------- ----------- Net Cash (Used) by Investing Activities (11,255,583) (107,124) Financing Activities Net (decrease) in demand deposits, NOW accounts and savings accounts (27,180,124) (3,571,955) Net increase in certificates of deposit 25,346,740 2,348,764 Net increase (decrease) in short-term funds 8,190,010 (3,218,360) Cash dividends (466,524) (431,102) Dividend investment plan 133,599 92,180 Long-term incentive plan 259,442 33,842 ----------- ----------- Net Cash Provided (Used) by Financing Activities 6,283,143 (4,746,631) ----------- ----------- (Decrease) in Cash and Cash Equivalents (3,688,833) (4,429,275) Cash and Cash Equivalents at Beginning of Period 31,771,444 32,051,488 ----------- ----------- Cash and Cash Equivalents at End of Period $28,082,611 $27,622,213 =========== =========== <FN> See notes to consolidated financial statements. -5- COBANCORP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 1995 NOTE A PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of CoBancorp Inc. and its wholly-owned subsidiary, PremierBank & Trust. All material intercompany accounts and transactions have been eliminated. BASIS OF PRESENTATION: The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. It is the opinion of management that all adjustments made to the unaudited interim financial statements were of a normal recurring nature. CASH EQUIVALENTS: For purposes 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. PER SHARE AMOUNTS: All per share amounts have been adjusted to reflect the four-for-three stock split in February 1994. RECLASSIFICATIONS: Certain amounts in the 1994 consolidated financial statements have been reclassified to conform to the 1995 presentation. -6- COBANCORP INC. MARCH 31, 1995 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion focuses on information about CoBancorp Inc.'s financial condition and results of operations which is not otherwise apparent from the consolidated financial statements attached. EARNINGS RESULTS Net income increased 20.0 percent to $1,460,000 for the first three months of 1995, from the $1,217,000 earned in the same period of 1994. Earnings per share increased to $.44, up from $.36 per share in the first three months of the prior year. NET INTEREST INCOME The net interest margin on a fully taxable-equivalent basis was 5.48 percent for the first three months of 1995, compared to 5.50 percent one year ago. Net interest income for the first three months of 1995 amounted to $6,688,000 compared to $6,112,000 in 1994. 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 $576,000, or 9.4 percent, is attributable primarily to an increase in earning assets and to higher interest rates on those assets. These factors were partially offset by an increase in interest-bearing liabilities and, to a lesser extent, an increase in the cost of those liabilities. Average interest-earning assets were $485,904,000 and $443,326,000 for the first three months of 1995 and 1994, 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: -7- SUMMARY OF NET INTEREST INCOME CHANGES (RATE/VOLUME VARIANCE) Three months ended 3/31/95 vs. 3/31/94 (in thousands of dollars) Change in interest Current Current Old Old income/expense due to volume rate volume rate Volume Rate Both Total Taxable securities $ 79,718 6.92% $ 82,106 6.29% $ (38) $ 129 $ (3) $ 88 Nontaxable securities 73,162 8.06 63,942 8.09 187 (5) (2) 180 Federal funds sold and other short-term funds 139 4.69 3,077 3.07 (22) 12 (13) (22) Taxable loans: Real estate loans 153,992 7.92 136,667 8.32 355 (132) (16) 207 Commercial loans 134,736 9.19 119,721 7.63 282 463 69 814 Installment loans 38,401 9.98 30,820 10.80 202 (62) (16) 124 Overdrafts 62 192 0 0 Quickline loans 122 17.81 108 18.76 1 0 (1) Credit card loans 2,694 39.96 2,739 35.28 (4) 32 0 28 Nontaxable loans: IRBs 2,877 10.12 3,955 6.16 (17) 39 (10) 12 -------- -------- ----- ----- ------ ------- TOTAL INTEREST-EARNING ASSETS 485,904 8.49 443,326 8.01 946 476 8 1,431 Interest-bearing transaction accounts: NOW 21,422 2.09 26,009 2.09 (24) 0 1 (23) Advantage 50 29,903 2.02 28,927 2.01 5 1 0 6 Savings accounts: Savings 140,282 2.32 144,405 2.42 (25) (33) 1 (57) IMMAs 26,987 2.16 30,142 2.17 (17) (1) 1 (17) Time deposits: Christmas/vaction clubs 960 3.92 2,087 4.04 (11) (1) (12) CDs under $100,000 96,176 4.54 87,318 3.96 86 125 13 224 CDs over $100,000 (regular) 10,477 5.27 4,612 4.16 60 13 16 89 CDs over $100,000 (public fund) 38,453 5.93 10,719 3.16 216 73 189 478 IRAs 30,903 4.73 30,089 4.36 9 27 1 37 Short-term funds: Repurchase agreements 2,430 5.13 3,156 2.68 (5) 19 (4) 10 Federal funds purchased 6,411 6.05 748 3.52 49 5 36 90 Notes payable TT&L 2,702 5.61 3,216 2.98 (4) 21 (3) 14 Sweep accounts 15,356 2.16 12,513 2.12 15 1 16 -------- -------- ----- ----- ----- ------- TOTAL INTEREST-BEARING LIABILITIES 422,462 3.45 383,940 2.90 354 250 251 855 ----- ----- ----- ------- NET INTEREST MARGIN 5.48 5.50 $ 592 $ 226 $(243) $ 576 ===== ===== ===== ======= YTD FTE net interest income (current year) $ 6,688 YTD FTE net interest income (prior year) 6,112 ------- Change in FTE net interest income $ 576 ======= <FN> Presented on a fully-taxable equivalent basis, using year-to-date average balances. -8- The trends in various components of the balance sheet and their respective yields and rates which affect interest income and expense are shown in the following table: AVERAGE CONSOLIDATED BALANCE SHEETS, NET INTEREST INCOME AND RATES Three Months Ended March 31, 1995 Three Months Ended March 31, 1994 Average Interest Average Interest Daily (Annaul- Yield/ Daily (Annual- Yield/ Balance ized) Rate Balance ized) Rate ASSETS Interest-earning assets: Loans (including fees) (1) Taxable $330,008 $29,522 8.95% $290,247 $24,812 8.55% Tax-exempt (2) 2,877 291 10.11 3,954 243 6.15 Investment securities Taxable 79,718 5,515 6.92 82,106 5,165 6.29 Tax-exempt (2) 73,162 5,896 8.06 63,942 5,175 8.09 Federal funds sold 139 7 5.04 3,077 94 3.07 Total interest-earning assets (2) 485,904 41,231 8.49 443,326 35,489 8.01 Noninterest-earning assets: Cash and due from banks 23,725 23,159 Bank premises and equipment 10,647 10,595 Other assets 15,119 11,994 Less allowance for loan losses (5,631) (5,291) TOTAL ASSETS $529,764 $483,783 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities: Interest-bearing transaction accounts $ 51,325 $ 1,053 2.05 $ 54,935 $ 1,125 2.05 Savings 167,269 3,844 2.30 174,547 4,145 2.37 Time deposits 176,969 8,694 4.91 134,825 5,379 3.99 Short-term funds 26,899 995 3.70 19,633 472 2.40 Total interest-bearing liablities 422,462 14,586 3.45 383,940 11,121 2.90 Noninterest-bearing liabilities: Demand deposits 60,698 55,471 Other liabilities 4,352 4,731 Shareholders' equity 42,252 39,641 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $529,764 $483,783 ======== ======== NET INTEREST INCOME $26,645 $24,368 ======= ======= NET YIELD/RATE ON INTEREST- EARNING ASSETS (2) 5.48% 5.50% <FN> (1) Nonaccrual loans are included in average loan balance. (2) Presented on a fully tax equivalent basis using a tax rate of 34%. -9- NET NONINTEREST EXPENSES Total net noninterest expense (total noninterest expense less total noninterest income) has increased slightly, to $4,331,000 for the first three months of 1995, compared to $4,059,000 the previous year. However, exclusive of securities gains (losses), net other expenses decreased by $23,000 from the first quarter of last year. During the last quarter of 1994, the Corporation began a project, using the expertise of a national consulting firm, to analyze operating efficiencies and bank pricing and procedures. The benefits from this process are beginning to impact the Corporation's results of operations, as reflected in the less-than-one-percent increase in salaries, wages and benefits over first-quarter 1994, in spite of the addition of three branches since then. Occupancy, furniture and equipment costs have increased compared to last year. However, these increased expenses have been offset by increased income from service charges on deposits, and decreases in administrative expenses. The provision for loan losses decreased to $60,000 for the first three months of 1995, compared to $125,000 for the same period last year. This reflects the continuing emphasis on asset quality. NONPERFORMING LOANS Nonaccrual loans were slightly above year-end 1994 levels, and at March 31, 1995, totaled $405,000, compared to $358,000 at December 31, 1994. The category of accruing loans past due 90 days or more totaled $51,000 at both March 31, 1995 and December 31, 1994. The balance in the allowance for loan losses was $5,608,000 at March 31, 1995, compared to $5,617,000 at December 31, 1994. 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 December 31 1995 1994 Accruing loans past due 90 days or more as to principal or interest: Loans secured by real estate $ 13 $ 3 Loans to individuals 38 48 ------ ------ $ 51 $ 51 ====== ====== Nonaccrual loans: Loans secured by real estate $ 397 $ 358 Commercial and industrial loans 8 ------ ------ $ 405 $ 358 ====== ====== -10- ALLOWANCE FOR LOAN LOSSES AND LOAN CHARGE-OFFS In determining the adequacy of the allowance for loan losses, management evaluates past loan loss experience, present and anticipated economic conditions and the credit worthiness of its borrowers. The allowance for loan losses is increased by provisions charged against income and recoveries of loans previously charged off. The allowance is decreased by loans that are determined uncollectible by management and charged against the allowance. Potential problem loans are those loans which are on the Bank's "watch list." These loans exhibit characteristics that could cause the loans to become nonperforming or require restructuring in the future. This "watch list" is reviewed monthly and adjusted for changing conditions. At the end of the first three months, the allowance for loan losses as a percentage of loans was 1.68 percent in 1995, and 1.80 percent in 1994. The provision for loan losses was $60,000 in the three months ended March 31, 1995, and $125,000 for the same period of 1994. The following table contains information relative to loan loss experience for the three months ended March 31, 1995, and the year ended December 31, 1994. Three months ended Year ended March 31, 1995 December 31, 1994 Allowance for loan losses at beginning of period $5,617 $5,226 Loans charged off: Real estate 31 Installment 127 297 Credit card 27 61 Other 1 5 Commercial and collateral 7 38 ------ ------ 162 432 Recoveries on loans charged off: Real estate 2 33 Installment 38 245 Credit card 5 32 Other 1 Commercial and collateral 48 303 ------ ------ 93 614 ------ ------ Net charge-offs (recoveries) 69 (182) Provision for loan losses 60 208 ------ ------ Allowance for loan losses at end of period $5,608 $5,617 ====== ====== Ratio of allowance for loan losses to total loans at end of period 1.68% 1.70% ====== ====== -11- CAPITAL At March 31, 1995, the Corporation's risk-based capital ratios based on Federal Reserve Board guidelines were as follows: Tier 1 "core" capital to risk-weighted assets 13.35 percent Total capital to risk-weighted assets 14.61 percent Tier 1 leverage ratio 8.15 percent These ratios substantially exceed the minimums which are in effect for bank holding companies after the end of 1992. Return on average assets was 1.15 percent for the first quarter of 1995, compared to 0.98 percent for the same period in 1994. Return on average equity was 14.48 percent for the first three months of 1995, compared to 11.97 percent for the first three months of 1994. 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) No exhibits were required to be filed as part of this report. (b) The registrant was not required to file any reports on Form 8-K during the quarter ended March 31, 1995. -12- COBANCORP INC. MARCH 31, 1995 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) Timothy W. Esson May 11, 1995 Executive Vice President -13-