1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to ________
COMMISSION FILE NUMBER: 000-22201
EMERALD FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
OHIO 34-1842953
- -------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
14092 PEARL ROAD
STRONGSVILLE, OHIO 44136
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(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (440) 238-7311
CAPITAL STOCK, WITHOUT PAR VALUE
--------------------------------
Title of Class
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period 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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Capital Stock, No Par Value 10,264,288
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(Class) (Outstanding at April 30, 1998)
2
EMERALD FINANCIAL CORP.
TABLE OF CONTENTS
-----------------
PART I. FINANCIAL INFORMATION PAGE
Item I. Financial Statements:
Consolidated Statements of Financial
Condition as of March 31, 1998, and
December 31, 1997.......................................... 2
Consolidated Statements of Income for
the Three Month Periods Ended March
31, 1998 and 1997.......................................... 3
Consolidated Statements of Cash Flows
for the Three Month Periods Ended March
31, 1998 and 1997.......................................... 4
Notes to Consolidated Financial Statements................. 5
Selected Financial Information....................................... 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 9
Tables..................................................... 19
Item 3. Qualitative and Quantitative Disclosures
about Market Risk......................................... 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................... 23
Item 2. Changes in Securities...................................... 23
Item 3. Defaults on Senior Securities.............................. 23
Item 4. Submission of Matters to a Vote of Shareholders............ 23
Item 5. Other Information.......................................... 23
Item 6. Exhibits and Reports on Form 8-K........................... 23
SIGNATURES .................................................................. 24
EXHIBITS .................................................................... 25
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3
EMERALD FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
MARCH 31, DECEMBER 31,
1998 1997
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(In thousands, except per share data)
ASSETS:
CASH AND CASH EQUIVALENTS
Cash and deposits with banks $ 9,362 $ 7,729
Interest bearing deposits with banks 16,718 3,033
INVESTMENT SECURITIES
Held-to-maturity (fair values of $11,486 and $14,037 at
March 31, 1998 and December 31, 1997, respectively) 11,687 14,231
Available for sale (amortized cost of $35,295 and $31,256 at
March 31, 1998 and December 31, 1997, respectively) 35,597 31,480
MORTGAGE-BACKED SECURITIES
Held-to-maturity (fair values of $24,377 and $26,416 at
March 31, 1998 and December 31, 1997, respectively) 23,844 25,825
Available for sale (amortized cost of $27,379 and $27,209 at
March 31, 1998 and December 31, 1997, respectively) 27,513 27,312
LOANS-NET
(Including allowance for loan losses of $1,740 and $1,625 at
March 31, 1997 and December 31, 1996, respectively) 464,058 461,457
Loans held for sale 1,798 7,823
Accrued interest receivable 3,165 3,343
Federal Home Loan Bank stock-at cost 3,566 3,504
Premises and equipment-net 4,192 4,259
Cash surrender value of life insurance 10,712 10,341
Prepaid expenses and other assets 3,587 3,628
- ---------------------------------------------------------------------------------------------
TOTAL ASSETS $615,799 $603,965
=============================================================================================
LIABILITIES:
Deposits $529,373 $520,690
Federal Home Loan Bank advances 27,824 28,138
Deferred federal income tax 1,884 1,875
Advance payments by borrowers 787 1,574
Accrued interest payable 1,349 1,002
Accounts payable and other 3,731 2,171
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TOTAL LIABILITIES 564,948 555,450
SHAREHOLDERS' EQUITY
Common stock, no par value, 20,000,000 shares authorized,
10,262,288 and 10,145,200 shares issued and outstanding
at March 31, 1998 and December31, 1997, respectively 9,831 9,831
Accumulated other comprehensive income 287 216
Retained earnings 40,733 38,468
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TOTAL SHAREHOLDERS' EQUITY 50,851 48,515
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TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $615,799 $603,965
=============================================================================================
Shareholders' Equity per share $ 4.96 $ 4.78
Tangible Equity per share $ 4.87 $ 4.70
See notes to unaudited consolidated financial statements
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EMERALD FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED MARCH 31,
1998 1997
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(Dollars In thousands, except per share data)
INTEREST INOME
Loans $ 9,411 $ 8,764
Investment securities 637 858
Mortgage-backed securities 869 1,064
Other 243 181
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11,160 10,867
INTEREST EXPENSE
Deposits 6,518 6,357
Advances from the Federal Home Loan Bank 416 370
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6,934 6,727
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NET INTEREST INCOME 4,226 4,140
Provision for loan losses 114 78
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NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 4,112 4,062
NON-INTEREST INCOME
Gain on sale of loans and other assets 374 48
Loan service fees 200 166
Other 461 211
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1,035 425
NON-INTEREST EXPENSE
Salaries and employee benefits 936 1,061
Net occupancy and equipment 406 381
Franchise tax 163 147
Federal deposit insurance 81 76
Amortization of goodwill 28 31
Other 779 590
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Non-interest expense 2,393 2,286
INCOME BEFORE FEDERAL INCOME TAXES 2,754 2,201
Provision for federal income taxes 898 764
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NET INCOME $ 1,856 $ 1,437
=================================================================================
Basic earnings per common share $ 0.18 $ 0.14
Diluted earnings per common share $ 0.17 $ 0.14
See notes to unaudited consolidated financial statements
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5
EMERALD FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED MARCH 31,
1998 1997
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(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,856 $ 1,437
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan losses 114 78
Gain from sale of loans and other assets (374) (48)
Accretion of discounts and other deferred yield items (830) (477)
Depreciation and amortization 183 191
Effect of change in accrued interest
receivable and payable 525 (71)
Federal Home Loan Bank stock dividends (63) (49)
Deferred federal income taxes (28) 10
Net change in other assets and liabilities 1,015 (890)
Proceeds from sale of loans originated for sale 35,289 6,970
Disbursements on loans originated for sale (28,897) (6,135)
- -------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,790 1,016
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans (1,695) (14,624)
Purchases of:
Loans - (4,422)
Mortgage-backed securities available for sale (5,593) (9,011)
Investment securities available for sale (15,202) (2,284)
Investment securities held to maturity (8,600) (2,100)
Premises and equipment (82) (29)
Proceeds from:
Principal repayments and maturities of:
Mortgage-backed securities available for sale 5,423 217
Mortgage-backed securities held to maturity 1,980 1,362
Investment securities available for sale 9,168 -
Investment securities held to maturity 11,144 20,438
Sales of available for sale mortgage-backed securities - -
Sales of available for sale investment securities 1,995 -
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NET CASH USED IN INVESTING ACTIVITIES (1,462) (10,453)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 8,682 18,148
Payments on advances from the Federal Home Loan Bank (314) (7,366)
Proceeds from advances from the Federal Home Loan Bank - 10,000
Net decrease in escrows (787) (772)
Effect of stock options exercised 767 -
Payment of dividends on common stock (358) (304)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 7,990 19,706
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NET CHANGE IN CASH AND CASH EQUIVALENTS 15,318 10,269
CASH AND CASH EQUIVALENTS, AT BEGINNING OF THE PERIOD 10,762 7,552
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CASH AND CASH EQUIVALENTS, AT END OF THE PERIOD $ 26,080 $ 17,821
=========================================================================================================================
See notes to unaudited consolidated financial statements
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6
EMERALD FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
--------------------
Emerald Financial Corp. (Emerald or Company) is a unitary
thrift holding company formed in 1996 which became the parent company of The
Strongsville Savings Bank (Strongsville or Bank) on March 6, 1997, through a
tax-free exchange of shares of Strongsville for shares of Emerald. The Company's
primary holding is The Strongsville Savings Bank. The Bank conducts its
principal activities from its Community Financial Centers ("Offices") located in
southwestern Cuyahoga County, Lorain County and Medina County. The Bank's
principal activities include residential lending and retail banking.
2. BASIS OF PRESENTATION
---------------------
The consolidated financial statements of the Company include
the accounts of Emerald and the accounts of its wholly owned subsidiary, The
Strongsville Savings Bank. All significant inter-company transactions have been
eliminated. In the opinion of management, the accompanying unaudited financial
statements include all adjustments (consisting only of normal recurring
accruals) which the Company considers necessary for a fair presentation of (a)
the results of operations for the three month periods ended March 31, 1998 and
1997; (b) the financial condition at March 31, 1998, and December 31, 1997; and
(c) the statements of cash flows for the three month periods ended March 31,
1998 and 1997. The results of operations for the three month period ended March
31, 1998 are not necessarily indicative of the results that may be expected for
a full year.
Certain prior period data has been reclassified to conform to
current year presentation.
3. STATEMENTS OF CASH FLOWS
------------------------
For purposes of the Statements of Cash Flows, Emerald
considers all cash and deposits with banks with maturities of less than three
months to be cash equivalents.
Income tax payments of $20,000 and $-0- were made during the
three month periods ended March 31, 1998 and 1997, respectively. Interest paid
totaled $6,587,000 and $6,540,000 for the three month periods ended March 31,
1998 and 1997, respectively. There were transfers from loans to real estate
owned of $233,000 with $371,000 in loans made to finance the sale of real
estate owned during the three month period ended March 31, 1998. There were
transfers from
5
7
loans to real estate owned of $535,000 with no loans made to finance the sale of
real estate owned during the three month period ended March 31, 1997.
4. SHAREHOLDERS' EQUITY
--------------------
On April 20, 1998, the board declared a two-for-one stock split in the
form of a 100 percent common stock dividend payable May 15, 1998 to shareholders
of record as of May 1, 1998. The stock split increased the Company's outstanding
common shares from 5.1 million to 10.2 million shares. Shareholders' equity has
been restated to give retroactive recognition to the stock split for all periods
presented. In addition, all references in the consolidated financial statements
and notes thereto to number of shares, per- share amounts, stock option data,
and market prices of the Company's common stock have been restated giving
retroactive recognition to the stock split.
5. EARNINGS PER SHARE
------------------
Basic and diluted earnings per share are presented in accordance with
Statement of Accounting Standards No. 128, Earnings per Share. The following
table reconciles the weighted average shares outstanding and the income
available to common shareholders used for basic and diluted earnings per share.
QUARTER ENDED MARCH 31,
--------------------------------------------------
1998 1997
------------------------- ------------------------
Weighted average number of common
shares outstanding used in basic
earnings per common share calculation 10,198,618 10,123,200
Net dilutive effect of stock options 549,056 171,494
------------------------- ------------------------
Weighted average number of shares
outstanding adjusted for effect of
dilutive securities 10,747,674 10,294,694
========================= ========================
Net income $1,856,000. $1,437,000.
========================= ========================
Basic earnings per common share $ 0.18 $ 0.14
========================= ========================
Diluted earnings per common share $ 0.17 $ 0.14
========================= ========================
6. COMPREHENSIVE INCOME
--------------------
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income, was issued in June 1997 and became effective on January 1,
1998. This statement requires companies to report all items that are recognized
as components of comprehensive income under accounting standards. The Company's
comprehensive income for the quarters ended March 31, 1998 and 1997 are as
follows:
6
8
FOR THE QUARTER ENDED MARCH 31,
1998 1997
------------------------------------
(In thousands)
Net income $1,856 $1,437
Unrealized holding gains (losses) arising
during the period, net of tax effect of
$37,000 and ($60,000) for the periods
ended March 31, 1998 and 1997,
respectively. 71 (117)
Less reclassification adjustment for gains
and losses included in net income -- --
------------------------------------
Comprehensive income $1,927 $1,320
====================================
7. NEW ACCOUNTING STANDARDS
------------------------
The Company adopted Statement of Financial Accountings Standards (SFAS)
No. 131, Disclosures about segments of an Enterprise and Related Information, on
January 1, 1998. This statement provides accounting and reporting standards for
the way pubic enterprises are to report information about operating segments in
annual financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. Management has
determined that adoption of SFAS No. 131 will not result in increased reporting
and disclosure requirements.
The Company adopted SFAS No. 132, Employers' Disclosures about Pensions
and Other Postretirement Benefits, on January 1, 1998. This statement revises
employers' disclosures about pension and other postretirement benefit plans. It
does not change the measurement or recognition of those plans. It standardizes
the disclosure requirements for pensions and other postretirement benefits,
requires additional information on changes in the benefit obligations and fair
values of plan assets that will facilitate financial analysis, and eliminates
certain disclosures. Management has determined that adoption of SFAS No. 132
will not result in increased reporting and disclosure requirements.
7
9
- ------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL INFORMATION
THREE MONTHS ENDED MARCH 31,
1998 1997
- ------------------------------------------------------------------------------------------------------
Unaudited
(Dollars in thousands, except per-share data)
ANNUALIZED RETURNS AND OPERATING RATIOS
Basic earnings per share $ 0.18 $ 0.14
Diluted earnings per share $ 0.17 $ 0.14
Return on Average Assets 1.23% 1.00%
Return on Average Equity 14.93% 13.13%
Noninterest expense to
average assets 1.57% 1.58%
Efficiency ratio 48.40% 49.92%
OTHER SELECTED FINANCIAL RATIOS
Interest rate spread 2.62% 2.60%
Net yield on interest-earning assets 2.92% 2.95%
Yield on average interest-earning assets 7.71% 7.75%
Cost of average interest-bearing liabilities 5.09% 5.15%
Non-performing loans to total loans 0.40% 0.33%
Non-performing assets to total assets 0.45% 0.34%
Net recoveries (charge-offs) to average loans 0.00% 0.00%
Capital ratios:
Tangible capital ratio 7.94% 7.25%
Core capital ratio 7.94% 7.25%
Risk-based capital ratio 13.21% 12.38%
Dividends per share $ 0.035 $ 0.03
Annualized total asset growth 7.84% 14.92%
Average total assets $ 602,211 $ 571,953
Average loans, net (includes held for sale) 465,972 431,952
Average interest-earning assets 578,926 561,253
Average deposits 517,254 497,044
Average advances from the FHLB 27,912 25,841
Average shareholders' equity 49,731 43,754
Weighted average shares outstanding-Basic 10,198,618 10,123,200
Weighted average shares outstanding-Diluted 10,747,674 10,294,694
Shares outstanding at period end 10,262,288 10,123,200
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8
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Part I, Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
- -------
Emerald Financial Corp. (Emerald or Company), a unitary thrift holding
company, became the holding company of The Strongsville Savings Bank
(Strongsville or Bank) in a tax-free exchange of shares of the Bank for shares
of Emerald on March 6, 1997. As a result, Emerald owns and operates the Bank.
The Bank was founded in 1961 as an Ohio-chartered, federally insured savings
association whose business activities are concentrated in the greater Cleveland,
Ohio area. The Company conducts its business through its home office in
Strongsville and its thirteen additional full-service Community Financial
Centers located in Cuyahoga, Lorain and Medina counties.
The Company's principal business has historically been attracting
deposits from the general public and making loans secured by first mortgage
liens on residential and other real estate. The Bank and the banking industry in
general are significantly affected by prevailing economic conditions, the
general level and trend of interest rates as well as by government policies and
regulations concerning, among other things, fiscal affairs, housing and
financial institutions.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- ---------------------------------------------
The Company's total assets at March 31, 1998, were $615.8 million,
representing an increase of $11.8 million, or 7.8%, annualized, for the three
month period and of $27.2 million, or 4.5% for the twelve month period ended
March 31, 1998. The increase in assets was primarily concentrated in interest
bearing deposits with banks.
The Company's deposits were $529.4 million at March 31, 1998,
representing an increase of $8.7 million, or 6.7%, annualized, during the three
month period and of $17.8 million, or 3.5% during the twelve month period ended
March 31, 1998.
Net interest income was $4.2 million for the quarter ended March 31,
1998, an increase of $0.1 million over the first quarter of 1997. The increase
in interest-earning assets combined with an increase in interest rate spread,
caused the improvement. Average interest-earning assets increased $17.6 million
from $561.3 million for the first quarter of 1997 to $578.9 million for the
first quarter of 1998. The Bank's interest rate spread increased 2 basis points
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from 2.60% during the first quarter of 1997 to 2.62% during the first quarter of
1998.
Net income for the first quarter of 1998, at $1.8 million, was $0.4
million more than the $1.4 million for the same period in 1997. The increase was
primarily due to the increase in non-interest income.
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Table 1 presents information regarding the average balances of
interest-earning assets and interest-bearing liabilities, the total dollar
amount of interest income from interest-earning assets and their average yields
and the total dollar amount of interest expense on interest-bearing liabilities
and their average rates. Table 1 also presents net interest income,
interest-rate spread, net interest margin and the ratio of average
interest-earning assets to average interest-bearing liabilities. Interest-rate
spread represents the difference between the weighted average yield on
interest-earning assets and the weighted average cost of interest-bearing
liabilities. Net interest margin represents net interest income as a percent of
average interest-earning assets. Average balance calculations were based on
daily and monthly balances. Assets available for sale are included in the major
asset category as if they were held-to-maturity.
- --------------------------------------------------------------------------------
TABLE 1
AVERAGE BALANCE TABLE
FOR THE THREE MONTHS ENDED MARCH 31,
1998 1997
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
- ------------------------------------------------------------------------------------------------------------------------------
(In thousands)
INTEREST-EARNING ASSETS
Loans, net (1) $ 465,972 $ 9,411 8.08% $ 431,952 $ 8,764 8.12%
Investment securities 44,410 637 5.74% 56,161 858 6.11%
Mortgage-backed securities 52,621 869 6.61% 57,563 1,064 7.40%
Other interest-earning assets 15,923 243 6.10% 15,577 181 4.65%
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 578,926 11,160 7.71% 561,253 10,867 7.75%
Noninterest-earning assets 23,285 10,700
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 602,211 $ 571,953
==============================================================================================================================
INTEREST-BEARING LIABILITIES
Deposits (2) $ 517,254 $ 6,518 5.04% $ 497,044 $ 6,357 5.12%
Advances from FHLB 27,912 416 5.96% 25,841 370 5.73%
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 545,166 6,934 5.09% 522,885 6,727 5.15%
Noninterest-bearing liabilities 7,314 5,314
Shareholders' equity 49,731 43,754
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 602,211 $ 571,953
==============================================================================================================================
Net interest income $ 4,226 $ 4,140
Interest-rate spread 2.62% 2.60%
Net interest margin 2.92% 2.95%
Ratio of average interest-
earning assets to average
interest-bearing liabilities 106.19% 107.34%
- ------------------------------------------------------------------------------------------------------------------------------
(1) Average balances include non-accrual loans. Interest income includes
deferred loan fee amortization of $390,000 and $381,000 for the three
months ended March 31, 1998 and 1997, respectively.
(2) Deposits include noninterest-bearing demand accounts which were
$12,718,000 and $9,880,000 at March 31, 1998 and 1997, respectively.
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Table 2 presents certain information regarding changes in interest income and
interest expense of the Company for the three month periods ended March 31, 1998
and 1997. The table shows the changes in interest income and interest expense by
major category attributable to changes in the average balance (volume) and the
changes in interest rates. The net change not attributable to either rate or
volume is allocated on a prorata basis to the change in rate or volume. Assets
available for sale are included in the major asset category as if they were
held-to-maturity.
TABLE 2
- -------------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCE TABLE
1998 COMPARED TO 1997 1997 COMPARED TO 1996
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGES IN DUE TO CHANGES IN
VOLUME RATE TOTAL VOLUME RATE TOTAL
- -------------------------------------------------------------------------------------------------------------------------------
(In thousands)
INTEREST INCOME ON INTEREST-EARNING ASSETS
Loans, net $ 690 $ (43) $ 647 $ 1,768 $ (301) $ 1,467
Investment securities (171) (50) (221) (272) 33 (239)
Mortgage-backed securities (87) (108) (195) 122 49 171
Other 4 58 62 37 (16) 21
- -------------------------------------------------------------------------------------------------------------------------------
Total 436 (143) 293 1,655 (235) 1,420
- -------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE ON INTEREST-BEARING LIABILITIES
Deposits 262 (101) 161 833 (43) 790
Advances from FHLB 20 26 46 208 (33) 175
- -------------------------------------------------------------------------------------------------------------------------------
Total 282 (75) 207 1,041 (76) 965
- -------------------------------------------------------------------------------------------------------------------------------
CHANGE IN NET INTEREST INCOME $ 154 $ (68) $ 86 $ 614 $ (159) $ 455
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME
- --------------------------------------------------------------------------------
Net interest income is the primary component of net income and is
determined by the characteristics of interest-earning assets and
interest-bearing liabilities, including the spread, or the difference between
the yields earned and the rates paid on those assets and liabilities. Net
interest income is the difference between interest income and interest expense.
Three months ended March 31, 1998
--------------------------------
(Dollars in thousands)
Net interest income:
Current period $ 4,226
Prior period 4,140
--------------------------------
Dollar change from prior period $ 86
--------------------------------
Percent change from prior period 2.08%
================================
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Interest income
- ---------------
Interest income for the three months ended March 31, 1998, was $11.2
million, compared to $10.9 million for the first quarter of 1997, an increase of
$0.3 million or 2.70%. This increase was primarily due to the increase in
average interest-earning assets as demonstrated on Table 2. Average
interest-earning assets increased to $578.9 million for the first quarter of
1998 from $561.3 million for the first quarter of 1997. The effect of the
increase in interest-earning assets was offset somewhat by the 4 basis point
decline in the average yield on interest-earning assets to 7.71% for the first
quarter of 1998 from 7.75% for the like period in 1997.
Interest expense
- ----------------
Interest expense increased during the quarter ended March 31, 1998,
compared to the same period in 1997 primarily due to an increase in average
interest-bearing liabilities of $22.3 million, or 4.26%, offset by a decrease in
the average cost of interest-bearing liabilities. Average interest-bearing
liabilities were $545.2 million and $522.9 million for the first quarter of 1998
and 1997, respectively. The average cost of interest-bearing liabilities
decreased 6 basis points to 5.09% for the first quarter of 1998 from 5.15% for
the same period in 1997. This decrease partially offset the effect of the
increase in interest-bearing liabilities.
Provision for loan losses
- -------------------------
The provision for loan losses for the three months ended March 31,
1998, was $114,000 compared to $78,000 for the same period in 1997. The
provisions for both periods were commensurate with management's estimate of the
credit risk in the loan portfolio. Economic conditions in the Bank's market area
were stable.
Further discussion and other information relating to loan losses and
nonperforming assets are included in the section titled "Asset Quality."
NONINTEREST INCOME
- --------------------------------------------------------------------------------
Three months ended March 31, 1998
------------------------------------
(Dollars in thousands)
Noninterest income:
Current period $1,035
Prior period 425
------------------------------------
Dollar change from prior period $ 610
------------------------------------
Percent change from prior period 143.66%
====================================
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Noninterest income consists primarily of fees earned for servicing
loans and providing services for customers, gains on loan sales and earnings
credited to bank owned life insurance. The increase in noninterest income is
primarily due to an increase in gains on sales of loans. Gains on the sale of
loans were $367,000 during the first quarter of 1998 compared to $42,000 for the
first quarter of 1997. The 1998 gain was higher because more loans were sold
during the first quarter of 1998 than the same period in 1997.
NONINTEREST EXPENSE
- --------------------------------------------------------------------------------
Three months ended March 31, 1998
---------------------------------------
(Dollars in thousands)
Noninterest expense:
Current period $ 2,393
Prior period 2,286
---------------------------------------
Dollar change from prior period $ 107
---------------------------------------
Percent change from prior period 4.72%
=======================================
The increase in noninterest expense is due to the general price
increases and to expenses related to real estate owned during the first quarter
of 1998. Management is pleased with the efficiency ratio of 48.40%, which has
improved from the 49.92% a year ago.
FEDERAL INCOME TAXES
- --------------------------------------------------------------------------------
The Bank provided $898,000 for federal income tax during the first
quarter of 1998 and $764,000 during the like period in 1997. Income before the
provision for federal income taxes increased for the compared periods resulting
in a corresponding increase in the provision for federal income taxes.
FINANCIAL RESOURCES AND LIQUIDITY
- --------------------------------------------------------------------------------
Financial institutions, such as Strongsville Savings, must ensure that
sufficient funds are available to meet deposit withdrawals, loan commitments and
expenses. Management of cash flows requires the anticipation of deposit flows
and loan payments. The Company's primary sources of funds are deposits, and loan
payments. The Bank uses the funds from deposit inflows and loan payments
primarily to originate loans and to purchase investment securities.
At March 31, 1998, loans-in-process to be funded over a future period
of time totaled $35 million, and loan commitments or loans committed but not
closed totaled $55 million. Funding for these amounts is expected to be
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provided by the sources described above. Management believes the Bank has
adequate resources to meet its normal funding requirements.
The Bank is a party to a credit agreement with the Federal Home Loan
Bank of Cincinnati whereby the Bank can obtain advances. The Bank had $28
million in advances outstanding at March 31, 1998.
For an analysis of Emerald's cash flows, refer to the Consolidated
Statements of Cash Flows on page 4. Management believes the Company has adequate
resources to meet its normal funding requirements.
SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Shareholders' equity was $50.9 million at March 31, 1998, an increase
of $2,337,000, or 19.26%, annualized, during the first quarter of 1998. This
increase was primarily the result of net income. Emerald paid dividends in the
first quarter of 1997 of 3.5(cent) per share, an increase of 16.67% over the
3.0(cent) per share dividend paid in the first quarter of 1997.
The Company's return on average assets was 1.23% and return on average
equity was 14.93% for the first quarter of 1998.
At March 31, 1998, the Bank was in excess of all capital requirements
specified by federal regulations as shown by the following table.
TIER 1 LEVERAGE TIER 1 RISK-BASED TOTAL RISK-BASED
CAPITAL CAPITAL CAPITAL
------------------------------------------------------------
(Dollars in thousands)
Capital amount -- Actual $ 48,721 $ 48,721 $ 50,441
Capital amount -- Well capitalized 30,699 22,916 38,193
------------------------------------------------------------
Amount in excess of requirement $18,022 $25,805 $12,248
============================================================
Capital ratio -- Actual 7.94% 12.76% 12.38%
Capital ratio -- Well capitalized 5.00% 6.00% 10.00%
------------------------------------------------------------
Amount in excess of requirement 2.94% 6.76% 2.38%
============================================================
Strongsville Savings' capital levels at March 31, 1998, qualify it as a
"well-capitalized" institution, the highest of five tiers under applicable
federal definitions.
15
17
QUALIFIED THRIFT LENDER TEST
- --------------------------------------------------------------------------------
Savings associations insured by the Savings Association Insurance Fund
of the Federal Deposit Insurance Corporation (FDIC) are required to maintain 65%
of total portfolio assets in Qualified Thrift Investments. As of March 31, 1998,
the Bank had 81.04% of total assets invested in Qualified Thrift Investments.
YEAR 2000 ISSUE
- --------------------------------------------------------------------------------
The Company is aware of the issues associated with the programming code
in existing computer systems as the year 2000 approaches. The Year 2000 (Y2K)
problem is pervasive and complex as virtually every computer operation will be
affected in some way by the rollover of the two digit year value to 00. The
issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause the system to
fail.
The Company is utilizing both internal and external resources to identify,
correct and test the systems for the Y2K compliance. It is anticipated that all
reprogramming efforts will be complete by December 31, 1998, allowing adequate
time for testing. To date, confirmations have been received from Emerald's
primary vendors that plans have been developed and are being implemented to
address processing of transactions in the year 2000. Management estimates that
Y2K compliance expense will amount to approximately $600,000 over the next one
and one half years.
16
18
ASSET QUALITY
- --------------------------------------------------------------------------------
Table 3 sets forth information regarding non-performing assets at March
31, 1998, December 31, 1997, and March 31, 1997.
- --------------------------------------------------------------------------------
TABLE 3
NON-PERFORMING ASSETS ANALYSIS
MARCH 31, DECEMBER 31, MARCH 31,
1998 1997 1997
- ----------------------------------------------------------------------------------------------
(Dollars In thousands)
NON-ACCRUING LOANS
1-4 family - permanent $ 507 $ 156 $ 407
1-4 family - construction 459 692 -
Multi-family and Commercial
real estate - - -
Land and development 181 181 -
Commercial non-real estate 371 370 -
Consumer and other 38 29 14
- ----------------------------------------------------------------------------------------------
Total 1,556 1,428 421
LOANS DELINQUENT 90 DAYS OR MORE
AND STILL ACCRUING
1-4 family - permanent 304 716 442
1-4 family - construction - - 591
Multi-family and Commercial
real estate - - -
Land and development - - -
Commercial non-real estate - - -
Consumer and other - - -
- ----------------------------------------------------------------------------------------------
Total 304 716 1,033
Total non-performing loans 1,860 2,144 1,454
Investments, net of allowance for credit
losses of $162,000 at March 31, 1998
December 31,1997 446 486 -
Real estate owned 493 683 535
- ----------------------------------------------------------------------------------------------
Total non-performing assets $2,799 $3,313 $1,989
==============================================================================================
Allowances for loan losses $1,740 $1,625 $1,500
==============================================================================================
Non-performing loans to total loans-net 0.40% 0.45% 0.33%
Non-performing assets to total assets 0.45% 0.55% 0.34%
Allowance for loan losses to ending
loan balance (before allowance) 0.37% 0.35% 0.34%
Allowance for loan losses to
non-performing loans 93.55% 75.80% 103.15%
- ----------------------------------------------------------------------------------------------
17
19
Table 4 presents information concerning activity in the allowance for
loan losses during the quarters ended March 31, 1998 and 1997.
- --------------------------------------------------------------------------------
TABLE 4
ACTIVITY IN THE ALLOWANCE FOR LOAN LOSSES
FOR THE THREE MONTHS ENDED
MARCH 31,
1998 1997
- --------------------------------------------------------------------------------------
(Dollars in thousands)
Allowance at the beginning of the period $ 1,625 $ 1,423
Provision charged to expense 114 78
Charge-offs:
1-4 family - permanent - -
1-4 family - construction - -
Multi-family and Commercial
real estate - -
Land and development - -
Commercial non-real estate - -
Consumer and other - 5
- --------------------------------------------------------------------------------------
- 5
Recoveries
1-4 family - permanent - -
1-4 family - construction - -
Multi-family and Commercial
real estate - -
Land and development - -
Commercial non-real estate - -
Consumer and other 1 4
- --------------------------------------------------------------------------------------
1 4
- --------------------------------------------------------------------------------------
Net recoveries (charge-offs) 1 (1)
- --------------------------------------------------------------------------------------
Allowance at the end of the period $ 1,740 $ 1,500
======================================================================================
The amount of the allowance for loan losses is based on management's
analysis of risks inherent in the various segments of the loan portfolio,
management's assessment of known or potential problem credits which have come to
management's attention during the ongoing analysis of credit quality, historical
loss experience, current economic conditions, and other factors. Loan loss
estimates are reviewed periodically, and adjustments, if any, are reported in
earnings in the period in which they become known.
18
20
Table A sets forth the composition of the Bank's loan portfolio at
March 31, 1998, December 31, 1997, and March 31, 1997.
- --------------------------------------------------------------------------------
TABLE A
LOAN PORTFOLIO COMPOSITION
MARCH 31, 1998 DECEMBER 31, 1997 MARCH 31, 1997
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
- -----------------------------------------------------------------------------------------------------------------------------
REAL ESTATE MORTGAGE LOANS: (Dollars In thousands)
Permanent first mortgage loans:
1-4 family $ 321,019 69.18% $ 319,796 69.30% $ 309,317 69.59%
Multi-family 868 0.19% 924 0.20% 1,020 0.23%
Commercial real estate 49,372 10.63% 52,499 11.38% 53,073 11.94%
Land 453 0.10% 553 0.12% 136 0.03%
- -----------------------------------------------------------------------------------------------------------------------------
Total permanent mortgage loans 371,712 80.10% 373,772 81.00% 363,546 81.79%
- -----------------------------------------------------------------------------------------------------------------------------
Construction first mortgage loans:
Residential development 62,499 13.46% 56,217 12.18% 58,377 13.12%
1-4 family 38,698 8.34% 37,413 8.11% 38,956 8.76%
Multi-family 1,050 0.23% 1,050 0.23% 80 0.02%
Commercial real estate 7,777 1.68% 6,879 1.49% 1,869 0.43%
- -----------------------------------------------------------------------------------------------------------------------------
Total construction loans 110,024 23.71% 101,559 22.01% 99,282 22.33%
- -----------------------------------------------------------------------------------------------------------------------------
Total mortgage loans 481,736 103.81% 475,331 103.01% 462,828 104.12%
- -----------------------------------------------------------------------------------------------------------------------------
OTHER LOANS
Commercial 6,169 1.33% 5,736 1.24% 4,611 1.04%
Consumer 16,189 3.49% 15,460 3.35% 9,968 2.24%
- -----------------------------------------------------------------------------------------------------------------------------
Total other loans 22,358 4.82% 21,196 4.59% 14,579 3.28%
- -----------------------------------------------------------------------------------------------------------------------------
Total loans 504,094 108.63% 496,527 107.60% 477,407 107.40%
Less:
Loans in process 35,039 7.55% 30,015 6.50% 27,573 6.20%
Allowance for loan losses 1,740 0.38% 1,625 0.35% 1,500 0.34%
Deferred yield items 3,258 0.70% 3,430 0.75% 3,820 0.86%
- -----------------------------------------------------------------------------------------------------------------------------
40,037 8.63% 35,070 7.60% 32,893 7.40%
- -----------------------------------------------------------------------------------------------------------------------------
Total loans held for investment-Net $ 464,057 100.00% $ 461,457 100.00% $ 444,514 100.00%
=============================================================================================================================
Real estate loans held for sale $ 1,798 $ 7,823 $ -
=============================================================================================================================
- -----------------------------------------------------------------------------------------------------------------------------
19
21
Table B sets forth the activities in the Bank's loan portfolio for the
three month periods ended March 31, 1998, and 1997.
- -----------------------------------------------------------------------------
TABLE B
ACTIVITY IN THE LOAN PORTFOLIO
FOR THE QUARTER ENDED
MARCH 31,
1998 1997
- -----------------------------------------------------------------------------
(In thousands)
PERMANENT MORTGAGE LOAN ORIGINATIONS
1-4 family $ 42,958 $ 19,263
Multi-family - -
Commercial real estate 919 1,460
Land 500 80
- -----------------------------------------------------------------------------
44,377 20,803
CONSTRUCTION FIRST MORTGAGE LOAN ORIGINATIONS
Residential development 19,304 11,494
1-4 family 11,618 8,258
Multi-family - -
Commercial real estate 1,315 908
- -----------------------------------------------------------------------------
32,237 20,660
NONMORTGAGE LOANS
Commercial 628 465
Consumer 3,540 5,562
- -----------------------------------------------------------------------------
4,168 6,027
- -----------------------------------------------------------------------------
TOTAL LOAN ORIGINATIONS 80,782 47,490
PURCHASED LOANS
Commercial real estate - 4,422
- -----------------------------------------------------------------------------
TOTAL NEW LOANS 80,782 51,912
LESS
Principal repayments 43,571 25,391
Loan sales 35,751 7,033
- -----------------------------------------------------------------------------
79,322 32,424
- -----------------------------------------------------------------------------
NET INCREASE IN LOANS $ 1,460 $ 19,488
=============================================================================
- -----------------------------------------------------------------------------
20
22
Table C sets forth the composition of the Bank's deposits by interest
rate category at March 31, 1998, December 31, 1997, and March 31, 1997.
- -------------------------------------------------------------------------------------------------------------------------------
TABLE C
DEPOSIT COMPOSITION
------------------------------------------------------------------------------------------------
MARCH 31, 1998 DECEMBER 31, 1997 MARCH 31, 1997
WTD AVG WTD AVG WTD AVG
COST AMOUNT PERCENT COST AMOUNT PERCENT COST AMOUNT PERCENT
- -------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
PASSBOOK ACCOUNTS 2.90% $ 51,180 9.67% 2.93% $ 51,629 9.91% 2.90% $ 46,360 9.06%
NOW ACCOUNTS 1.96% 34,487 6.51% 2.02% 33,976 6.52% 1.99% 30,866 6.03%
MONEY MARKET DEPOSIT ACCOUNTS 2.53% 18,406 3.48% 2.53% 15,506 2.98% 2.53% 17,481 3.42%
COMMERCIAL ACCOUNTS 0.00% 11,665 2.20% 0.00% 12,992 2.50% 0.00% 9,880 1.93%
- -------------------------------------------------------------------------------------------------------------------------------
2.27% 115,738 21.86% 2.27% 114,103 21.91% 2.30% 104,587 20.44%
CERTIFICATES OF DEPOSIT:
4.50% and less 4.00% 23,158 4.37% 4.01% 26,391 5.07% 2.52% 1,494 0.29%
4.51% to 5.50% 5.36% 57,328 10.83% 5.38% 52,424 10.07% 5.31% 101,594 19.86%
5.51% to 6.50% 6.05% 273,777 51.72% 6.04% 264,388 50.78% 6.02% 227,578 44.48%
6.51% to 7.50% 7.36% 51,761 9.78% 7.36% 55,516 10.66% 7.32% 67,653 13.22%
7.51% and greater 8.95% 7,611 1.44% 8.92% 7,868 1.51% 8.86% 8,713 1.70%
- -------------------------------------------------------------------------------------------------------------------------------
6.05% 413,635 78.14% 6.06% 406,587 78.09% 6.11% 407,032 79.56%
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS 5.23% $ 529,373 100.00% 5.23% $520,690 100.00% 5.33% $511,619 100.00%
============================================================================================================================
- -------------------------------------------------------------------------------------------------------------------------------
Table D sets forth the remaining terms to maturity for the certificates
of deposit at March 31, 1998.
TABLE D
CERTIFICATES OF DEPOSIT MATURING/REPRICING DURING:
(In Thousands)
The year ending March 31, 1999 $ 277,213
The year ending March 31, 2000 65,290
The year ending March 31, 2001 27,350
The year ending March 31, 2002 7,420
The year ending March 31, 2003 5,004
After March 31, 2003 31,358
============================================================
$ 413,635
============================================================
21
23
Part I, Item 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's asset and liability management program is intended to
minimize the impact of significant changes in interest rates on net interest
income and net portfolio value. The Executive Committee of the Bank, which
includes representatives from the Board and from senior management, monitors and
evaluates methods for managing interest rate risk within acceptable levels as
determined by the Board of Directors. If projected changes in the Bank's net
portfolio value are not within the limits established by the Board, the Board
may direct management to change the asset and liability mix to bring interest
rate risk within such approved limits. Management believes the keys to
successful interest rate and credit risk management include the monitoring and
management of interest rate sensitivity and the quality of assets, discussed
above. Interest rate risk is the risk that net interest income or net portfolio
value will decline significantly in periods of changing interest rates.
Strongsville Savings has endeavored to buffer net income from the
effect of changes in interest rates by reducing the maturity or repricing
mismatch between its interest-earning assets and interest-bearing liabilities.
The Bank's strategy includes originating adjustable rate mortgage (ARM) loans,
selling certain fixed-rate residential mortgage loans to the Federal Home Loan
Mortgage Corporation (Freddie Mac) and investing in securities with short to
medium terms.
The Company's investment portfolio consists primarily of investment
grade corporate debt, government agency debt and mortgage-backed securities
issued by government agencies. Substantially all of the corporate debt and
government agency debt mature in three years or less.
The Company's strategy to reduce the maturity or repricing mismatch
between its interest rate sensitive assets and liabilities includes reducing the
terms to maturity of its long-term interest-earning assets, as noted above, and
lengthening the terms to repricing or maturity of its interest-bearing
liabilities.
A common industry measure of a financial institution's general
sensitivity to interest rates is called the gap (the GAP). The GAP represents
the difference between the Company's interest-earning assets and
interest-bearing liabilities maturing within certain time frames as a percent of
the Company's total assets. Management believes there have been no significant
changes in the Company's GAP during the quarter ended March 31, 1998.
22
24
PART II
ITEM 1 Legal Proceedings
-----------------
There were no legal proceedings requiring disclosure during the
quarter.
ITEM 2 Changes in Securities
---------------------
There were no changes in securities during the quarter.
ITEM 3 Defaults of Senior Securities
-----------------------------
There were no defaults of senior securities during the quarter.
ITEM 4 Submission of Matters to a Vote of Security Holders
----------------------------------------------------
There were no items submitted to a vote by security holders during the
quarter.
ITEM 5 Other Information
-----------------
There is no other information to be reported.
ITEM 6 Exhibits and Reports on Form 8-K
--------------------------------
(a) Not applicable
(b) No reports on Form 8-K were filed during the quarter.
23
25
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.
EMERALD FINANCIAL CORP.
(Registrant)
Date May 14, 1998 /s/ THOMAS P. PERCIAK .
------------ --------------------------------------
Thomas P. Perciak,
President & Chief Executive Officer
Date May 14, 1998 /s/ JOHN F. ZIEGLER .
------------ --------------------------------------
John F. Ziegler,
Executive Vice President &
Chief Financial Officer
24
26
INDEX TO EXHIBITS
Page No.
--------
Exhibit 11. COMPUTATION OF EARNINGS PER SHARE 26
Exhibit 27. FINANCIAL DATA SCHEDULE 27
25