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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 1998
[_] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________ to ________
COMMISSION FILE NUMBER: 000-22201
EMERALD FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
Ohio 34-1842953
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(State or other jurisdiction of (I.R.S. 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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to
Section 12(g) of the Act: Common Stock, without par value
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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 [_] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The registrant's voting stock is authorized for quotation on the National
Association of Securities Dealers Automated Quotation System National Market
System under the symbol "EMLD." As of February 28, 1999, the registrant had
10,968,551 shares of common stock, without par value, outstanding. The aggregate
market value of the voting stock held by nonaffiliates of the registrant, based
on the average of the bid and asked prices of such stock as of February 28,
1999, was $103,081,979.
DOCUMENTS INCORPORATED BY REFERENCE
None
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TABLE OF CONTENTS
Part I Page
Item 1. Business 2
Item 2. Properties 34
Item 3. Legal Proceedings 35
Item 4. Submission of Matters to a Vote of Shareholders 35
Part II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 36
Item 6. Selected Financial Data 37
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 39
Item 7A Quantitative and Qualitative Disclosures About Market
Risk 51
Item 8. Financial Statements and Supplementary Data 54
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 90
Part III
Item 10. Directors and Executive Officers of the Registrant 90
Item 11. Executive Compensation 93
Item 12. Security Ownership of Certain Beneficial Owners and
Management 106
Item 13. Certain Relationships and Related Transactions 109
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 109
Signatures 110
When used in this Form 10-K or future filings by the Company with the Securities
and Exchange Commission, in the Company's press releases or other public or
stockholder communications, or in oral statements made with the approval of an
authorized executive officer, the words or phrases "would be", "estimate", "will
allow", "intends to", "will likely result", "are expected to", "will continue",
"is anticipated", "project", or similar expressions are intended to identify
"forward looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995.
The Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and to advise
readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities and competitive and regulatory
factors, could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected.
The Company does not undertake, and specifically disclaims any obligation, to
update any forward looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements.
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PART I
Item 1. Business
BUSINESS
General
Emerald Financial Corp. (Emerald or Company), an Ohio corporation organized in
1996 for the purpose of becoming a holding company, owns all the outstanding
common stock of The Strongsville Savings Bank (Strongsville Savings or Bank).
Emerald is a unitary thrift holding company which, under current laws, has very
few restrictions on permissible types of business activities. Emerald became the
holding company of Strongsville Savings 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 and its subsidiary on a consolidated basis. In addition,
Emerald formed Emerald Development Corp., a wholly owned subsidiary on June 3,
1997. The development company was formed to take advantage of opportunities to
develop real estate as well as to enter into joint real estate development
ventures in the future.
Unless the context otherwise requires, Emerald, the Bank, and their subsidiaries
are hereinafter collectively referred to as the "Company." See "Management's
Discussion and Analysis of Financial Condition and Results of Operations-General
set forth in Item 7 to this Form 10-K.
Founded in 1961, Strongsville Savings is an Ohio-chartered, federally insured
savings association whose business activities are concentrated in the greater
Cleveland, Ohio area. The Bank offers a wide range of consumer-oriented lending
and deposit products and services and is active in the origination of loans to
developers and builders of residential real estate within its market area. In
conducting the Bank's lending operations, management maintains strict
underwriting criteria and closely monitors the Bank's loan portfolio.
The Bank conducts its business through its home office in Strongsville and its
Community Financial Centers in Berea, Brecksville, Broadview Heights, North
Royalton, Parma Heights, and Westlake (Cuyahoga County); Brunswick, Hinckley and
Medina Township (Medina County); and Avon, Avon Lake, Columbia Station, North
Ridgeville, and Wellington (Lorain County). The Bank anticipates opening an
office in Northfield Center (Summit County) in the fourth quarter of 1999.
The Bank's headquarters office is located at 14092 Pearl Road, Strongsville,
Ohio 44136, and the Bank's telephone number at that address is (440) 238-7311.
The Bank began operations in 1961 as an Ohio-chartered stock savings and loan
association and changed its name from The Strongsville Savings and Loan
Association to The Strongsville Savings Bank in 1984. Substantially all of the
Bank's business activities are focused in Cuyahoga, Medina, Lorain, and Summit
Counties. The Bank conducts its lending and deposit-gathering activities through
its headquarters in Strongsville, Cuyahoga County, Ohio, and through its network
of area Community Financial Centers in the suburbs to the south and west of
Cleveland, Ohio.
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The Bank developed a well-balanced branch network in the suburbs to the south
and west of Cleveland. The Bank's branch network provides the Bank a stable,
low-cost, consumer-oriented deposit base in the many established communities of
its market area. The Bank's research and close relationships with area real
estate professionals was beneficial in the Bank's residential development niche
in such communities as Strongsville, Westlake, Brecksville, Hinckley, North
Ridgeville, North Royalton, Avon and Avon Lake. Management expects these
communities to be among the major growth areas in Cuyahoga and the contiguous
counties into the next century. In 1996 and 1999, the Bank opened offices in
Avon and Avon Lake, respectively. Both of these cities are expanding markets for
residential growth. Management has also applied to the State of Ohio to open an
office in Northfield Center, another growing community.
The Bank is very active in the origination of loans to developers and builders
of residential housing in its market area, including loans to (i) acquire lots
and land for residential subdivision, (ii) to develop raw land by financing the
cost of improvements such as streets, sewers and utilities, and (iii) to
construct houses on such improved property. The Bank's franchise is expected to
provide the Bank with a stable source of real estate construction and mortgage
loan originations through 2000 and beyond.
The Bank offers a wide range of consumer-oriented lending and deposit products
and services to the residents in its market area. The Bank currently is a
leading residential real estate construction lender in Cuyahoga, Medina and
Lorain Counties. Central to the Bank's operating philosophy is the development
and maintenance of strong personal relationships with local realtors, builders,
developers, public officials and other real estate-related professionals.
The Bank is a community-oriented financial institution serving its market area
with a wide selection of residential loans and retail financial services,
emphasizing customer service. The Bank's services include consumer and
commercial checking accounts, savings accounts, certificates of deposit,
residential and commercial real estate loans, home equity lines of credit, and
secured and unsecured consumer loans and rental of safe-deposit boxes. The
Company's branch network is comprised of fifteen full-service banking offices,
twelve proprietary ATMs, access to a network of metropolitan, regional and
national ATMs, and electronic fund transfer services. The Bank has historically
concentrated its business activities in the Northeastern Ohio area, primarily
Cuyahoga, Lorain, Medina, and Summit Counties.
The Bank's business consists primarily of attracting deposits from the general
public and originating and investing in loans secured by first mortgage liens on
residential and other real estate primarily in Northeastern Ohio. The Bank also
invests in certain government obligations and other investments permitted by
federal law and regulations. The principal source of funds for the Bank's
lending activities are increases in deposit accounts, principal and interest
payments of loans and proceeds from the sale of loans. The Bank's principal
source of earnings is interest income from loans and other interest-earning
assets. Its principal expenses are interest paid on deposit accounts and
operating expenses.
Management recognizes that the thrift industry is changing rapidly.
Consumer-oriented services historically provided by banks and thrifts are now
being offered by other entities, such as insurance companies and brokerage
firms. To compete effectively in this environment, the Bank's goal is to provide
its customers with a consumer-oriented institution where a wide range of
financial needs
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can be met, including a full range of deposit services such as ATM services, NOW
checking accounts, IRA and Keogh investment accounts and certificates of deposit
with terms ranging from seven days to ten years. The Bank's consumer-oriented
products also include mortgage loan, construction loans, home equity lines of
credit, various consumer loan products to finance automobiles, home
improvements, education and VISA(R) and MasterCard(R) credit cards.
Recent Developments
On March 1, 1999, Emerald and Fifth Third Bancorp (Fifth Third), an Ohio
corporation, entered into an Affiliation Agreement (Merger Agreement), pursuant
to which Emerald will merge with and into Fifth Third through a tax-free,
stock-for-stock exchange, with Fifth Third as the surviving corporation
(Merger). Under the terms of the Merger Agreement, upon consummation of the
Merger each share of Emerald common stock issued and outstanding immediately
prior to the effective time of the Merger shall be converted into the right to
receive 0.3 of a share of Fifth Third common stock.
The Merger, which would be accounted for as a pooling of interests, is expected
to close in August 1999. The Merger Agreement has been approved by the boards of
directors of both companies. Consummation of the Merger is subject to certain
customary conditions, including, among others, the adoption of the Merger
Agreement by Emerald shareholders and receipt of regulatory approvals.
Director Joan M. Dzurilla has entered into a Shareholder Support Agreement with
Fifth Third pursuant to which she agreed to vote her shares owned of Emerald in
favor of the Merger Agreement. The Shareholder Support Agreement was executed as
a condition of and inducement of Fifth Third entering into the Merger Agreement.
Lending Activities
General. The Bank's primary lending activity is originating conventional first
mortgage loans for the purchase of residential real property. Conventional loans
are loans which are not insured by the Federal Housing Administration or
partially guaranteed by the Veterans Administration. Within this category, the
largest portion of the Bank's loans are made to home buyers on the security of
single-family dwellings. At December 31, 1998, the Bank's net loans receivable
totaled $532.1 million, representing approximately 79.6% of its total assets. At
that date, 73.0% of total mortgage loans consisted of loans secured by first
mortgage liens on residential properties.
In order to manage interest rate risk in the loan portfolio, the Bank has
implemented a number of measures designed to provide more frequent interest rate
adjustments on interest-earning assets so more interest-earning assets would
respond to increases in interest rates on basis similar to that of
interest-bearing liabilities. These measures were designed to reduce adverse
effects on net interest income during periods of rising interest rates. These
measures include: (i) origination of permanent mortgage loans with adjustable
interest rates on residential properties and other real estate, (ii) origination
of residential construction and development loans with adjustable interest
rates, (iii) origination of nonresidential construction loans with adjustable
interest rates and (iv) purchases of loans with adjustable interest rates which
meet the Bank's underwriting standards. At December 31, 1998, approximately
$264.7 million (49.7% of total loans) were comprised of loans described above.
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1-to-4 Family Residential Real Estate Lending. The cornerstone of the Bank's
lending program has been the origination of permanent loans, secured by
mortgages on owner-occupied, 1-to-4 family residences. At December 31, 1998,
$364.8 million, or 65.5%, of the Bank's mortgage loans consisted of permanent
loans on 1-to-4 family residences. Substantially all of these loans were secured
by properties located in the Bank's primary market area.
The Bank originates a variety of different types of residential loans including
conventional 15- and 30- year fixed-rate loans, one- and three-year ARM's and,
to a lesser extent, 10- and 20-year fixed rate loans. During recent years, in
order to meet consumer demand and maximize the yield on its residential loan
portfolio, the Bank has originated fixed rate loans which qualify for sale to
the secondary market, primarily the Federal Home Loan Mortgage Corporation
("Freddie Mac"). The Bank's fixed-rate residential loans are underwritten and
documented to permit their sale to the secondary market and the Bank has sold
certain qualifying residential loans to Freddie Mac. Loans sold to Freddie Mac
are on a nonrecourse basis. The Bank also originates ARM's, although, in order
to maintain its interest rate spread, the Bank generally does not offer
discounted initial interest rates.
The Bank's current 1-to-4 family permanent residential ARM's are fully
amortizing loans with contractual maturities of up to 30 years. The Bank's ARM
products carry interest rates which are reset to a stated margin over an index
based on the one- or three-year U.S. Treasury Constant Maturities Index.
Increases or decreases in the interest rate of the Bank's ARM loans based on the
one- or three-year U.S. Constant Maturities index are generally limited to 2% at
any adjustment period and a maximum of 5% or 6% over the life of the loan,
depending on whether the loan resets at one- or three-year intervals,
respectively. The Bank's ARM's are not convertible into fixed-rate loans, do not
contain prepayment penalties and do not produce negative amortization. The
Bank's ARM's are assumable, providing the assuming borrower meets the same
underwriting criteria as a borrower on a newly originated loan. At December 31,
1998 the total balance of 1-to-4- family permanent residential ARM's was $66.0
million, or 18.1% of the Bank's 1-to-4 family permanent mortgage loan portfolio.
The Bank evaluates both the borrower's ability to make principal and interest
payments and the value of the property that will secure the loan. The Bank
originates residential mortgage loans with loan-to-value ratios of up to 97%. On
any mortgage loan exceeding an 80% loan-to-value ratio at the time of
origination, however, the Bank requires private mortgage insurance in an amount
intended to reduce the Bank's exposure to 80% of the appraised value of the
underlying collateral. Property securing real estate loans made by the Bank is
generally appraised by independent fee appraisers selected by the Bank and
subject to review by the management and Board of Directors of the Bank. The Bank
requires evidence of marketable title and lien position on all loans secured by
real property and requires fire and extended coverage casualty insurance in
amounts at least equal to the principal amount of the loan or the value of
improvements on the property, depending on the type of loan. The Bank may also
require flood insurance to protect the property securing its interest.
The Bank's fixed-rate residential mortgage loans customarily include
"due-on-sale" clauses, which are provisions giving the Bank the right to declare
a loan immediately due and payable in the event the borrower sells or otherwise
disposes of the real property subject to the mortgage and the loan is
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not repaid. The Bank enforces due-on-sale clauses on fixed-rate mortgage loans
to the extent permitted under applicable laws.
Residential mortgage loan originations come from a number of sources, including
solicitations by the Bank, referrals by builders and real estate brokers,
existing borrowers and depositors and walk-in customers. Loan applications are
accepted at all of the Bank's offices.
The Bank's permanent multi-family and commercial real estate loan portfolio
includes loans secured by small apartment buildings, strip shopping centers,
small office buildings, churches and other business properties, generally
located within the Bank's primary market area.
Permanent multi-family and commercial real estate loans generally have terms of
15 years or less; the maximum term available is 25 years. These loans typically
do not have balloon features. Interest rates on permanent loans generally adjust
(subject, in some cases, to specified interest rate caps) based on the Bank's
prime interest rate or at one- or three-year intervals to specified spreads over
the related U.S. Treasury Constant Maturities Index. Multi-family loans and
commercial real estate loans are generally written in amounts up to 80% and 75%,
respectively, of the appraised value of the property or sale price, whichever is
less.
Appraisals on properties securing multi-family and commercial real estate
property loans originated by the Bank are performed by independent fee
appraisers designated by the Bank at the time the loan application is made. All
appraisals on multi-family and commercial real estate loans are reviewed by the
Bank's management. The Bank's underwriting procedures generally require
verification of the borrower's credit history, income, financial statements,
banking relationships, references and income projections of the property. The
Bank generally requires the submission of annual financial statements to the
Bank for the life of the loan. Typically, the Bank requires the owners,
principal shareholders or general partners of business, corporate or partnership
borrowers to be personally liable for multi-family and commercial real estate.
Multi-family and commercial real estate loans generally present a higher level
of risk than loans secured by 1-to-4 family residences. This greater risk is due
to several factors, including the concentration of principal in a limited number
of loans and borrowers, the effects of general economic conditions on
income-producing properties and the increased difficulty of evaluating and
monitoring these type loans. Furthermore, the repayment of loans secured by
multi-family and commercial real estate is typically dependent upon the
successful operation of the related real estate project. If the cash flow from
the project is reduced (for example, if leases are not obtained or renewed), the
borrower's ability to repay the loan may be impaired.
Construction and Development Lending. The Bank makes construction loans to
individuals for the construction of their residences as well as to the builders
and developers for the construction of 1-to-4 family residences and the
acquisition and development of 1-to-4 family lots in the Bank's primary market
area.
Construction loans to individuals for their residences are structured to be
converted to permanent loans at the end of the construction phase, which
typically lasts six months. These construction loans have rates and terms
similar to any 1-to-4 family loan then offered by the Bank, except that during
the construction phase, the borrower pays interest only. Residential
construction loans are
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generally underwritten pursuant to the same guidelines used for originating
permanent residential loans. At December 31, 1998, the Bank had $11.9 million in
construction loans to individuals for construction of their personal residences.
Construction loans to builders of 1-to-4 family residences require the monthly
payment of interest and typically have terms of up to 12 months, with the
maximum possible term being 24 months. These loans may provide for the payment
of interest and loan fees from loan proceeds and carry interest rates which
adjust primarily with changes in the Bank's prime interest rate. Loan commitment
and origination fees are usually charged. At December 31, 1998, the Bank had
$29.6 million of construction loans to builders of 1-to-4 family residences.
The Bank also makes loans to developers for the purpose of acquiring unimproved
land and developing such land into improved sublots for residential development.
The Bank only makes such residential land acquisition and development loans if
the Bank has received assurances from local planning commissions that the land
will be considered developable and zoned residential. These loans typically have
terms from one to three years (with the maximum term being five years) and
primarily carry interest rates which adjust to maintain a specified spread over
the prime rate and, to a lesser extent, adjust (subject, in some cases, to
interest rate caps) at one, two or three-year intervals to specified spreads
over the related U.S. Treasury Constant Maturities Index. Loan commitment and
origination fees, in the form of points, are usually charged. These loans
generally provide for the payment of loan fees from loan proceeds. The principal
is typically paid down as improved lots are sold. At December 31, 1998, The Bank
had $88.2 million of residential development loans.
Construction and development loans are obtained principally through
solicitations of the Bank and through continued business from builders and
developers who have previously borrowed from the Bank as well as referrals of
builders and developers. The application process includes a submission to the
Bank of accurate plans, specifications, and costs of the project to be
constructed or developed, as well as both personal and corporate tax returns,
both personal and corporate financial statements and environmental underwriting
analysis. These items are used as the basis to determine the appraised value of
the subject property and the debt-servicing ability of the borrower. Loans are
based on the lesser of current appraised value or the cost of construction (land
plus building).
Acquisition and development loans to finance the cost of acquiring unimproved
property for future residential subdivision and improving such property are
generally made up to a maximum loan-to-value ratio of 75% based upon an
independent appraisal. Construction loans to finance the costs of building
residential houses are generally made up to a maximum loan-to-value ratio of 80%
based upon an independent appraisal. Construction and development loans to
borrowers other than owner occupants also involve many of the same risks
discussed above regarding multi-family and commercial real estate loans and tend
to be more sensitive to general economic conditions than many other types of
loans.
At December 31, 1998, the Bank had five construction and development loan
borrowers having aggregate loans in an amount greater than $8.0 million (15% of
then tangible capital) which totaled $52.5 million. All construction and
development loans were in compliance with applicable lending limits. The Office
of Thrift Supervision (OTS) made special loans-to-one-borrower lending
authorities available to the Bank on January 2, 1990 which permit the Bank to
lend up to 30% of
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tangible capital to one borrower for the development of residential housing. The
special loans-to-one-borrower lending authority granted to the Bank is renewable
annually and was most recently renewed in October 1998. For a discussion of the
regulatory requirements incident to the Bank's usage of the special lending
authorities, see "REGULATION - Federal Regulation - Loans to One Borrower and
Aggregate Loan Limits". The Bank expects the 15% limit on loans to one borrower
to represent no significant impediment to its lending function as its tangible
capital continues to grow.
As of December 31, 1998, the Bank had seventeen borrowers having aggregate loans
for residential acquisition, development and construction purposes exceeding $1
million. No such loans were nonperforming as of that date.
Construction loans involve greater underwriting and default risks than loans
secured by mortgages on existing properties. These loans can involve large loan
balances concentrated in a single borrower or a group of borrowers in the same
industry. Loan funds are advanced upon the security of the project under
construction, which is more difficult to value prior to the completion of
construction. Should a default occur which results in foreclosure, the Bank
could be adversely affected in that it would have to take control of the project
and attempt either to arrange for completion of construction or to dispose of
the unfinished project.
The Bank's underwriting criteria are designed to evaluate and minimize the risk
of each construction loan. A wide variety of factors are carefully considered
before originating a construction loan, including the availability of permanent
financing or a takeout commitment to the borrower (which may be provided by the
Bank at market rates); the reputation of the borrower and the contractor;
independent valuations and reviews of cost estimates; preconstruction sale
information and cash flow projections of the borrower. At the time of the Bank's
origination of a construction loan to a builder, the builder often has a signed
contract with a purchaser for the sale of the to-be-constructed house, which, by
assuring the builder of a repayment source, reduces the Bank's underwriting
risks on the construction loan. To reduce the risks inherent in construction
lending, the Bank limits the number of properties which can be constructed on a
"speculative" or unsold basis by a builder at any one time to two houses and
requires the borrower or its principals personally to guarantee repayment of the
loan. Moreover, the Bank controls certain of the risks associated with
construction lending by requiring builders to submit itemized bills to the Bank,
whereupon the Bank disburses the builder's loan funds directly to the contractor
and subcontractors, rather than to the builder.
Consumer Loans. Ohio and federal laws and regulations permit an Ohio-chartered,
federally insured savings association such as the Bank to make secured and
unsecured consumer loans, and home improvement loans.
The Bank offers automobile loans, home equity lines of credit, home improvement,
and other secured and unsecured personal loans. These loans generally have fixed
interest rates and terms of five years or less, with the exception of home
equity lines of credit and home improvement loans. Home equity lines of credit
have adjustable rates based on the Bank's prime interest rate and typically have
terms of ten years. Home improvement loans have fixed interest rates and have
terms no longer than fifteen years. These rates are generally higher than the
rates offered on mortgage loans. The Bank also offers VISA(R) and MasterCard(R)
credit cards to its customers as an agent for an Ohio-based commercial bank.
During 1998, the Bank originated approximately $16.7
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million of consumer loans and approximately $18.7 million in 1997. The Emerald
Home Equity Line of Credit (Emerald Line), introduced in December 1996 accounted
for $13.5 million at December 31, 1998.
The underwriting standards employed by the Bank for consumer loans include a
determination of the applicant's payment history on other debts and ability to
meet existing obligations and payments on the proposed loan. Although credit
worthiness of the applicant is of primary consideration, the underwriting
process also includes a comparison of the value of the security, if any, in
relation to the proposed loan amount. While consumer loans generally involve a
higher level of credit risk than 1-to-4 family residential loans, consumer loans
are typically made at higher interest rates and for shorter terms or at
adjustable rates, thus improving the interest rate sensitivity of the Bank's
loan portfolio.
Loan Portfolio Composition. Table I sets forth the composition of the Bank's
loan portfolio, in dollar amounts and in percentages for the last five years,
along with a reconciliation to loans receivable, net.
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Table I December 31,
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1998 1997 1996 1995 1994
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Amount % Amount % Amount % Amount % Amount %
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(Dollars In Thousands)
Real estate mortgage loans
Permanent first mortgage
One-to-four family
Held for portfolio $358,765 67.43% $319,796 68.15% $301,284 70.75% $220,490 65.55% $194,629 69.06%
Held for sale 5,997 1.13% 7,916 1.69% 806 0.19% 5,396 1.60% -- 0.00%
Multi-family 506 0.10% 924 0.20% 1,049 0.25% 1,183 0.35% 1,294 0.46%
Commercial real estate 51,845 9.74% 52,499 11.19% 46,883 11.01% 42,098 12.52% 38,109 13.52%
Land 621 0.12% 553 0.12% 195 0.04% 358 0.11% 427 0.15%
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Subtotal 417,734 78.52% 381,688 81.35% 350,217 82.24% 269,525 80.13% 234,459 83.19%
Construction first mortgage
Residential acquisition
& development 88,206 16.57% 56,217 11.98% 54,670 12.84% 48,538 14.43% 29,107 10.33%
One-to-four family 41,485 7.80% 37,413 7.97% 37,049 8.70% 26,960 8.02% 29,818 10.58%
Multi-family 375 0.07% 1,050 0.22% 240 0.05% 2,660 0.79% 1,400 0.50%
Commercial real estate 8,816 1.66% 6,879 1.47% 2,376 0.56% 4,233 1.26% 3,163 1.12%
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Subtotal 138,882 26.10% 101,559 21.64% 94,335 22.15% 82,391 24.50% 63,488 22.53%
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Total mortgage loans 556,616 104.62% 483,247 102.99% 444,552 104.39% 351,916 104.63% 297,947 105.72%
Other loans
Commercial 6,656 1.25% 5,736 1.22% 4,250 1.00% 3,955 1.18% 1,584 0.56%
Consumer 18,297 3.43% 15,460 3.29% 9,117 2.14% 8,895 2.64% 7,390 2.62%
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Subtotal 24,953 4.68% 21,196 4.51% 13,367 3.14% 12,850 3.82% 8,974 3.18%
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Total loans 581,569 109.30% 504,443 107.50% 457,919 107.53% 364,766 108.45% 306,921 108.90%
Less
Undisbursed loans
in process 43,547 8.19% 30,015 6.40% 26,676 6.27% 23,639 7.03% 20,134 7.14%
Allowance for loan losses 1,778 0.33% 1,625 0.35% 1,423 0.33% 1,168 0.35% 948 0.34%
Deferred yield adjustment 4,174 0.78% 3,523 0.75% 3,965 0.93% 3,608 1.07% 3,996 1.42%
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Subtotal 49,499 9.30% 35,163 7.50% 32,064 7.53% 28,415 8.45% 25,078 8.90%
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Total loans receivable, net $532,070 100.00% $469,280 100.00% $425,855 100.00% $336,351 100.00% $281,843 100.00%
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Table II sets forth the amount of the Bank's real estate loan portfolio having
fixed rates and the amount having adjustable rates. These loans are presented
before any deductions for loans-in-process, allowance for loan losses and
deferred yield items.
- ------------------------------------------------------------------------------------------------------------------------------------
Table II December 31,
----------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
Amount % Amount % Amount % Amount % Amount %
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
Adjustable rate loans
One-to-four family $ 96,118 17.26% $103,686 21.46% $ 87,794 19.75% $ 72,644 20.64% $ 60,754 20.39%
Multi-family 881 0.16% 1,974 0.41% 1,289 0.29% 3,843 1.09% 2,694 0.91%
Commercial real estate 59,158 10.63% 55,143 11.40% 44,261 9.96% 41,123 11.69% 37,482 12.58%
Land & development 88,707 15.94% 56,621 11.72% 54,865 12.34% 48,896 13.90% 29,534 9.91%
- ------------------------------------------------------------------------------------------------------------------------------------
Total 244,864 43.99% 217,424 44.99% 188,209 42.34% 166,506 47.32% 130,464 43.79%
Fixed rate loans
One-to-four family
Held for portfolio 304,132 54.64% 253,523 52.46% 250,539 56.36% 174,806 49.67% 163,693 54.94%
Held for sale 5,997 1.08% 7,916 1.64% 806 0.18% 5,396 1.53% -- 0.00%
Multi-family -- 0.00% -- 0.00% -- 0.00% -- 0.00% -- 0.00%
Commercial real estate 1,503 0.27% 4,235 0.88% 4,998 1.12% 5,208 1.48% 3,790 1.27%
Land & development 120 0.02% 149 0.03% -- 0.00% -- 0.00% -- 0.00%
- ------------------------------------------------------------------------------------------------------------------------------------
Total 311,752 56.01% 265,823 55.01% 256,343 57.66% 185,410 52.68% 167,483 56.21%
- ------------------------------------------------------------------------------------------------------------------------------------
Total mortgage loans $556,616 100.00% $483,247 100.00% $444,552 100.00% $351,916 100.00% $297,947 100.00%
====================================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
Table III shows the contractual maturities of the Bank's loan portfolio at
December 31, 1998. The table does not include prepayments and scheduled
principal repayments.
- -------------------------------------------------------------------------------------------
Table III
Outstanding 1 Year or 1 to 3 3 to 5 5 to 10 10 to 15 After 15
12/31/98 Less Years Years Years Years Years
-------- ------- ------- ------- ------- -------- --------
- -------------------------------------------------------------------------------------------
(In Thousands)
Permanent Loans:
Residential $364,762 $ 12 $ 319 $ 7,256 $41,661 $127,986 $187,528
Commercial 52,351 629 516 1,452 18,829 18,181 12,744
Construction 50,676 22,992 6,705 1,623 695 5,183 13,478
Land & development 88,827 13,628 74,600 427 41 131 --
Other 24,953 5,280 1,778 1,774 15,526 595 --
- -------------------------------------------------------------------------------------------
Total $581,569 $42,541 $83,918 $12,532 $76,752 $152,076 $213,750
===========================================================================================
- -------------------------------------------------------------------------------------------
Table IV shows the contractual maturities of the Bank's loan portfolio by fixed-
and adjustable-rate loans. It does not reflect actual repayments because of loan
refinancings, principal payments and enforcement of due-on-sale clauses, which
give the Bank the right to declare a conventional loan immediately due and
payable in the event, among other things, that the borrower sells the real
estate subject to the mortgage.
10
12
- --------------------------------------------------------------------------------------------------
Table IV
Outstanding 1 Year 1 to 3 3 to 5 5 to 10 10 to 15 After 15
12/31/98 or Less Years Years Years Years Years
- --------------------------------------------------------------------------------------------------
(In Thousands)
Fixed interest rates $316,887 $ 1,333 $ 1,020 $ 8,210 $41,776 $126,320 $138,228
Adjustable interest rates 264,682 41,208 82,898 4,322 34,976 25,756 75,522
- --------------------------------------------------------------------------------------------------
Total $581,569 $42,541 $83,918 $12,532 $76,752 $152,076 $213,750
==================================================================================================
- --------------------------------------------------------------------------------------------------
Purchase and Sale of Loans. Management believes that purchases of loans and loan
participations can be desirable and evaluates potential purchases as
opportunities arise and the Bank's needs dictate. Such purchases can enable the
Bank to take advantage of favorable lending opportunities, diversify its
portfolio and limit origination expenses. For loan purchases, the Bank uses the
same criteria for investment as if it had originated the loans using its own
underwriting standards. At December 31, 1998 approximately $0.7 million of the
Bank's residential loan portfolio and $6.2 million of the Bank's multi-family
and non-residential real estate loan portfolios were serviced by other
institutions.
When loans or loan participations are sold by the Bank, The Bank retains the
responsibility for servicing the loans. The Bank receives a fee for servicing
these loans. The amount of mortgage loans the Bank serviced for others amounted
to approximately $265.7 million at December 31, 1998.
Table V shows total loan origination, purchase, sale and repayment for the
periods indicated:
- -------------------------------------------------------------------------------------
Table V Year Ended December 31,
-----------------------
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------
(In Thousands)
Conventional mortgage loans:
Loan originations (1):
One-to-four family $190,480 $104,097 $154,482 $ 85,892 $ 63,085
Construction 54,705 55,682 50,468 43,661 50,151
Commercial & multi-family 9,683 4,694 7,508 5,182 2,519
Land & development 75,307 43,654 41,001 43,250 30,693
- -------------------------------------------------------------------------------------
Total 330,175 208,127 253,459 177,985 146,448
Consumer loans 16,687 18,667 4,003 4,528 4,970
Commercial loans 3,281 3,513 3,212 4,348 770
- -------------------------------------------------------------------------------------
Total 350,143 230,307 260,674 186,861 152,188
Loans and participations
Purchased 926 4,922 2,250 700 --
Sold 94,869 55,690 54,692 43,374 21,677
Loan repayments & refinances 177,155 140,125 110,693 86,342 86,954
- -------------------------------------------------------------------------------------
Net loan activity $ 79,045 $ 39,414 $ 97,539 $ 57,845 $ 43,557
=====================================================================================
(1) Loans originated include undisbursed portions of loans-in-process and
unearned discounts.
- -------------------------------------------------------------------------------------
Changes in Lending Activities. Loan originations in 1998 were impressive at
$350.1 million, an increase of $119.8 million from 1997 originations of $230.3
million. Mortgage refinances were
11
13
$113.2 million in 1998, $47.9 million in 1997 and $63.3 million in 1996. Loan
originations (excluding mortgage refinancing) were $236.9 million in 1998,
$182.4 million in 1997 and $197.4 million in 1996.
Income from Lending Activities. The Bank earns interest and fee income from its
lending activities. The Bank earns income from fees for originating loans and
for making commitments to originate loans and purchase loans and loan
participations. Certain of these fees net of origination costs are amortized
over the life of the respective loan. The Bank also receives loan fees related
to existing loans, which include prepayment charges, late charges, assumption
fees and servicing fees. Income from loan origination and commitment fees and
discounts varies with the volume and type of loans and commitments made and
purchased and with competitive and economic conditions.
Nonperforming loans and other assets
General. Late payment fees are assessed by the Bank if a payment is not received
by the 15th day following its due date. Any borrower whose payment was not
received by this time is mailed a past due notice. If the loan is still
delinquent after a second past due notice is mailed, a loan department employee
will attempt to contact the customer to resolve any problem that might exist.
When an advanced stage of delinquency approaches (generally 90 days past due)
and if repayment cannot be expected within a reasonable amount of time or a
repayment agreement has not been entered into, the Bank will contact an attorney
to request that the required 30-day prior notice of foreclosure proceedings be
prepared and delivered to the borrower so that, if necessary, foreclosure
proceedings may be initiated shortly after the loan is 90 days delinquent. This
procedure has historically aided in achieving a low level of nonperforming loans
and, as of December 31, 1998 only $2,000,000 or 0.38% of the Bank's total loan
portfolio was nonperforming. As of December 31, 1998 the Bank's level of
nonperforming assets to total assets was 0.35%.
On December 31, 1998 the Bank held no real estate properties acquired as a
result of foreclosure, voluntary deed, or other means. When the Bank has such
real estate, it is classified as "real estate owned" (REO) until it is sold.
When property is so acquired, it is recorded at the lower of cost (the unpaid
principal balance at the date of acquisition plus foreclosure and other related
costs) or fair value less estimated selling costs. For collateral-dependent
loans, the fair value is determined by obtaining an appraisal from an
independent fee appraiser. For loans which are not collateral dependent, the
fair value is determined based on the present value of expected cash flows. Any
reduction to record the property at its fair value is charged to expense.
Generally, unless the property is 1-to-4 family and well collateralized,
interest accrual ceases after 90 days of delinquency, but not later than the
date of acquisition. Costs incurred to maintain REO property are charged to
expense. The Bank has not had to foreclose on an acquisition and development
loan in the last 5 years.
On December 31, 1998 the Bank held three investments in auto loan backed
securities totaling $344,000 which were classified as non-accruing. The issuer
has experienced difficulty with a subservicer in meeting certain terms of their
aggreement relating to reserve requirements.
If a credit card account becomes 10 days delinquent, a notice is sent to the
account holder demanding that the payment be made so that the card is current.
Another notice is sent to the
12
14
cardholder if the account becomes 20 days delinquent. If payment is not received
within 30 days, authorization requests are denied, a message appears on the
cardholder's account statement and a follow-up telephone call is made. These
telephone collection efforts and statement messages continue until the account
is deemed uncollectible, usually between 120 to 150 days delinquent at which
time it is turned over to a collection agency for intensive collection efforts
and legal action if appropriate.
Not categorized as nonperforming loans are certain potential problem loans that
management believes are adequately secured and for which no material loss is
expected, but as to which certain circumstances may cause the borrowers to be
unable to comply with the present loan repayment terms at some future date. At
December 31, 1998 there were approximately $0.5 million of such potential
problem loans.
13
15
Table VI below sets forth information regarding delinquent loans and other
non-performing assets. It is the Bank's policy that past-due conventional loans
be reviewed monthly to determine whether any due but uncollected portion thereof
should be classified as uncollectible.
- --------------------------------------------------------------------
Table VI
NON-PERFORMING ASSETS
1998 1997 1996
- --------------------------------------------------------------------
(Dollars In thousands)
Non-accruing loans
1-4 family - permanent $ 777 $ 156 $ 599
1-4 family - construction 654 692 --
Multi-family and Commercial
real estate -- -- --
Land and development 181 181 --
Commercial non-real estate 120 370 --
Consumer and other 7 29 5
- --------------------------------------------------------------------
Total 1,739 1,428 604
Loans delinquent 90 days or more
and still accruing
1-4 family - permanent 210 716 683
1-4 family - construction -- -- 412
Multi-family and Commercial
real estate 51 -- --
Land and development -- -- --
Commercial non-real estate -- -- --
Consumer and other -- -- --
- --------------------------------------------------------------------
Total 261 716 1,095
Total non-performing loans 2,000 2,144 1,699
Investments 344 486 --
Real estate owned -- 683 --
- --------------------------------------------------------------------
Total non-performing assets $2,344 $3,313 $1,699
====================================================================
Allowances for loan losses $1,778 $1,625 $1,423
====================================================================
Non-performing loans to total loans-net 0.38% 0.46% 0.40%
Non-performing assets to total assets 0.35% 0.55% 0.30%
Allowance for loan losses to ending
loan balance (before allowance) 0.33% 0.35% 0.33%
Allowance for loan losses to
non-performing loans 88.87% 75.80% 83.76%
- --------------------------------------------------------------------
14
16
Interest income that would have been recorded under the original terms of
all nonaccrual loans during each period and the interest income actually
recognized for each period are summarized below:
Years Ended December 31
----------------------
1998 1997 1996
---- ---- ----
(In Thousands)
Interest income that would have been recorded $202 $119 $101
Interest income recognized 23 112 9
Interest income foregone $179 $ 7 $ 92
================================================================================
Allowance for Loan Losses. 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. If actual circumstances and losses differ substantially from
management's assumptions and estimates, such allowance for loan losses may not
be sufficient to absorb all future losses, and net earnings could be adversely
affected. Loan loss estimates are reviewed periodically, and adjustments, if
any, are reported in earnings in the period in which they become known. In
addition, the Bank maintains a portion of the allowance to cover potential
losses inherent in the portfolio which have not been specifically identified.
Although management believes that it uses the best information available to make
such determinations and that the allowance for loan losses was adequate at
December 31, 1998, future adjustments to reserves may be necessary, and net
income could be affected, if circumstances and/or economic conditions differ
substantially from the assumptions used in making the initial determinations. A
downturn in the Northeastern Ohio real estate market could result in the Bank
experiencing increased levels of nonperforming assets and charge-offs, increased
provisions for loan losses and reductions in income. Additionally, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the recognition of additions to the allowance based on their judgment of
information available to them at the time of their examination.
Substantially all the delinquent loans are well collateralized residential real
estate loans. Accruing loans delinquent 90 days or more included two residential
mortgage loans totaling $210,000 and one commercial loan totaling $51,000 at
December 31, 1998. The appraised values of the residences and the commercial
real estate securing these loans was deemed sufficient to cover the outstanding
debt and accrued interest. The Bank's collection procedures generally begin
within 30 days of delinquency and, combined with the Bank's underwriting
standards, have minimized delinquencies in the loan portfolio.
15
17
Table VII presents the allocation of the allowances for loan losses by the Bank
to the related outstanding loan balances at each of the dates indicated.
- ----------------------------------------------------------------------------------------------------------------
Table VII December 31,
------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Amount % Amount % Amount % Amount % Amount %
- ----------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Real estate loans $1,488 83.69 $1,165 71.69 $1,264 88.83 $1,000 85.62 $818 86.29
Consumer and commercial
loans (non-mortgage) 290 16.31 460 28.31 159 11.17 168 14.38 130 13.71
- ----------------------------------------------------------------------------------------------------------------
Total $1,778 100.00 $1,625 100.00 $1,423 100.00 $1,168 100.00 $948 100.00
================================================================================================================
- ----------------------------------------------------------------------------------------------------------------
Table VIII presents information concerning activity in the Bank's allowance for
loan losses during the periods indicated.
- -----------------------------------------------------------------------------------------
Table VIII Year Ended December 31,
-----------------------
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------
(Dollars in Thousands)
Allowance at beginning of period $ 1,625 $ 1,423 $ 1,168 $ 948 $ 840
Provision charged to expense 710 215 305 238 92
Charge0ffs:
One-to-four family permanent -- 5 -- -- --
One-to-four family construction 132 -- -- -- --
Commercial non-real estate 378 -- 10 -- --
Consumer 53 19 50 21 13
- -----------------------------------------------------------------------------------------
Total charge-offs 563 24 60 21 13
Recoveries:
One-to-four family permanent 2 -- -- -- --
Commercial non-real estate -- -- -- -- 25
Consumer 4 11 10 3 4
- -----------------------------------------------------------------------------------------
Total recoveries 6 11 10 3 29
- -----------------------------------------------------------------------------------------
Net recoveries (charge-offs) (557) (13) (50) (18) 16
- -----------------------------------------------------------------------------------------
Allowance at end of period $ 1,778 $ 1,625 $ 1,423 $ 1,168 $ 948
=========================================================================================
Net charge-offs (recoveries)
during period to average loans
outstanding during the period 0.11% 0.00% 0.01% 0.01% (0.01)
=========================================================================================
- -----------------------------------------------------------------------------------------
Classified Assets. The OTS regulations on classification of assets require
savings associations to classify their own assets and to establish appropriate
general and specific allowances for losses, subject to OTS review. These
regulations are designed to encourage management to evaluate assets on a
case-by-case basis and to discourage automatic classifications. Assets
classified as substandard or doubtful must be evaluated by management to
determine a reasonable general loss reserve which is included in total capital
for purposes of the association's risk-based capital requirement, but which is
not included in core capital or tangible capital or in capital under generally
accepted
16
18
accounting principles. Assets classified as loss must either be written off or
reserved for by a specific allowance which is not included in capital for
purposes of any of the regulatory capital requirements.
Investments
Investment securities primarily satisfy the Bank's liquidity needs and provide a
return on residual funds after lending activities. Investments may be in bonds
and mortgage-backed securities, provided that they are all of qualified bank
investment grade pursuant to the Bank's written investment policy. The Bank does
not make any investments in securities which are rated less than investment
grade by a nationally recognized statistical rating organization. A goal of the
Bank's investment policy is to contain interest rate risk wherever possible.
All securities-related activity is reported to the Executive Committee of the
Board. General changes in investment strategy are required to be reviewed and
approved by the Board. The Bank's Chief Executive Officer and Chief Financial
Officer are authorized to purchase and sell securities on behalf of the Bank in
accordance with the Bank's stated investment policy.
Table IX sets forth the carrying value of the Bank's investment portfolio at the
dates indicated and includes investments available for sale.
- --------------------------------------------------------------------------------
Table IX Year Ended December 31,
-----------------------
1998 1997 1996
- --------------------------------------------------------------------------------
(In Thousands)
Short-term investments
Interest-earning deposits $ 62 $ 3,033 $ 4,406
- --------------------------------------------------------------------------------
Investment securities
Held-to-maturity
Corporate bonds -- 5,816 26,829
U.S. government and
agency obligations 4,350 7,750 19,301
Other 344 665 1,554
- --------------------------------------------------------------------------------
4,694 14,231 47,684
Available for sale
Corporate bonds 32,344 20,633 5,113
U.S. government and
agency obligations 9,465 10,847 16,883
Other 4,690 985 --
- --------------------------------------------------------------------------------
46,499 32,465 21,996
- --------------------------------------------------------------------------------
Total $51,255 $49,729 $74,086
================================================================================
- --------------------------------------------------------------------------------
There were no investment securities in the Bank's portfolio which had an
aggregate carrying value in excess of ten percent of the Bank's shareholders'
equity as of December 31, 1998.
17
19
Table X sets forth the carrying value of the Bank's mortgage-backed securities
portfolio at the dates indicated:
- --------------------------------------------------------------------------------
Table X Year Ended December 31,
-----------------------
1998 1997 1996
- --------------------------------------------------------------------------------
(In Thousands)
Mortgage-backed securities
Held to maturity
Federal National Mortgage Corporation $ -- $ 7,179 $ 7,472
Federal Home Loan Mortgage Corporation -- 6,001 7,593
Government National Mortgage Association -- 4,883 6,109
Other -- 7,762 11,362
- --------------------------------------------------------------------------------
-- 25,825 32,536
Available for sale
Federal National Mortgage Corporation 13,543 13,527 5,236
Federal Home Loan Mortgage Corporation 7,910 13,455 14,408
Government National Mortgage Association 4,432 -- --
Other 19,078 330 --
- --------------------------------------------------------------------------------
44,963 27,312 19,644
- --------------------------------------------------------------------------------
Total $44,963 $53,137 $52,180
================================================================================
- --------------------------------------------------------------------------------
Table XI sets forth the amount of the Bank's mortgage-backed securities
portfolio having fixed rates and the amount having adjustable rates at the dates
indicated:
- -------------------------------------------------------------------------------------
Table XI December 31,
------------
1998 1997 1996
---- ---- ----
Amount % Amount % Amount %
- -------------------------------------------------------------------------------------
(Dollars in Thousands)
Fixed interest rates $12,332 27.43% $10,050 18.91% $13,943 26.72%
Adjustable interest rates 32,631 72.57% 43,087 81.09% 38,237 73.28%
- -------------------------------------------------------------------------------------
Total $44,963 100.00% $53,137 100.00% $52,180 100.0%
=====================================================================================
- -------------------------------------------------------------------------------------
18
20
The following table reflects the contractual maturities and repricing of the
Bank's mortgage-backed securities and investment portfolios at the dates
indicated. Expected maturities of the mortgage-backed securities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
- --------------------------------------------------------------------------------------------------------------
Table XII Weighted Average
Remaining Term in
months
-----------------
Outstanding 2000- 2002- 2004- 2009 and To To
12/31/98 1999 2001 2003 2008 Thereafter Repricing Maturity
- --------------------------------------------------------------------------------------------------------------
(In Thousands)
Mortgage-backed securities $44,963 $ 837 $ -- $ 873 $1,958 $41,295 70 289
Interest earning deposits 62 62 -- -- -- -- 1 1
Corporate bonds 32,344 11,697 4,696 -- -- 15,951 57 178
U.S. Government and agency --
obligations 13,815 7,828 -- 5,987 -- -- 42 43
Other 5,034 4,101 -- -- -- 933 5 29
- --------------------------------------------------------------------------------------------------------------
Total $96,218 $24,525 $4,696 $6,860 $1,958 $58,179 $44 $154
==============================================================================================================
- --------------------------------------------------------------------------------------------------------------
Sources of Funds
Deposit Accounts. Savings deposits are a major source of the Bank's funds. The
Bank offers a number of alternatives for depositors designed to attract both
short-term and long-term savings, including regular and money market savings
accounts, NOW accounts, and a variety of fixed-maturity, fixed-rate certificates
with maturities ranging from seven days to 120 months. The Bank also provides
travelers checks, cashier's checks, money orders, U.S. Savings Bonds, ATM
services and IRA and Keogh accounts.
19
21
Table XIII shows the distribution of the Bank's deposits by type at the dates
indicated, along with the amount of time deposits by interest rate category.
- ------------------------------------------------------------------------------------------------------------------------------------
Table XIII
December 31,
----------------------------------------------------------------------------------------------------------
Weighted 1998 Weighted 1997 Weighted 1996
Type of account and Avg Cost ---- Avg Cost ---- Avg Cost ----
Interest rate 12/31/98 Amount % 12/31/97 Amount % 12/31/96 Amount %
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Passbook accounts 2.78% $ 59,894 10.71% 2.93% $ 51,629 9.91% 2.90% $ 46,034 9.33%
NOW accounts 1.76% 37,610 6.73% 2.02% 33,229 6.38% 2.02% 29,661 6.01%
Commercial accounts 0.00% 17,749 3.17% 0.00% 12,992 2.50% 0.00% 11,535 2.34%
Checking-noninterest 0.00% 1,832 0.33% 0.00% 747 0.14% 0.00% -- 0.00%
Money market accounts 2.27% 14,222 2.54% 2.53% 15,506 2.98% 2.53% 17,882 3.62%
- ------------------------------------------------------------------------------------------------------------------------------------
Subtotal 2.02% 131,307 23.48% 2.29% 114,103 21.91% 2.27% 105,112 21.30%
Certificates of deposit
4.50% and less 4.19% 27,868 4.98% 4.01% 26,391 5.07% 2.54% 1,849 0.37%
4.51% to 5.50% 5.32% 131,876 23.58% 5.38% 52,424 10.07% 5.34% 116,857 23.68%
5.51% to 6.50% 5.97% 210,366 37.62% 6.04% 264,388 50.78% 6.03% 187,013 37.90%
6.51% to 7.50% 7.36% 50,506 9.03% 7.36% 55,516 10.66% 7.32% 73,823 14.96%
7.51% and greater 8.96% 7,312 1.31% 8.92% 7,868 1.51% 8.85% 8,817 1.79%
- ------------------------------------------------------------------------------------------------------------------------------------
Subtotal 5.87% 427,928 76.52% 6.06% 406,587 78.09% 6.11% 388,359 78.70%
- ------------------------------------------------------------------------------------------------------------------------------------
Total 4.96% $559,235 100.00% 5.23% $520,690 100.00% 5.29% $493,471 100.00%
====================================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
The following table presents, by various interest rate categories, certain
information concerning maturities of the Bank's certificates of deposit as of
December 31, 1998.
- ---------------------------------------------------------------------------------------
Table XIV Maturing in:
Balances at One to Two to After three
12/31/98 One Year two years three years years
- ---------------------------------------------------------------------------------------
(In Thousands)
Certificates of deposit
4.50% and less $ 27,868 $ 27,859 $ -- $ -- $ 9
4.51% to 5.50% 131,876 98,025 28,025 4,548 1,278
5.51% to 6.50% 210,366 149,685 30,539 13,271 16,871
6.51% to 7.50% 50,506 16,951 8,867 2,912 21,776
7.51% and higher 7,312 4,670 1,628 707 307
- ---------------------------------------------------------------------------------------
Total $427,928 $297,190 $69,059 $21,438 $40,241
=======================================================================================
- ---------------------------------------------------------------------------------------
20
22
The following table sets forth the amount of the Bank's certificates of deposit
that are $100,000 or greater by time remaining until maturity as of December 31,
1998.
Maturity Period
(In Thousands)
Three months or less $ 21,025
Over three through six months 13,515
Over six through twelve months 28,583
Over twelve months 23,024
- --------------------------------------------------------------------------------
Total $ 86,147
================================================================================
Checking Account Services. The Bank offers commercial and NOW accounts and
interest-bearing money market accounts in order to attract funds. At December
31, 1998, the Bank's commercial checking accounts totaled $17.7 million; NOW
accounts totaled $37.6 million, non-interest bearing checking accounts totaled
$1.8 million and money market accounts totaled $14.2 million.
Borrowings. Deposits, payments of loan principal and interest, and proceeds from
the sale of loans are the primary source of funds for a thrift's lending
activities and other general business purposes. The Bank can also obtain funds
through loans (advances) from the FHLB of Cincinnati. Advances from the FHLB may
be on a secured or unsecured basis depending upon a number of factors, including
the purpose for which the funds are being borrowed and existing advances
outstanding. See "REGULATION - Federal Regulation Federal Home Loan Banks." At
December 31, 1998, the Bank had $48.2 million in advances outstanding from FHLB
of Cincinnati.
Competition
The principal competitors of the Bank within its market area are other thrifts
and commercial banks. In recent years, however, competition has also come from
mortgage banking companies, insurance companies, securities firms and other
non-FDIC-insured financial institutions. The Bank faces competition from the
significant market influence of one large local thrift that offers long-term,
fixed-rate residential mortgage loans. Additionally, consolidation of the
financial institutions industry in the Midwest in recent years has increased the
level of competition.
The Bank competes against larger institutions for deposits principally by
offering a variety of banking services, attractive rates and strategically
located banking facilities. The Bank has strong ties with the local community,
particularly with residential builders and developers, and seeks to provide high
quality personal banking services to professionals, small businesses, and
individuals, emphasizing quick and flexible responses to consumer preferences
and market demands.
21
23
Personnel
As of December 31, 1998 the Bank employed 131 full time-equivalent employees.
None of the Bank's employees are represented by any collective bargaining group,
and management considers its relations with employees to be satisfactory.
Incentive Compensation
For each of the 1998 and 1997 fiscal years, the Board established an incentive
program for mortgage loan officers. The incentive lending program provided
financial remuneration to loan officers for generating mortgage and other loan
originations. The Board also established an incentive program for 1998 which
includes Office managers as well as mortgage loan officers. Mr. Perciak does not
participate in the incentive programs above.
Compensation Pursuant to Plan
Insurance Plans. The Bank's full-time officers and employees are provided with
hospitalization, major medical, medical, prescription, long-term disability, and
term life insurance under group plans which are available generally and on the
same basis to all full-time employees with the majority of the contribution paid
by the Bank. Additionally, full-time officers and employees are provided with
major dental benefits through a group plan sponsored by the Bank, with officers
and employees paying for most of the cost of such coverage.
Profit-Sharing Plan. The Bank has a trusteed profit-sharing retirement plan (the
"Profit-Sharing Plan") covering substantially all salaried employees. Under the
terms of the Profit-Sharing Plan, the Bank's annual contribution is
discretionary and the Bank may terminate the Profit-Sharing Plan at any time.
The Profit-Sharing Plan is a tax-qualified employee benefit plan under Section
401(a) of the Internal Revenue Code of 1986, as amended (the "Code"). The
purpose of the Profit-Sharing Plan is to provide a qualified retirement program
for eligible employees of the Bank. A fund has been created as part of the
Profit-Sharing Plan to receive contributions made to the Profit-Sharing plan by
the Bank and the plan's participants, and to invest and disburse the fund's
assets for the benefit of the plan's participants and beneficiaries.
Employees of the Bank are eligible to participate in the Profit Sharing Plan on
the first day of January following the employees completion of one year of
service for the Bank. Bank contributions are allocated to each participant in
accordance to his or her compensation as a percentage of the compensation of all
participants. Employees are vested over a six-year period with respect to
employer contributions, with 20% of the account balance becoming vested each
year after two years. Employees are always 100% vested in their own
contributions made to the Profit-Sharing Plan. Other than rollover from other
qualified plans, ordinarily there are no employee contributions to the
Profit-Sharing Plan. Participants or their beneficiaries receive a distribution
of benefits from their Profit-Sharing Plan accounts upon reaching early or
normal retirement age, death or disability.
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The administrators of the Profit-Sharing Plan are Messrs. Perciak and Ziegler.
They direct the investment objectives of the Profit-Sharing Plan. A
Cleveland-based securities firm, the Custodian of the Profit-Sharing Plan, is
responsible for holding the assets comprising the fund. Participants accrue
benefits only to the extent of the fund's assets.
401(k) Plan. In January 1990, the Bank adopted a qualified, tax-exempt
profit-sharing plan with a cash or deferred feature qualifying under Section
401(k) of the Internal Revenue Code (the "401(k) Plan"). All employees age 20
1/2 or older are eligible to participate at the next plan entrance date provided
they have completed six months of service. Participants are permitted to make
salary reduction contributions to the 401(k) Plan in amounts of up to 15% of
their salary. The participant's salary reduction contribution is matched by Bank
contributions in an amount equal to 60% of the participant's contributions up to
a limit of 5% of the participant's salary. If the employee contributes more than
5 % of his salary, the Bank will make no matching contributions on the amount
over 5%.
Employees direct the investment options of their salary reduction contributions
to their accounts. Prior to January 1, 1995, employees also directed the
investment options of the Bank's matching contributions to their accounts.
During 1996 the Bank's matching contribution was invested in the common stock of
the Company. In 1997 the plan offered Company stock as an investment option for
the employee salary reduction contributions and for employer matching
contributions. Salary reduction contributions by employees and the earnings
thereon are fully vested immediately. The Bank's employer contributions and
earnings thereon under the 401(k) Plan are vested over a six-year period, with
20% of the account balance becoming vested each year after two years of service.
Supplemental Executive Retirement Plan. Effective January 1, 1995, the Bank
adopted a nonqualified, unfunded Supplemental Executive Retirement Plan (SERP)
that provides certain officers, classified as Vice President or above,
retirement benefits. The SERP provides for payments in the event of retirement,
disability, death or a change in control of the Bank. The plan was designed to
build and retain a competent management team. Under the plan, each executive has
been given retirement benefits intended to provide reasonable assurance that
such executive will remain with the Bank. If the executive's employment is
terminated for cause or the executive voluntarily resigns other than as a
constructive termination (other than for "good reason") following a change in
control, the Bank is released from all payment obligations to such executive.
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REGULATION
SET FORTH BELOW IS A BRIEF SUMMARY OF CERTAIN STATUTES AND
REGULATIONS AFFECTING EMERALD AND STRONGSVILLE SAVINGS. THE
FOLLOWING SUMMARY, LIKE THE DISCUSSION OF STATUTES AND REGULATIONS
CONTAINED ELSEWHERE HEREIN, DOES NOT PURPORT TO BE COMPLETE AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO APPLICABLE STATUTES AND
REGULATIONS.
Emerald is a thrift holding company and, as such, is subject to regulation by
the OTS. The Bank is an Ohio chartered savings and loan association and is a
member of the Federal Home Loan Bank System. The Banks deposits are insured by
the FDIC through the Savings Association Insurance Fund (SAIF). The lending
activities of Strongsville Savings must comply with various state and federal
regulatory requirements. The OTS, the Ohio Division of Financial Institutions
and the FDIC periodically examine the Bank for compliance with various
regulatory requirements. The Bank must file reports with the OTS describing its
activities and financial condition. This supervision and regulation is intended
principally for the protection of depositors.
Savings and Loan Holding Companies. Savings and loan holding companies are
required by the Home Owners' Loan Act (HOLA) to register with the OTS. Savings
and loan holding companies that own one and only one savings institution are
commonly referred to as "unitary savings and loan holding companies." In marked
contrast to other forms of savings and loan holding companies and bank holding
companies, there are generally no restrictions under HOLA on the activities of a
unitary savings and loan holding company. Emerald is considered a unitary
savings and loan holding company.
Nevertheless, if the Director of the OTS determines that there is reasonable
cause to believe that the continuation by any savings and loan holding company
(including a unitary savings and loan holding company) of an activity
constitutes a serious risk to the financial safety, soundness or stability of
its subsidiary savings institution, Section 10(p) of HOLA authorizes the
Director to impose restrictions such as (i) limiting payment of dividends by the
savings institution; (ii) limiting transactions between the savings institution
and its affiliates; and (iii) limiting any activities of the savings institution
that might create a serious risk that the liabilities of the holding company and
its affiliates may be imposed on the savings institution.
If Emerald were to acquire control of another savings institution (other than
through merger or other business combination with Strongsville Savings), Emerald
would become a multiple savings and loan holding company, losing its status as a
unitary institution and becoming subject to activities restrictions as a result.
Moreover, if the savings institution subsidiary of a unitary holding company
fails to satisfy the qualified thrift lender test discussed hereinafter, then
the unitary holding company becomes subject to the activities restrictions
applicable under HOLA to multiple savings and loan holding companies.
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Lastly, Congress is considering legislation that would limit unitary savings and
loan holding companies to the same activities as other financial institution
holding companies and permit certain bank holding companies to engage in
commercial activities and expanded securities and insurance activities. Emerald
cannot predict whether or in what form these legislative initiatives may become
law. See "- Recent Legislative Developments."
Qualified Thrift Lender. All savings institutions are required to satisfy a
qualified thrift lender test (QTL Test) set forth in Section 10(m) of HOLA and
regulations of the OTS in order to avoid certain restrictions on their
operations. A savings institution that does not meet the QTL test set forth in
HOLA and in OTS implementing regulations must either convert to a bank charter
or comply with the following restrictions on its operations: (i) the institution
may not engage in any new activity or make any new investment, directly or
indirectly, unless such activity or investment is permissible for a national
bank; (ii) the branching powers of the institution become restricted to those of
a national bank; (iii) the institution becomes ineligible to obtain any new
advances from its Federal Home Loan Bank; and (iv) payment of dividends by the
institution becomes subject to the rules regarding payment of dividends by a
national bank. Upon the expiration of three years from the date the savings
institution ceased to be a qualified thrift lender, the institution must cease
any activity and dispose of any investment not permissible for a national bank
and immediately repay any outstanding Federal Home Loan Bank advances (subject
to safety and soundness considerations).
Under the QTL Test that existed prior to amendment of HOLA Section 10(m) on
September 30, 1996 and that continues to be effective, 65% of an institution's
portfolio assets must consist of certain housing and consumer-related assets on
a monthly average basis in nine out of every 12 months. This QTL Test remains
effective after September 30, 1996, but it is no longer the exclusive QTL Test.
Assets that qualify without limit for inclusion as part of the 65% requirement
include loans made to purchase, refinance, construct, improve or repair
residential housing and manufactured housing; home equity loans; mortgage-backed
securities (where the mortgages are secured by domestic residential housing or
manufactured housing); shares of stock in a Federal Home Loan Bank; and loans
for educational purposes, loans to small businesses and loans made through
credit cards or credit card accounts. Other assets also qualify for purposes of
the QTL Test, subject to limitations. At December 31, 1998, the qualified thrift
investments of Strongsville Savings were approximately 83.74% of its portfolio
assets.
With the enactment on September 30, 1996 of the Economic Growth and Regulatory
Paperwork Reduction Act of 1996 (the "Regulatory Paperwork Reduction Act"),
including the Deposit Insurance Funds Act of 1996 set forth in Subtitle G
thereof (the "Deposit Insurance Funds Act"), Congress created an alternative QTL
Test, pursuant to which a savings association may also be treated as a qualified
thrift lender if the association qualifies as a "domestic building and loan
association" under the Internal Revenue Code of 1986, as amended (the "Code").
That is, at least 60% of the institution's assets (on a tax basis) must consist
of specified assets (generally loans secured by residential real estate or
deposits, educational loans, cash and certain governmental obligations).
Related to the QTL Test is a requirement that a thrift institution may not
invest more than a certain percentage of its assets in such things as
commercial, corporate, business, agricultural, education and consumer loans. The
Regulatory Paperwork Reduction Act increased thrift institutions' authority to
invest in loans of these types.
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Transactions with Insiders and Affiliates. Transactions between a savings
institution and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of a savings institution is any company or
entity that controls, is controlled by or is under common control with the
savings institution. In a holding company context, the parent holding company of
a savings institution (such as Emerald) and any companies that are controlled by
the parent holding company are affiliates of the savings institution. In
general, Sections 23A and 23B (i) limit the extent to which a savings
institution or its subsidiaries may engage in "covered transactions" with any
one affiliate to an amount equal to 10% of such institution's capital stock and
surplus, with an aggregate limit on all such transactions with all affiliates of
20% of such capital stock and surplus, and (ii) require that all such
transactions be on terms substantially the same, or at least as favorable, to
the institution or subsidiary as those provided to a non-affiliate. The term
"covered transaction" includes the making of loans, purchase of assets, issuance
of a guarantee and similar other types of transactions. In addition to the
restrictions imposed by Sections 23A and 23B, no savings institution may (i)
loan or otherwise extend credit to an affiliate, except for any affiliate
engaging only in those activities that are permissible for bank holding
companies, or (ii) purchase or invest in any stocks, bonds, debentures, notes or
similar obligations of any affiliate, except for affiliates that are
subsidiaries of the savings institution.
In addition, Sections 22(h) and (g) of the Federal Reserve Act impose
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, an executive officer or
to a holder of more than 10% of a savings institution's stock, as well as loans
to certain affiliated interests, may not (together with all other outstanding
loans to such person and affiliated interests) exceed the institution's
loans-to-one-borrower limit (generally equal to 15% of the institution's
unimpaired capital and surplus). Section 22(h) also requires that loans to
directors, executive officers and principal stockholders be made on terms
substantially the same as offered in comparable transactions to other persons
and also requires prior board approval for certain loans. In addition, the
aggregate amount of extensions of credit by a savings institution to all
insiders cannot exceed the institution's unimpaired capital and surplus.
Furthermore, Section 22(g) places additional restrictions on loans to executive
officers. At December 31, 1998, Strongsville Savings was in compliance with
these restrictions.
Restrictions on Acquisitions. Without prior approval of the Director of the OTS,
savings and loan holding companies generally are prohibited from acquiring (i)
control of any other savings institution or savings and loan holding company or
substantially all the assets thereof or (ii) more than 5% of the voting shares
of a savings institution or holding company thereof that is not a subsidiary.
Without the prior approval of the Director of the OTS, no director or officer of
a savings and loan holding company or person owning or controlling by proxy or
otherwise more than 25% of such company's stock, may acquire control of any
savings institution, other than a subsidiary savings institution, or of any
other savings and loan holding company.
Capital Requirements. Regulatory capital standards for savings institutions
consist of three components: a core capital requirement, a tangible capital
requirement and a risk-based capital requirement. All three components are
required to be no less stringent than the corresponding requirements applicable
to national banks.
All savings institutions must have core capital of at least 3.00% of adjusted
total assets. The Bank's core capital equals shareholders' equity adjusted for
net unrealized gains and losses on securities
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available for sale less goodwill. Strongsville Saving's core capital ratio was
8.02% at December 31, 1998.
Savings institutions have a statutory requirement to maintain tangible capital
of at least 1.5% of adjusted total assets. For purposes of this requirement, the
Bank's tangible capital is equal to its core capital. At December 31, 1998,
Strongsville Savings' tangible capital ratio was 8.02%.
The risk-based capital standard adopted by the OTS currently requires savings
institutions to maintain a minimum ratio of total capital (core capital plus
supplementary capital) to risk-weighted assets of 8.00%. At the end of 1998, the
Bank's supplementary capital consisted of general valuation allowances.
Supplementary capital may be used to satisfy the risk-based capital requirement
only up to an amount equal to core capital. In determining the amount of
risk-weighted assets, all assets, including certain off-balance sheet items, are
multiplied by a specific risk weight based on the risks which the OTS deems are
inherent in each type of asset. Strongsville Savings' risk-based capital ratio
was 12.60% at December 31, 1998.
The federal banking agencies recently adopted a revision to their uniform
financial institution rating system (UFIRS) for the purpose of incorporating a
risk sensitivity component. UFIRS is a supervisory rating system used by the OTS
and other banking agencies to evaluate the soundness of depository institutions
on a uniform basis. The federal banking agencies have implemented the UFIRS
through a so-called "CAMELS" rating system, which is applied in connection with
routine bank and thrift examinations. CAMELS is an acronym that stands for
Capital Adequacy, Asset Quality, Management, Earnings and Liquidity, and
Sensitivity to Market Risk. Routine bank and thrift examinations are undertaken
in order to analyze each of these factors for each institution examined, and the
institution is assigned component scores for each factor and an aggregate score,
or rating, based on analysis of all of such factors.
A savings institution that is not in capital compliance is subject automatically
to the following: (i) new directors and senior executive officers and employment
contracts for senior executive officers must be approved by the OTS in advance;
(ii) the savings institution may not accept or renew any brokered deposits;
(iii) the savings institution is subject to higher OTS assessments as a
capital-deficient institution; and (iv) the savings institution may not make any
capital distributions without prior written approval.
Any savings institution that fails any of the capital requirements is subject to
possible enforcement actions by the OTS or the FDIC. Enforcement actions could
include a capital directive, a cease-and-desist order, civil money penalties,
the establishment of restrictions on the institution's operations, termination
of federal deposit insurance and the appointment of a conservator or receiver.
The OTS' capital regulation provides that such actions, through enforcement
proceedings or otherwise, could require one or more of a variety of corrective
actions.
See Note 12 of the "Notes to Consolidated Financial Statements" for a discussion
of the Bank's capital calculation and its compliance with various minimum
regulatory capital requirements at December 31, 1998.
Prompt Corrective Action. The Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA") added to the FDIA a new Section 38, providing that each
federal banking agency must
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implement a system of prompt corrective action for institutions that it
regulates. The federal banking agencies, including the OTS, adopted
substantially similar regulations to implement Section 38 of the FDIA, effective
as of December 19, 1992.
Under the prompt corrective action regulations, an institution is deemed to be
(i) "well capitalized" if it has total risk-based capital of 10% or more, has a
Tier 1 risk-based capital ratio of 6% or more, has a Tier 1 leverage capital
ratio of 5% or more and is not subject to any order or final capital directive
to meet and maintain a specific capital level for any capital measure, (ii)
"adequately capitalized" if it has a total risk-based capital ratio of 8% or
more, a Tier 1 risk-based capital ratio of 4% or more and a Tier 1 leverage
capital ratio of 4% or more (3% under certain circumstances) and does not meet
the definition of "well capitalized," (iii) "undercapitalized" if it has a total
risk-based capital ratio that is less than 8%, a Tier 1 risk-based capital ratio
that is less than 4% or a Tier 1 leverage capital ratio that is less than 4% (3%
under certain circumstances), (iv) "significantly undercapitalized" if it has a
total risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital
ratio that is less than 3% or a Tier 1 leverage capital ratio that is less than
3%, and (v) "critically undercapitalized" if it has a ratio of tangible equity
to total assets that is equal to or less than 2%. Section 38 of the FDIA and the
regulations promulgated thereunder also specify circumstances under which a
federal banking agency may reclassify a well-capitalized institution as
adequately capitalized and may require an adequately capitalized institution or
an undercapitalized institution to comply with supervisory actions as if such
institution were in the next lower category (except that the FDIC may not
reclassify a significantly undercapitalized institution as critically
undercapitalized).
Within 45 days after an institution receives notice that it is undercapitalized,
significantly undercapitalized or critically undercapitalized, the institution
must file with the appropriate federal banking agency a written capital
restoration plan meeting regulatory requirements. The federal banking agency
must provide the institution with written notice of approval or disapproval
within 60 days after receiving a capital restoration plan.
An institution that is required to submit a capital restoration plan must
concurrently submit a performance guarantee executed by each company that
controls the institution. The guarantee would be limited to the lesser of (i) an
amount equal to 5% of the institution's total assets at the time the institution
was notified or deemed to have notice that it was undercapitalized or (ii) the
amount necessary to restore the relevant capital measures of the institution to
the levels required for the institution to be classified as adequately
capitalized. The guarantee would expire after the federal banking agency
notifies the institution that it has remained adequately capitalized for each of
four consecutive calendar quarters. An institution that fails to submit a
written capital restoration plan in a timely fashion, including any required
performance guarantee(s), or fails in any material respect to implement a
capital restoration plan, would become subject to the restrictions in Section 38
of the FDIA that are applicable to significantly undercapitalized institutions.
Immediately upon becoming undercapitalized, an institution becomes subject to
the provisions of Section 38 of the FDIA (i) restricting payment of capital
distributions and management fees, (ii) requiring that the appropriate federal
banking agency monitor the condition of the institution and its efforts to
restore its capital, (iii) requiring submission of a capital restoration plan,
(iv) restricting the growth of the institution's assets and (v) requiring prior
approval of certain expansion proposals. The appropriate federal banking agency
for an undercapitalized institution also may take any number of discretionary
supervisory actions if the agency determines that any of these actions is
necessary to
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resolve the problems of the institution at the least possible long-term cost to
the deposit insurance fund. Discretionary supervisory actions include requiring
the institution to raise additional capital; restricting transactions with
affiliates; restricting interest rates paid by the institution on deposits;
requiring replacement of senior executive officers and directors; restricting
the activities of the institution and its affiliates; requiring divestiture of
the institution or the sale of the institution to a willing purchaser; and any
other supervisory action that the agency deems appropriate. These and other
supervisory actions may be taken with respect to significantly undercapitalized
and critically undercapitalized institutions.
At December 31, 1998, Strongsville Savings' Tier 1 risk-based capital ratio was
12.19% and, as previously discussed, its risk-based and core capital ratios were
12.60% and 8.02%, respectively. As a result, Strongsville Savings was deemed to
be a "well capitalized" institution for purposes of the above regulations at the
end of 1998 and as such was not subject to the foregoing restrictions.
Capital Distributions Regulation. The OTS regulation on capital distributions
imposes limits on all capital distributions by savings institutions. Since this
regulation applies to the Bank, it will affect the Bank's ability to pay
dividends to its parent, Emerald, which in turn pays dividends to its
shareholders. The regulation establishes a three-tiered system of regulation,
with the greatest flexibility being afforded to well-capitalized institutions.
An institution that has regulatory capital which is at least equal to its fully
phased-in capital requirement, and has not been notified that is "is in need of
more than normal supervision," is a Tier 1 institution. Strongsville Savings was
a Tier 1 institution at the end of 1997. A Tier 1 institution is permitted to
make capital distributions during a calendar year up to the greater of (i) 100%
of its net income to date during the calendar year plus the amount that would
reduce by one-half its surplus capital ratio at the beginning of the calendar
year, or (ii) 75% of its net income over the most recent four-quarter period. In
December 1994, the OTS proposed revisions to its capital distribution
regulations to conform with the capital adequacy classification adopted under
FDICIA. Under the proposal, savings associations generally would be authorized
to make capital distributions so long as they are not deemed in troubled
condition and would remain classified as at least adequately capitalized
following a proposed distribution. Savings associations held by savings and loan
holding companies would still be required to submit prior written notification
to the OTS.
Deposit Insurance. The Bank's deposits are insured up to $100,000 by the FDIC
through the SAIF and backed by the full faith and credit of the United States
Government. The Bank is charged an annual premium for this insurance. The rate
assessed is based on the capital adequacy and supervisory rating of the
institution and is assigned by the FDIC.
The FDIC is authorized to establish separate annual assessment rates for deposit
insurance for members of the Bank Insurance Fund (BIF) and the SAIF. The FDIC
may increase assessment rates for either fund if necessary to restore the fund's
ratio of reserves to insured deposits to its target level within a reasonable
time.
The FDIC has established a risk-based assessment system for both SAIF and BIF
members. On September 30, 1996, the President signed into law an omnibus
appropriations act for fiscal year 1997 that included, among other things, the
recapitalization of the SAIF in a section entitled the Deposit Insurance Funds
Act of 1996. The Act included a provision whereby all insured depository
institutions were charged a one-time special assessment based upon their SAIF
assessable deposits
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as of March 31, 1995. The Bank recorded a pre-tax charge of $2,481,000, which
represented 65.7 basis points of the March 31, 1995 assessable deposits.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines after a hearing that the institution has
engaged or is engaging in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations, or has violated any applicable law,
regulation, order or any condition imposed by an agreement with the FDIC. The
FDIC may also suspend deposit insurance temporarily during the hearing process
for the permanent termination of insurance, if the institution has no tangible
capital. If insurance of accounts is terminated, the accounts at the institution
at the time of the termination, less subsequent withdrawals, would continue to
be insured for a period of six months to two years, as determined by the FDIC.
There are no pending proceedings to terminate the deposit insurance of
Strongsville Savings.
Classification of Assets. Federal regulations require savings institutions to
review their assets on a regular basis and to classify them as "substandard,"
"doubtful" or "loss," if warranted. General valuation allowances for loan losses
are required to be established, as needed, for assets classified as substandard
or doubtful. If an asset is classified as a loss, the institution must either
establish a specific valuation allowance equal to the amount classified as a
loss or charge off such amount. The institution's OTS Regional Director has the
authority to approve, disapprove or modify any asset classification, or the
amounts established as allowances for loan losses. Management believes that
following these procedures results in a level of valuation allowances that is
consistent with generally accepted accounting principles.
Loans to One Borrower and Aggregate Loan Limits. The aggregate amount of loans
which a savings association can make to one borrower is limited to an amount
equal to 15% of the thrift's unimpaired capital and unimpaired surplus. Because
unimpaired capital and surplus is generally synonymous with tangible capital,
loan limits are hereafter referred to in terms of tangible capital. A savings
association may loan to one borrower an additional amount not to exceed 10% of
the association's tangible capital if the additional amount is fully secured by
certain forms of "readily marketable collateral." Real estate-secured loans are
not considered "readily marketable collateral."
Savings associations are also authorized to make loans to one borrower, by order
of the Director of the OTS, in an amount not to exceed the lesser of $30 million
or 30% of tangible capital to develop residential housing, provided (i) the
purchase price of each single-family dwelling in the development does not exceed
$500,000, (ii) the savings association is in compliance with the fully phased-in
capital standards of FIRREA, (iii) the loans comply with applicable
loan-to-value requirements and (iv) the aggregate amount of loans made under
this authority does not exceed 150% of tangible capital. The Bank applied for
permission to use the lending authority described above to service the loan
demands of its largest residential builders and on January 2, 1990, became the
first thrift in the nation to receive the approval of the Director of the OTS.
Pursuant to subsequent applications, the Bank has since annually received
permission from the OTS to use the aforementioned lending authority. For a
discussion of the Bank's usage of this special lending authority and the revised
loans-to-one-borrower regulations of the OTS described below, see " - Lending
Activities - Construction and Development Lending."
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Consumer Laws, Fair Lending and Community Reinvestment Act. Federally chartered
savings associations are subject to regulatory oversight by the OTS under
various consumer protection and fair lending laws. These laws govern, among
other things, truth-in-lending disclosure, equal credit opportunity, fair credit
reporting and community reinvestment. Failure to abide by federal laws and
regulations governing community reinvestment could limit the ability of an
association to open a new branch or engage in a merger transaction. The OTS has
recently revised regulations governing community reinvestment to evaluate actual
lending and investment within an association's designated service area, with
particular emphasis on low-to-moderate income areas and borrowers. These new
regulations also evaluate an association's service to low and moderate-income
areas in terms of branch locations. The Bank does not anticipate a significant
impact on its operations as a result of these revised regulations.
Federal Home Loan Bank System. The Federal Home Loan Banks, currently twelve in
number, are under the regulatory oversight of the Federal Housing Financing
Board. Each Federal Home Loan Bank ("FHLB") provides credit to members in the
form of advances. Strongsville Savings is a member of the FHLB of Cincinnati and
must maintain an investment in the capital stock of that FHLB in an amount at
least equal to 1% of the aggregate outstanding principal amount of Strongsville
Saving's residential mortgage loans, home purchase contracts and similar
obligations at the beginning of each year. Strongsville Savings is in compliance
with this requirement with an investment in FHLB of Cincinnati stock of $3.8
million at December 31, 1998.
Each FHLB is required to establish standards of community investment or service
that its members must maintain for continued access to long-term advances from
the FHLBs. The standards take into account a member's performance under the
Community Reinvestment Act and its record of lending to first-time home buyers.
Long-term advances by a FHLB may be made solely for the purpose of providing
funds for residential housing finance.
Federal Reserve System. The Federal Reserve Board requires all depository
institutions to maintain reserves against their transaction accounts (primarily
NOW and Super NOW checking accounts). Required reserves are generally maintained
in the form of vault cash or in a noninterest-bearing account (or a pass-through
account) at a Federal Reserve Bank, the effect of this reserve requirement is to
reduce an institution's earning assets.
Recent Legislative Developments. With enactment in late 1994 of the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate
Branching Act"), Strongsville Savings may face additional competition from
financial institutions headquartered outside of the State of Ohio. The
Interstate Branching Act will allow banks and their holding companies
headquartered outside of Ohio to enter Strongsville Savings' market through
acquisition, merger or de novo branching.
On September 30, 1996, President Clinton signed into law the Regulatory
Paperwork Reduction Act, including the Deposit Insurance Funds Act in Subtitle G
thereof. This legislation eliminated the premium differential between
SAIF-insured institutions and BIF-insured institutions by recapitalizing the
SAIF's reserves to the required ratio, principally through a one-time special
assessment at the end of 1996. The new legislation also provides for the merger
of the BIF and the SAIF effective January 1, 1999, with merger of the separate
deposit insurance funds being contingent on prior elimination of the thrift
charter.
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State Regulation. As an Ohio-chartered savings institution, Strongsville Savings
is subject to regulation and supervision by the Ohio Division of Financial
Institutions (the "Division") as well. Strongsville Savings is subject to
examination at least once within every 18-month period by the Division. The
lending and investment authority of Strongsville Savings is prescribed by Ohio
laws and regulations, as well as applicable federal laws and regulations, and
Strongsville Savings is prohibited from engaging in any activities not permitted
by such laws and regulations.
Strongsville Savings is required by Ohio law and regulations to comply with
certain reserve and net worth requirements. Currently, Ohio-chartered savings
institutions are required to establish and maintain a reserve for the absorption
of bad debts and other losses in an amount at least equal to 3% of the
institution's savings account balance. For purposes of complying with this
reserve requirement, such savings institutions are able to include the amount of
any permanent stock issued and outstanding, contributed surplus, undivided
profits, specific loss or valuation reserves and any other nonwithdrawable
accounts. In addition, Ohio-chartered savings institutions that are rated a
"composite one" (the highest rating under the UFIRS system, discussed above) are
required to establish and maintain a ratio of net worth to total assets of not
less than 3%. All other Ohio-chartered savings institutions are required to have
a ratio of net worth to total assets of not less than 4%. Net worth consists of
common stockholders' equity, noncumulative perpetual preferred stock (including
any related surplus), minority interests in the equity capital accounts of
consolidated subsidiaries and subordinated debentures (in varying amounts and
percentages). At December 31, 1998, Strongsville Savings was in compliance with
applicable reserve and net worth requirements.
In addition, Ohio law restricts the ability of Ohio-chartered savings
institutions to invest in, among other things, (i) commercial real estate loans
(including commercial construction real estate loans) up to 20% of total assets;
(ii) land acquisition and development loans up to 2% of total assets; (iii)
consumer loans, commercial paper and corporate debt securities up to 20% of
total assets; (iv) commercial business loans up to 10% of total assets; and (v)
capital stock, obligations and other securities of service corporations up to
15% of total assets. Ohio law also sets forth the maximum loan-to-value ratios
with respect to various types of loans.
The investment authority of Ohio-chartered savings institutions is broader in
many respects than that of federally chartered savings institutions. However,
since the enactment of FIRREA, state-chartered savings institutions, such as
Strongsville Savings, are generally prohibited from acquiring or retaining any
equity investment, other than certain investments in service corporations, of a
type or in an amount that is not permitted for a federally chartered savings and
loan association. This prohibition applies to equity investments in real estate,
investments in equity securities and any other investment or transaction that is
in substance an equity investment, even if the transaction is nominally a loan
or other permissible transaction. At December 31, 1998, Strongsville Savings had
no investments subject to the foregoing prohibition.
Furthermore, a state-chartered savings institution may not engage as principal
in any activity not permitted for federal institutions unless the FDIC has
determined that such activity would pose no significant risk to the affected
deposit insurance fund and the institution is in compliance with the capital
standards prescribed under FIRREA. When certain activities are permissible for a
federal institution, the state institution may engage in the activity in a
higher amount if the FDIC has not determined that such activity would pose a
significant risk of loss to the affected deposit insurance fund and the
association meets its capital requirements. This increased investment authority
does not
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34
apply to investments in nonresidential real estate loans. At December 31, 1998,
Strongsville Savings had no investments that were affected by the foregoing
limitations.
Under Ohio law, an out-of-state savings institution or holding company may
charter or otherwise acquire an Ohio-chartered savings institution or holding
company if the Division determines that the laws of such other state permit an
Ohio-chartered savings institution or holding company to charter or otherwise
acquire an in-state savings institution or holding company on terms that are, on
the whole, substantially no more restrictive than Ohio law. Any such acquisition
would require the out-of-state entity to apply to the Division and receive
Division approval.
FEDERAL AND STATE TAXATION
Federal Taxation. Emerald Financial is subject to the provisions of the Internal
Revenue Code of 1986, as amended (the Code), which subject corporations to an
income tax generally calculated at 34% of taxable income. The Company and its
subsidiaries file a consolidated federal income tax return.
The Bank's tax bad-debt deduction prior to 1996 was determined under Section 593
of the Internal Revenue Code, and was the greater of the amounts using the
percentage-of-taxable income accounting method or the specific charge-off
accounting method. During 1996, legislation was passed that repealed Section 593
of the Internal Revenue Code, thereby eliminating the percentage-of-taxable
income accounting method after 1995. The excess reserves between 1988 and 1995
are required to be recaptured into taxable income over a six year period
beginning in 1996. This recapture was delayed for a two year period because the
Bank met certain residential loan requirements. The amounts to be recaptured
have been accrued for under SFAS No. 109, Accounting for Income Taxes. The
recapture amount of $3.3 million will result in tax payments of approximately
$1.1 million. The pre-1988 reserve provisions are subject to recapture
requirements only in the case of certain excess distributions to, and
redemptions of shareholders or if the Bank no longer qualifies as a "bank." Tax
bad debt deductions accumulated prior to 1988 by the Bank are approximately $2.4
million. No deferred income taxes have been provided on these bad debt
deductions and no recapture of these amounts is anticipated.
Audits of tax returns have been completed by the Internal Revenue Service with
respect to tax returns through 1993 for the Bank.
See Note 1 and Note 8 of the "Notes to Consolidated Financial Statements" for
further information concerning the financial statement reporting of federal
income taxes of the Bank.
State Taxation. Strongsville Savings is subject to the Ohio franchise tax on
financial institutions of 1.4% of its net worth plus certain reserve amounts.
Total net worth for this purpose is reduced by certain exempt assets.
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35
Item 2. Properties
The Bank owns its headquarters building in Strongsville, Ohio. The following
table indicates the location of each branch office, whether the same is owned or
leased and, if leased, the expiration date of the lease.
Lease
Location Owned/Leased Expiration Date
-------- ------------ ---------------
Strongsville Main Office Owned
14092 Pearl Road
Strongsville, Ohio 44136
Branches
Hinckley Office Owned
1585 Center Road
Hinckley, Ohio 44233
Berea Plaza Office Leased 2000
404 West Bagley Road
Berea, Ohio 44017
Avon Office Leased 2005
36839 Detroit Road
Avon, Ohio 44011
Avon Lake Office Leased 2004
409 Lear Road
Avon Lake, Ohio 44012
Medina Township Office Leased 2004
3455 Medina Road
Medina Township, Ohio 44256
North Royalton Office Leased 1999
13901 Ridge Road
North Royalton, Ohio 44133
Wellington Office Owned
161 East Herrick Avenue
Wellington, Ohio 44090
Southland Office Owned
6809 West 130th Street
Parma Heights, Ohio 44130
Westlake Office Owned
25151 Detroit Avenue
Westlake, Ohio 44145
North Ridgeville Office Leased 2004
32800 Center Ridge Road
North Ridgeville, Ohio 44039
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36
Brecksville Office Leased 2010
8801 Brecksville Road
Brecksville, Ohio 44141
Broadview Heights Office Leased 2005
7976 Broadview Road
Broadview Heights, Ohio 44147
Brunswick Office Leased 2006
1136 Pearl Road
Brunswick, Ohio 44212
Columbia Station Owned
26700 Royalton Road
Columbia Station, Ohio 44020
The Bank owns and operates twelve ATMs at various Community Financial Centers
and is a member of the following ATM networks: MAC (formerly Green Machine in
Ohio), Money Station and Plus System, all of which are ATM networks with members
nationwide.
At December 31, 1998, the net book value of the Bank's investment in premises
and equipment totaled $4.9 million.
Item 3. Legal Proceedings
The Bank and its subsidiary are involved as plaintiff or defendant in various
legal proceedings incident to their business. In the opinion of management,
these proceedings are not, either individually or in the aggregate, material to
the Bank and its subsidiary.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters subject to a vote of security holders during the quarter
ended December 31, 1998.
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37
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The capital stock of Emerald Financial Corp. began trading under the symbol
"EMLD" on the National Association of Securities Dealers Automated Quotation
System (NASDAQ) National Market System on March 7, 1997. Prior to March 7, 1997,
the Company's stock was traded under the symbol "SSBK" on the NASDAQ small cap
market. As of February 28, 1999, there were approximately 503 holders of the
Company's capital stock. Emerald offers a Dividend Reinvestment Program (the
DRIP) to shareholders of record, although the DRIP has been suspended as of
February 27, 1999 in light of Emerald's pending merger with and into Fifth Third
Bancorp.
The following table sets forth the high and low prices of the Company's capital
stock and cash dividends per share for the periods shown.
Dividends Paid
Year Period High Low Per Share
- --------------------------------------------------------------------------------
1996 First Quarter $ 5.00 $ 4.63 2.7(cent)
Second Quarter 5.44 4.88 3.0
Third Quarter 5.63 5.13 3.0
Fourth Quarter 5.63 5.25 3.0
1997 First Quarter 6.13 5.31 3.0
Second Quarter 7.50 5.69 3.0
Third Quarter 8.13 6.63 3.0
Fourth Quarter 11.06 7.88 3.0
1998 First Quarter 12.38 10.25 3.5
Second Quarter 16.25 10.63 3.5
Third Quarter 14.00 10.00 8.5
Fourth Quarter 11.88 9.75 4.0
Information contained in Note 16 of the Notes to Consolidated Financial
Statements in "Item 8. Financial Statements and Supplementary Data" and "Item 1.
Business - Regulation Capital Distribution Regulation" provides additional
information concerning restrictions on the payment of dividends.
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38
Item 6. Selected Financial Data
FIVE-YEAR SUMMARY
At and For the Year Ended December 31,
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Data)
Summary of Operations
For the year
Net interest income after provision
for loan losses $ 16,653 $ 16,490 $ 15,059 $ 13,830 $ 12,917
Non interest income 4,368 2,306 2,435 2,052 1,194
Income before cumulative effect of
change in accounting principle 7,639 6,141 3,548 4,717 4,410
Cumulative effect of change in
accounting principle 117 -- -- -- --
- --------------------------------------------------------------------------------------------
Net income $ 7,756 $ 6,141 $ 3,548 $ 4,717 $ 4,410
============================================================================================
Per common share
Basic earnings per share
Income before cumulative effect of
change in accounting principle $ 0.75 $ 0.61 $ 0.35 $ 0.47 $ 0.44
Cumulative effect of change in
accounting principle 0.01 -- -- -- --
- --------------------------------------------------------------------------------------------
Net income $ 0.76 $ 0.61 $ 0.35 $ 0.47 $ 0.44
============================================================================================
Diluted earnings per share
Income before cumulative effect of
change in accounting principle $ 0.71 $ 0.59 $ 0.35 $ 0.47 $ 0.44
Cumulative effect of change in
accounting principle 0.01 -- -- -- --
- --------------------------------------------------------------------------------------------
Net income $ 0.72 $ 0.59 $ 0.35 $ 0.47 $ 0.44
============================================================================================
Summary of Financial Condition
Total assets $668,459 $603,965 $567,490 $492,097 $419,258
Investment securities 51,193 46,696 69,680 75,949 79,700
Mortgage-backed securities 44,963 53,137 52,180 52,005 37,274
Total gross loans 581,569 504,443 457,919 364,766 306,921
Loans-net 532,070 469,280 425,855 336,351 281,843
Goodwill 552 663 786 920 1,062
Deposits 559,235 520,690 493,471 432,563 363,050
Advances from Federal Home Loan Bank 48,232 28,138 25,234 13,333 15,583
Shareholders' equity 54,784 48,515 43,158 41,091 37,153
- --------------------------------------------------------------------------------------------
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39
FIVE-YEAR SUMMARY
At and For the Year Ended December 31,
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Data)
Per Share Information(6)
Dividends paid $ 0.20 $ 0.12 $ 0.12 $ 0.10 $ 0.08
Book value 5.33 4.78 4.27 4.06 3.67
Tangible book value(1) 5.29 4.70 4.19 3.97 3.57
Other Statistical and Operating Data
Return on average assets(ROAA) 1.24% 1.03% 0.68% 1.03% 1.18%
ROAA before effect of one-time
SAIF assessment 1.24% 1.03% 0.99% 1.03% 1.18%
Return on average equity (ROAE) 14.83% 13.45% 8.38% 12.07% 12.47%
ROAE before effect of one-time
SAIF assessment 14.83% 13.45% 12.25% 12.07% 12.47%
Net yield on average interest-
earning assets(2) 2.89% 2.87% 3.00% 3.15% 3.58%
Interest rate spread during the year(3) 2.62% 2.53% 2.62% 2.76% 3.24%
Other noninterest expense to
average assets(4) 1.55% 1.55% 1.79% 1.85% 1.93%
Dividend payout ratio excluding one-time
SAIF assessment 25.84% 19.79% 22.94% 21.46% 18.08%
Total allowance for loan losses to
nonperforming loans 88.87% 75.80% 83.76% 56.91% 120.11%
Allowance for loan losses to total loans 0.33% 0.35% 0.33% 0.35% 0.34%
Nonperforming loans to total loans 0.38% 0.46% 0.40% 0.61% 0.28%
Nonperforming assets to total assets 0.35% 0.55% 0.30% 0.42% 0.19%
Net charge-offs to average loans(5) 0.11% 0.00% 0.01% 0.01% -0.01%
Number of full-service offices 14 14 14 12 10
Weighted average common
shares outstanding 10,263,081 10,130,312 10,123,200 10,123,200 10,123,200
Capital Ratios
Equity to assets:
Average for the year 8.33% 7.68% 8.06% 8.52% 9.46%
At year end 8.20% 8.03% 7.61% 8.35% 8.86%
Tangible capital(1) 8.02% 7.74% 7.49% 8.14% 8.64%
Core capital 8.02% 7.74% 7.49% 8.14% 8.87%
Risk-based capital 12.60% 12.85% 12.93% 13.51% 14.22%
- ---------------------------------------------------------------------------------------------------------------------
(1) Tangible book value and tangible capital each represent shareholders'
equity less goodwill and net unrealized gains (losses) on securities
available for sale.
(2) Net interest income divided by average interest-earning assets.
(3) The difference between the weighted average yield on interest-earning
assets and the weighted average rate paid on interest-bearing liabilities.
(4) Goodwill amortization is excluded from the numerator in this ratio.
(5) Net charge-offs during the year to average loans outstanding during the
year.
(6) All share and per-share information has been retroactively adjusted for
the two-for-one stock split on May 15, 1998.
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40
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
EMERALD FINANCIAL CORP.
MANAGEMENTS' DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
December 31, 1998
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41
Management's Discussion and Analysis
Emerald Financial Corp. (Emerald or Company), a unitary thrift holding company,
became The Strongsville Savings Bank's (Strongsville Savings or Bank) holding
company 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.
Strongsville Savings takes great pride in its history of providing friendly and
professional service to its customers. Our commitment to providing customers
with the financial products and services they need and want has brought success
to Strongsville Savings and to our customers. We help our customers achieve
their financial goals by providing a variety of products. The Bank offers a
traditional product line which includes NOW accounts, IRA accounts and a variety
of term deposit, passbook and other deposit vehicles. Many customers have
enjoyed the American dream of home-ownership with mortgage loan financing from
Strongsville Savings. We offer home equity lines of credit, loans for
residential construction and development, commercial property and many other
purposes.
Emerald's franchise is strong with a network of 15 Community Financial Centers
(Offices) throughout Southwestern Cuyahoga County, Lorain County and Medina
County. Our strategy is to position our full service Offices in communities
poised for growth. Our customer service approach has proved successful as
evidenced by our strong growth at each Office. We expect the tradition to
continue through our close attention to the marketplace, to our customers and to
their financial needs.
FINANCIAL REVIEW
The Company's total assets were $668.5 million at December 31, 1998,
representing an increase of $64.5 million or 10.7% over the previous year total
assets of $604.0 million. The Company's 13.4% loan growth was funded by
increases in deposits and by advances from the Federal Home Loan Bank (FHLB) of
Cincinnati. Emerald's deposits increased 7.4% during 1998 from $520.7 million to
$559.2 million.
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42
The composition of Emerald's assets and liabilities at year end 1998 and 1997
are displayed below.
[The following tables were depicted as pie charts in the printed material]
1998 Total Assets
Total loans,net Cash & investments Other
--------------- ------------------ -----
1998 Total Assets 80% 16% 4%
1998 Total Liabilities & Shareholders' Equity
Total deposits Shareholders' equity Other
-------------- -------------------- -----
Total Liabilities
& Shareholders' Equity 84% 8% 8%
1997 Total Assets
Total loans,net Cash & investments Other
--------------- ------------------ -----
1997 Total Assets 78% 18% 4%
1997 Total Liabilities & Shareholders' Equity
Total deposits Shareholders' equity Other
-------------- -------------------- -----
Total Liabilities
& Shareholders' Equity 86% 8% 6%
Shareholders' equity increased $6.3 million, or 12.9% to $54.8 million during
1998 primarily through the retention of net income of $7.8 million offset by
dividends of $2.0 million.
Emerald's dividend payments have increased over the past five years as noted
below. The Bank paid quarterly dividends totaling 19.5(cent) per share for 1998,
an increase of 62.5% over the 12.0(cent) per share paid in 1997. The Company's
stock split two-for-one on May 15, 1998. All share and per-share information has
been adjusted to reflect the effect of the stock split.
[The following table was depicted as a line charts in the printed material]
1994 1995 1996 1997 1998
Dividends per share 0.08 0.1 0.12 0.12 0.195
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RESULTS OF OPERATIONS
Emerald strives to produce strong, stable core earnings from operations. Core
earnings consist of net interest income and recurring non-interest income,
reduced by recurring non-interest expenses. The Company's revenue enhancement
and cost reduction measures have contributed to the increase in core earnings
over the three years ended December 31, 1998, as evidenced in the chart below.
Recurring noninterest income excludes gains (losses) on sales of loans and
other assets for all periods presented.
Core earnings before federal income tax for the three years ended December 31,
1998, are noted below. 1996 noninterest expense is before the effect of the
one-time SAIF assessment of $2.5 million on September 30, 1996.
- --------------------------------------------------------------------------------
December 31
1998 1997 1996
- --------------------------------------------------------------------------------
(In Millions)
Net interest income $17.4 $16.7 $15.4
Less provision for loan losses 0.7 0.2 0.3
- --------------------------------------------------------------------------------
16.7 16.5 15.1
Noninterest income (recurring) 2.8 1.9 1.3
Noninterest expense (recurring) 9.8 9.5 9.5
- --------------------------------------------------------------------------------
Core earnings $ 9.7 $ 8.9 $ 6.9
- --------------------------------------------------------------------------------
NET INTEREST INCOME
Net interest income is the chief component of net income. Net interest income is
the difference between interest income on interest-earning assets and interest
expense on interest-bearing liabilities. Net interest income is determined by
changes in the composition of interest-earning assets and interest-bearing
liabilities and fluctuations in the levels of interest rates.
Interest rates in general declined slightly throughout the three years ended
December 31, 1998. Yields on interest-earning assets decreased six basis points
during 1998 while costs on interest-bearing liabilities decreased fifteen basis
points during the year.
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44
INTEREST INCOME
Emerald's primary source of income is interest income from its loan portfolio
and other interest-earning assets. The Company's commitment to providing
residential home loans is evident by its $400.3 million portfolio of permanent
and construction single-family residential mortgage loans. The Company's
interest-earning assets include the residential mortgage loan portfolio, the
residential acquisition and development loan portfolio, the other loan
portfolios and the investment securities and mortgage-backed securities
portfolios.
Emerald's interest income was $46.1 million in 1998, $44.9 million in 1997 and
$39.9 million in 1996, representing annual increases of 2.53% and 12.72% for the
years ended December 31, 1998 and 1997, respectively. These increases are
attributable to a combination of the effects of increases in volume and changes
in rate that are set forth in Table 2. Average interest-earning assets were
$600.2 million with an average yield of 7.68% in 1998, $580.2 million with an
average yield of 7.74% in 1997 and $512.2 million with an average yield of 7.78%
in 1996. See Table 1 for more details regarding average interest-earning assets
and their yields.
INTEREST EXPENSE
Emerald's primary source of funding for interest-earning assets is retail
deposits. Management believes that by providing professional service, the Bank
has achieved deposit growth during a period characterized by disintermediation.
As financial institutions often struggle to retain retail deposits, the Bank has
been able to increase deposits by 7.4% in 1998 and 5.5% in 1997. Management has
dedicated resources to focus employees to providing excellent customer service,
to understanding the Bank's products and to cross sell the Banks products.
Management believes the Bank has a stable deposit base because the base consists
of retail deposits from the people in the communities the Bank serves.
The Bank's interest expense was $28.7 million in 1998, $28.3 million in 1997 and
$24.5 million in 1996. The change in interest expense was primarily a result of
the growth in deposits. The average cost of interest-bearing liabilities
decreased fifteen basis points to 5.06% during 1998 from 5.21% in 1997. See
tables 1 and 2 for more information regarding average balances, average rates
and changes in interest expense attributable to changes in volume and changes in
rates.
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45
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. The table 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, and 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 at amortized cost.
- ----------------------------------------------------------------------------------------------------------------------------------
TABLE 1
AVERAGE BALANCE TABLE
Year Ended December 31,
1998 1997 1996
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Interest-Earning Assets
Loans, net(1) $488,438 39,077 8.00% $451,820 36,892 8.17% $394,329 32,442 8.23%
Investment securities 41,553 2,690 6.47% 56,712 3,441 6.07% 63,189 3,836 6.07%
Mortgage-backed securities 52,117 3,419 6.56% 56,708 3,882 6.85% 44,792 3,110 6.94%
Other interest-earning assets 18,094 913 5.05% 14,991 713 4.76% 9,937 470 4.73%
- ----------------------------------------------------------------------------------------------------------------------------------
Total 600,202 46,099 7.68% 580,231 44,928 7.74% 512,247 39,858 7.78%
Noninterest-earning assets 26,982 14,734 12,808
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $627,184 $594,965 $525,055
==================================================================================================================================
Interest-Bearing Liabilities
Deposits(2) $533,380 26,779 5.02% $513,950 26,575 5.17% $457,974 23,516 5.13%
Advances from FHLB 34,079 1,957 5.74% 28,095 1,680 5.98% 16,303 978 6.00%
- ----------------------------------------------------------------------------------------------------------------------------------
Total 567,459 28,736 5.06% 542,045 28,255 5.21% 474,277 24,494 5.16%
Noninterest-bearing liabilities 7,427 7,256 8,434
Shareholders' equity 52,298 45,664 42,344
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $627,184 $594,965 $525,055
==================================================================================================================================
Net interest income 17,363 16,673 15,364
Interest-rate spread 2.62% 2.53% 2.62%
Net interest margin 2.89% 2.87% 3.00%
Ratio of average interest-
earning assets to average
interest-bearing liabilities 105.77% 107.04% 108.01%
(1) Average balances include non-accrual loans. Interest income includes
deferred loan fee amortization of $1,372,000, $1,613,000 and $1,650,000
for the years ended December 31, 1998, 1997 and 1996, respectively.
(2) Deposits include noninterest-bearing demand accounts which were
$19,581,000, $11,739,000 and $11,535,000 at December 31, 1998, 1997 and
1996, respectively.
- ----------------------------------------------------------------------------------------------------------------------------------
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46
Table 2 presents certain information regarding changes in interest income and
interest expense of the Company for the years ended December 31, 1998, 1997 and
1996. The table shows the changes in interest income and expense by major
category attributable to changes in the average balance (volume) and changes in
interest rates. The net change not attributable to either rate or volume is
allocated on a pro-rata basis to the change in rate or volume. Assets available
for sale are included in the major asset category at amortized cost.
- ----------------------------------------------------------------------------------------------
TABLE II
RATE/VOLUME 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 $ 2,940 $ (755) $ 2,185 $ 4,684 $ (234) $ 4,450
Investment securities (996) 213 (783) (363) -- (363)
Mortgage-backed securities (304) (159) (463) 812 (40) 772
Other 155 45 200 240 3 243
- ----------------------------------------------------------------------------------------------
Total 1,795 (656) 1,139 5,373 (271) 5,102
- ----------------------------------------------------------------------------------------------
Interest expense on
interest-bearing liabilities
Deposits 875 (671) 204 2,876 183 3,059
Advances from FHLB 342 (65) 277 705 (3) 702
- ----------------------------------------------------------------------------------------------
Total 1,217 (736) 481 3,581 180 3,761
- ----------------------------------------------------------------------------------------------
Change in net interest income $ 578 $ 80 $ 658 $ 1,792 $ (451) $ 1,341
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
PROVISIONS FOR LOAN LOSSES
The provision for loan losses represents a charge to income for possible credit
losses on loans. The Bank maintains the level of the allowance for loan losses
at an amount adequate to absorb potential losses inherent in the loan portfolio.
A quarterly review of the adequacy of the allowance for loan losses considers
growth in the loan portfolio, potential losses identified by the portfolio
review process, and the Company's historical loan loss experience. In addition,
management considers economic conditions, including the overall level of
interest rates and the general trend of the national economy, local economy and
housing markets.
The provision for loan losses was $710,000 in 1998, $215,000 in 1997 and
$305,000 in 1996. The provisions for the three years ended December 31, 1998,
reflect generally stable economic conditions in Emerald's market area, as well
as the high credit quality of the Company's loan
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47
portfolio. The allowance for loan losses throughout 1998, 1997 and 1996 was
commensurate with management's estimate of the credit risk in the loan
portfolio.
NONINTEREST INCOME
Noninterest income is composed mainly of fees the Bank earns from services
performed for customers and for servicing loans sold to the secondary market.
Loan servicing and other loan related fees were $859,000 in 1998, $738,000 in
1997 and $623,000 in 1996.
Gains on the sale of loans to the secondary market and gains on sales of
securities and other assets are included in noninterest income. This is the
component of noninterest income with the greatest level of variation. Gains on
sales of loans experience variations due to the number of loans sold to the
secondary market and to the price offered by the secondary market for such
loans. The Bank sells loans to the secondary market in conjunction with certain
fixed-rate loan programs, to provide funding and as an interest rate risk
management tool. The Bank recorded gains on loan sales of $1,035,000 in 1998,
$437,000 in 1997 and $711,000 in 1996.
NONINTEREST EXPENSE
Emerald's major subsidiary, Strongsville Savings Bank, has made a commitment to
expand its franchise value by blanketing its market area with easy access
Community Financial Centers. We believe the expansion of the Company's financial
network will benefit current and future customers by being close to their homes.
There are operating costs involved in franchise expansion; however, we believe
the benefits of expanding to provide full coverage to our targeted market are
worth the investment. Our strategy has shown good results as the deposits at the
five Offices added since 1993 stood at $104.3 million at December 31, 1998, and
$87.3 million at December 31, 1997. The Bank entered the Avon Lake market when
it opened its fifteenth office in February 1999 in Avon Lake.
While Strongsville Savings grew and expanded its franchise and services into
more communities, management worked hard to control costs. The Company's ratio
of noninterest expense to average assets was 1.55% in 1998 and in 1997 an
improvement over the 1.79% in 1996. The common industry benchmark for this ratio
is 2.00% or less. According to SNL Securities Thrift Performance as of September
30, 1998, industry averages were 2.25% for the twelve months ended September 30,
1998, and 2.21% and 2.23% for the years ended December 31, 1997 and 1996,
respectively.
Noninterest expense was $9,790,000 in 1998, $9,485,000 in 1997 and $9,524,000 in
1996. The increase of $305,000 in 1998 is primarily due to marketing and data
processing expenses.
Congress passed legislation to recapitalize the SAIF fund of the FDIC during
1996 that required thrift institutions, such as Strongsville Savings, to pay a
one-time assessment to recapitalize the SAIF fund of 65.7(cent) per $100 of
deposits as of March 31, 1995. The Bank recognized a charge to
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48
earnings of $2.5 million (pre-tax) as a result. The Company has adjusted 1996
results in the paragraphs above as if this one-time charge had not been
incurred.
FEDERAL INCOME TAXES
The Bank provided for federal income taxes as follows: $3,592,000 in 1998,
$3,170,000 in 1997 and $1,941,000 in 1996. The changes in the level of the
Company's provision for federal income taxes were primarily due to changes in
the level of pre-tax income. The effective tax rates for the periods were 32.0%
in 1998, 34.0% in 1997 and 35.4% in 1996. The reduction in the effective rate is
attributable to tax planning strategies implemented by the Company.
LENDING ACTIVITIES
The cornerstone of Strongsville Savings' lending activities is providing
mortgage loans to homeowners. The Bank principally originates conventional first
mortgage loans secured by residential real estate. The Bank's newest loan
product, the Emerald Home Equity Line of Credit (the Emerald Line), enables
customers to utilize the equity in their homes to fund improvements, education
or whatever they choose. The Emerald Line's interest rate is based on the
Company's prime rate. Loans made to home-owners on owner-occupied one-to-four
family residences typically have low credit risk because the borrower occupies
the home. Credit risk management is also enhanced by the historically stable
real estate values in Northeastern Ohio.
Strongsville Savings has developed a niche in the residential construction loan
market. The Bank makes residential land development loans to local builders and
developers with whom strong business relationships have been developed. These
loans are made on land zoned for residential use which will be developed into
residential building lots. In addition, the Bank provides construction loans to
builders for the construction of homes, most of which are pre-sold, and to
individuals for the construction of their homes.
Management considers these development and construction loans as having somewhat
greater credit risk than conventional residential mortgage loans because there
is uncertainty related to the completion of projects within their time and cost
budgets. Strongsville's management constantly monitors these loans and reviews
the progress of each with the borrowers and contractors to manage and mitigate
the risk involved.
Management believes that loans secured by commercial property may present a
higher degree of credit risk than residential loans. The factors that tend to
increase the credit risk of these loans include the concentration of principal
in a limited number of loans and borrowers, the effects of general economic
conditions on income-producing properties and the increased difficulty of
evaluating and monitoring such properties. Furthermore, the repayment of loans
secured by commercial real estate is typically dependent upon the cash flows of
the related business enterprise. The Bank has instituted procedures to monitor
the cash flows of its commercial real estate loan customers.
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49
ASSET QUALITY
Management has designed stringent underwriting standards to minimize credit risk
in the Company's loan portfolio. All loans are subject to these standards, which
include evaluating each applicant's ability to make periodic payments, his or
her equity in the property, and the value of the underlying collateral.
Management monitors the loan portfolio to determine that the level of credit
risk remains stable and acceptable.
The Bank defines non-performing loans as those loans where there is an
indication that the borrower no longer has the ability to repay. Generally,
these loans are more than 90 days delinquent. Non-performing assets include
non-performing loans. The Company's non-performing assets have consistently been
below peer group averages. The Company's ratio of non-performing assets to total
assets was 0.35%, 0.55% and 0.30% at December 31, 1998, 1997 and 1996,
respectively. According to the SNL Securities Thrift Performance as of September
30, 1998, the industry average ratio of non-performing assets to total assets
was 0.50% at September 30, 1998, and 0.54% and 0.59% at December 31, 1997 and
1996, respectively.
- --------------------------------------------------------------------------------
Table V December 31,
Non-performing Assets 1998 1997 1996
- --------------------------------------------------------------------------------
Total non-performing loans $ 2,000 $ 2,144 $ 1,699
Other non-performing assets 344 1,169 --
- --------------------------------------------------------------------------------
Total non-performing assets $ 2,344 $ 3,313 $ 1,699
- --------------------------------------------------------------------------------
Non-performing assets to
total assets 0.35% 0.55% 0.30%
Allowance for loan losses to
non-performing loans 88.87% 75.80% 83.76%
Net charge-offs to average
loans outstanding for the year 0.11% 0.00% 0.01%
- --------------------------------------------------------------------------------
At December 31, 1998, non-performing loans included eleven residential loans
totaling $987,000, two construction loans totaling $654,000, two land loans
totaling $181,000, two commercial business loans totaling $171,000 and eight
consumer loans totaling $7,000. Other non-performing assets included three
investments totaling $344,000. The Bank's strict underwriting standards and
collection procedures serve to minimize credit risk.
At December 31, 1998, there was one loan secured by a funeral home totaling
$483,000 which is not included in the table above. Indications of possible cash
flow problems have caused management concern regarding the borrower's ability to
comply with present loan repayment terms and may result in the classification of
this loan as non-performing in the future. Based on
48
50
written opinions from an independent fee appraiser, the collateral value of the
property is sufficient to cover the total outstanding debt.
LIQUIDITY
The Bank is required to maintain an average daily balance of liquid assets
(cash, certain time deposits, bankers' acceptances, specified United States
Government, state or federal agency obligations, shares of certain mutual funds
and certain corporate debt securities and commercial paper) equal to a monthly
average of not less than specified percentages of its net withdrawable deposit
accounts plus short-term borrowings. The average eligible liquidity at December
31, 1998 was 8.57%, which exceeded the 5.0% requirement. The Company's
short-term liquidity at December 31, 1998, was 5.67%, which exceeded the 1.0%
requirement.
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 funds from deposit inflows and loan payments primarily
to originate loans, and to purchase short-term investment securities and
interest-earning deposits.
At December 31, 1998, loans-in-process to be funded over a future period of time
totaled $43.5 million, and loan commitments or loans committed but not closed
totaled $47.4 million. There were no commitments to purchase or sell loans at
December 31, 1998 or 1997. Funding for these amounts is expected to be 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 (FHLB)
of Cincinnati whereby the Bank can obtain advances. The Bank had $48.2 million
in advances outstanding from FHLB of Cincinnati at December 31, 1998.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data herein have been prepared in
accordance with generally accepted accounting principles, which require
measurement of financial condition and results of operations in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation.
Changes in the general level of prices for goods and services have a relatively
minor impact on the Company's total expenses because the Company's primary
assets and liabilities are monetary in nature. Increases in operating expenses
such as salaries and maintenance are in part attributable to inflation. However,
interest rates have a far more significant effect than inflation on the
performance of financial institutions, including the Bank.
49
51
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.
Emerald has established a company-wide program to address the Y2K issue. The
effort encompasses software, hardware, networks, PC's and other facilities, and
supplier and customer readiness. The target date for mission critical system to
be Y2K compliant is March 31, 1999. The Company is currently on schedule and is
over 90% complete. The Company has identified and remediated its mission
critical systems. Testing of mission critical systems is scheduled to be
completed by March 31, 1999. The Company has established contingency plans for
its mission critical systems which involve alternative processing or manual
processing, depending on the nature of each system involved. Through 1998, the
Company has expensed incremental remediation costs of $25,000 with remaining
incremental remediation costs estimated at $ 60,000. The company does not track
employee time separately for Y2K projects, therefore any Y2K-related payroll
costs are included in compensation expense.
There are certain market risks associated with the Y2K issue that could impact
the Company. The Bank may experience increases in problem loans and credit
losses in the event that borrowers fail to properly respond to the Y2K issue.
Costs of funds could increase in the event that customers react to publicity
about the Y2K issue by withdrawing deposits. The Company could also be impacted
if third parties it deals with in conducting its business, such as governmental
agencies, telephone companies, and other service providers, fail to properly
address the Y2K issue. The Bank has identified critical business interfaces and
is assessing their efforts related to the Y2K issue.
NEW ACCOUNTING PRONOUNCEMENTS
See the Notes to the Consolidated Financial Statements, Note 1, caption New
Accounting Standards for a discussion of accounting and reporting developments
affecting the Bank.
50
52
Item 7(a). Quantitative and Qualitative Disclosures about Market Risk
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. This strategy has resulted in an investment of $264.7 million, or 45.5%
of the Company's total loan portfolio in ARM loans at December 31, 1998. The
Bank originated $156.8 million, $129.3 million and $97.7 million in ARM loans in
1998, 1997 and 1996, respectively. Although the Bank is committed to originating
ARM loans, management believes that discounted "teaser" rate loans diminish the
effectiveness of ARM loans for managing interest rate risk; therefore the Bank
does not offer teaser rate loans.
Strongsville Savings sold $94.9 million in long-term fixed-rate loans to Freddie
Mac during 1998. The Bank only sells loans to the secondary market on a
non-recourse basis with servicing retained.
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 Company's investment portfolio are
available for sale thus allowing the company the flexibility to respond to
anticipated interest rate risk challenges or opportunities.
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. At December 31, 1998, the Company's long-term fixed-rate deposits
with terms exceeding three years were $40.2 million.
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.
51
53
Generally, a negative gap indicated that a company's net interest income (NII)
would decrease during periods of rising interest rates and NII would increase
during periods of declining interest rates. The Company considers the gap as a
component of its interest rate risk analysis and is pleased with the decline in
negative gap from 4.11% of assets at December 31, 1997 to negative 3.71% of
total assets at December 31, 1998.
Table 6 illustrates the maturities or repricing of the Company's assets and
liabilities at December 31, 1998 based on information from the financial model
used by Strongsville Savings concerning prepayments and decay rates of major
asset and liability categories.
- ----------------------------------------------------------------------------------------------------------------------------------
Table VI
December 31, 1998
10 or
Maturing or Within 6-12 1-3 3-5 5-10 More Total Fair
Repricing Periods 6 Months Months Years Years Years Years Value
- ----------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets
Adjustable-rate mortgages $ 130,704 $ 33,206 $ 40,581 -- -- -- $ 204,491 $ 204,480
Weighted average yield 8.49% 7.71% 7.90% -- -- -- 8.24% --
Fixed-rate mortgage loans 28,213 25,757 82,488 57,292 77,167 31,155 302,072 305,327
Weighted average yield 6.89% 6.88% 6.85% 6.82% 6.78% 6.73% 6.82% --
Other loans 21,769 461 1,506 1,046 503 -- 25,285 25,559
Weighted average yield 8.55% 9.02% 9.01% 8.97% 8.90% 0.00% 8.61% --
Investments 51,570 9,544 6,163 7,529 18,505 6,485 99,796 99,950
Weighted average yield 6.42% 6.22% 6.04% 5.51% 6.16% 6.73% 6.28% --
- ----------------------------------------------------------------------------------------------------------------------------------
Total 232,256 68,968 130,738 65,867 96,175 37,640 631,644 635,316
- ----------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities
Certificates of deposit 153,253 144,068 90,367 40,240 -- -- 427,928 435,807
Weighted average rate 5.38% 5.74% 5.96% 6.63% -- -- 5.74% --
Money markets 1,905 1,650 4,667 2,625 2,574 801 14,222 14,223
Weighted average rate 2.27% 2.27% 2.27% 2.27% 2.27% 2.27% 2.27% --
NOW and passbooks 13,150 10,732 32,210 18,118 17,766 5,528 97,504 98,162
Weighted average rate 2.39% 2.37% 2.39% 2.39% 2.39% 2.39% 2.39% --
Advances from the FHLB 1,293 -- 23,939 -- 23,000 -- 48,232 47,781
Weighted average rate 6.14% 0.00% 5.82% 0.00% 4.97% -- 5.42% --
- ----------------------------------------------------------------------------------------------------------------------------------
Total 169,601 156,450 151,183 60,983 43,340 6,329 587,886 595,973
- ----------------------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap $ 62,655 $ (87,482) $ (20,445) $ 4,884 $ 52,835 $ 31,311 $ 43,758 --
Cumulative gap $ 62,655 $ (24,827) $ (45,272) $ (40,388) $ 12,447 $ 43,758 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Cumulative interest rate
sensitivity gap as a
percent of total assets
at December 31, 1998 9.37% -3.71% -6.77% -6.04% 1.86% 6.55% --
Cumulative interest rate
sensitivity gap as a
percent of total assets
at December 31, 1997 10.37% -4.11% -7.50% -6.69% 2.06% 7.25% --
- ----------------------------------------------------------------------------------------------------------------------------------
52
54
The table presents the repricing dates of the Company's interest-earning assets
and interest-bearing liabilities at December 31, 1998. The annual prepayment and
decay rates used in this table are obtained from an independent analysis
service. Annual prepayment assumptions for 1998 range from 11% to 26% on
fixed-rate mortgage loans, 9% to 45% on ARM loans, 11% to 18% on non-residential
real estate mortgage loans, and 11% to 16% on other loans. Annual prepayment
assumptions for 1997 range from 8% to 22% on fixed-rate mortgage loans, 9% to
34% on ARM loans, 12% to 15% on non-residential real estate mortgage loans, and
9% to 20% on other loans. The NOW, money market deposit and passbook accounts'
decay rates were assumed to vary across time horizons from 0% to 33% in 1998 and
in 1997.
The method used to analyze interest-rate sensitivity in Table 6 has a number of
limitations. Certain assets and liabilities may react differently to changes in
interest rates even though they reprice or mature in the same or similar time
periods. The interest rates on certain assets and liabilities may change at
different times from changes in market rates, with some changing in advance of
changes in market rates and some lagging behind changes in market rates. Also,
certain assets, e.g. ARM loans, often have provisions that may limit changes in
interest rates each time the interest rate changes and on a cumulative basis
over the life of the loan. Additionally, the actual prepayments and withdrawals
experienced in the event of a change in interest rates could deviate
significantly from those assumed in calculating the data shown in the table.
Finally, the ability of some borrowers to service their debt may decrease in the
event of an interest rate increase.
53
55
Item 8. Financial Statements and Supplementary Data
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(With Independent Auditors' Report Thereon)
54
56
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
Table of Contents
Page
Independent Auditors' Report 1
Consolidated Statements of Financial Condition 2
Consolidated Statements of Income 3
Consolidated Statements of Shareholders' Equity 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 7
55
57
Independent Auditors' Report
The Board of Directors
Emerald Financial Corp.:
We have audited the accompanying consolidated statements of financial condition
of Emerald Financial Corp. and Subsidiaries (Company), including The
Strongsville Savings Bank, as of December 31, 1998 and 1997, and the related
consolidated statements of income, shareholders' equity, and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits. The consolidated
financial statements of The Strongsville Savings Bank and Subsidiary for the
year ended December 31, 1996 were audited by other auditors whose report thereon
dated January 25, 1997, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 1998 and 1997 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Emerald Financial Corp. and Subsidiaries at December 31, 1998 and 1997, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
February 5, 1999
56
58
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
December 31, 1998 and 1997
(dollars in thousands)
Assets 1998 1997
--------- ---------
Cash and cash equivalents:
Cash and deposits with banks $ 9,980 7,729
Interest-bearing deposits with banks 62 3,033
Securities (note 2):
Held to maturity (fair values of $4,603 and $14,037 at
December 31, 1998 and 1997, respectively) 4,694 14,231
Available for sale (at fair value), (amortized cost of $46,779
and $32,240 at December 31, 1998 and 1997, respectively) 46,499 32,465
Mortgage-backed and related securities (note 3):
Held to maturity (fair value of $26,416 at December 31, 1997) -- 25,825
Available for sale (at fair value), (amortized cost of $44,980
and $27,209 at December 31, 1998 and 1997, respectively) 44,963 27,312
Loans held for investment, net (including allowance for loan
losses of $1,778 and $1,625 at December 31, 1998 and
1997, respectively) (note 4) 526,197 461,457
Loans held for sale (note 4) 5,873 7,823
Accrued interest receivable 3,449 3,343
Federal Home Loan Bank stock, at cost 3,823 3,504
Premises and equipment, net (note 5) 4,948 4,259
Cash surrender value of life insurance 16,404 10,341
Prepaid expenses and other assets 1,567 2,643
--------- ---------
Total assets $ 668,459 603,965
========= =========
Liabilities and Shareholders' Equity
Liabilities:
Deposits (note 6) $ 559,235 520,690
Advances from Federal Home Loan Bank (note 7) 48,232 28,138
Advance payments by borrowers for taxes and insurance 1,847 1,574
Deferred federal income taxes (notes 8) 1,911 1,875
Accrued interest payable 861 1,002
Accounts payable and other accrued expenses 1,589 2,171
--------- ---------
Total liabilities 613,675 555,450
--------- ---------
Commitments and contingencies (note 14)
Shareholders' equity (notes 8 and 12)
Common stock, no par value; 20,000,000 shares authorized;
10,283,164 and 10,145,200 shares issued and outstanding
at December 31, 1998 and 1997, respectively 10,074 9,831
Treasury stock at cost, 25,800 shares (267) --
Retained earnings - substantially restricted 45,174 38,468
Accumulated other comprehensive income (loss) (197) 216
--------- ---------
Total shareholders' equity 54,784 48,515
--------- ---------
Total liabilities and shareholders' equity $ 668,459 603,965
========= =========
See accompanying notes to consolidated financial statements.
57
59
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 1998, 1997, and 1996
(dollars in thousands, except per share data)
1998 1997 1996
------- ------- -------
Interest income:
Loans $39,077 36,892 32,442
Investment securities 2,690 3,473 3,836
Mortgage-backed and related securities 3,419 3,882 3,110
Other investments 913 713 470
------- ------- -------
Total interest income 46,099 44,960 39,858
------- ------- -------
Interest expense:
Deposits (note 6) 26,779 26,575 23,516
Advances from Federal Home Loan Bank 1,957 1,680 978
------- ------- -------
Total interest expense 28,736 28,255 24,494
------- ------- -------
Net interest income 17,363 16,705 15,364
Provision for loan losses (note 4) 710 215 305
------- ------- -------
Net interest income after provision
for loan losses 16,653 16,490 15,059
Noninterest income:
Loan servicing fees 859 738 623
Service fees and other charges 1,078 952 680
Gain on sale of loans held for sale and other assets 1,014 463 1,008
Gain on sale of securities (note 2) 509 6 --
Gain on sale of mortgage-backed securities (note 3) 55 6 83
Other 853 141 41
------- ------- -------
4,368 2,306 2,435
Noninterest expense:
Salaries and employee benefits (note 10) 3,819 4,084 3,716
Net occupancy and equipment 1,565 1,550 1,549
Federal deposit insurance premium 327 316 935
One-time SAIF assessment (note 11) -- -- 2,481
Franchise tax 641 586 560
Advertising and promotions 683 467 537
Other 2,755 2,482 2,227
------- ------- -------
9,790 9,485 12,005
------- ------- -------
Income before federal income taxes and cumulative
effect of a change in accounting principle 11,231 9,311 5,489
Federal income taxes (note 8) 3,592 3,170 1,941
------- ------- -------
Income before cumulative effect of a
change in accounting principle 7,639 6,141 3,548
------- ------- -------
Cumulative effect of a change in accounting principle,
net of related income taxes of $60 (note 1) 117 -- --
------- ------- -------
Net income $ 7,756 6,141 3,548
======= ======= =======
Basic earnings per common share $ 0.76 0.61 0.35
======= ======= =======
Diluted earnings per common share $ 0.72 0.59 0.35
======= ======= =======
See accompanying notes to consolidated financial statements.
58
60
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1998, 1997, and 1996
(dollars in thousands, except per share data)
Accum-
ulated
other
Common Stock compre- Total
------------------------ hensive share-
Shares Retained income Treasury holders'
outstanding Amount earnings (loss) stock equity
----------- ------ -------- ------ ----- ------
Balance at December 31, 1995 10,123,200 $ 9,831 31,064 196 -- 41,091
Dividends - $0.118 per share -- -- (1,190) -- -- (1,190)
Comprehensive income:
Net unrealized loss in fair value
of securities -- -- -- (291) -- (291)
Net income -- -- 3,548 -- -- 3,548
----------- ----------- ----------- ----------- ----------- -----------
Total comprehensive income -- -- 3,548 (291) -- 3,257
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1996 10,123,200 9,831 33,422 (95) -- 43,158
Stock options exercised 22,000 -- 106 -- -- 106
Tax benefits of stock options exercised -- -- 14 -- -- 14
Dividends - $0.12 per share -- -- (1,215) -- -- (1,215)
Comprehensive income:
Net unrealized gain in
fair value of securities -- -- -- 311 -- 311
Net income -- -- 6,141 -- -- 6,141
----------- ----------- ----------- ----------- ----------- -----------
Total comprehensive income -- -- 6,141 311 -- 6,452
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1997 10,145,200 9,831 38,468 216 -- 48,515
Stock options exercised 142,188 -- 672 -- -- 672
Treasury shares acquired (25,800) -- -- -- (267) (267)
Tax benefits of stock options exercised -- -- 282 -- 282
Dividends - $0.195 per share -- -- (2,004) -- -- (2,004)
Dividend reinvestment plan shares 21,576 243 -- -- -- 243
Comprehensive income:
Net unrealized loss in fair value
of securities -- -- -- (413) -- (413)
Net income -- -- 7,756 -- -- 7,756
----------- ----------- ----------- ----------- ----------- -----------
Total comprehensive income -- -- 7,756 (413) -- 7,343
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1998 10,283,164 $ 10,074 45,174 (197) (267) 54,784
=========== =========== =========== =========== =========== ===========
Disclosure of reclassification amount:
1998 1997 1996
----------- ----------- -----------
Unrealized holding gains (losses)
arising during the period
net of tax effect of $(40),
171, and (122) for the
periods ended December 31,
1998, 1997 and 1996,
respectively $ (78) 331 (236)
Less reclassification adjustment
for gains and losses
included in net income net
of tax effect of $(173),
(10), and (28) for the
periods ended December 31,
1998, 1997 and 1996,
respectively (335) (20) (55)
----------- ----------- -----------
$ (413) 311 (291)
=========== =========== ===========
See accompanying notes to consolidated financial statements.
59
61
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997, and 1996
(dollars in thousands)
1998 1997 1996
-------- -------- --------
Cash flows from operating activities:
Net income $ 7,756 6,141 3,548
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for loan losses 710 215 305
Gain on sale of loans held for sale and other assets (1,014) (463) (1,008)
Gain on sale of securities (509) (6) --
Gain on sale of mortgage-backed and related securities (233) (6) (83)
Amortization of deferred loan fees, premiums, and discounts, net (3,281) (2,517) (2,780)
Proceeds from sale of loans originated for sale 93,847 55,221 54,222
Disbursements on loans originated for sale (91,011) (61,820) (49,251)
Depreciation and amortization 744 740 815
Change in accrued interest receivable and payable (247) 311 222
Deferred federal income taxes 248 131 151
Other, net (1,623) (1,035) (282)
-------- -------- --------
Net cash provided by (used in) operating activities 5,387 (3,088) 5,859
-------- -------- --------
Cash flows from investing activities:
Net increase in loans (61,095) (29,164) (89,255)
Purchases of:
Loans (926) (4,922) (2,250)
Mortgage-backed securities available for sale (28,687) (14,519) (14,488)
Mortgage-backed securities held to maturity -- -- (3,149)
Securities available for sale (41,665) (44,645) (30,600)
Securities held to maturity (27,400) (18,200) (13,420)
Federal Home Loan Bank stock (58) (441) (239)
Premises and equipment (1,343) (910) (566)
Cash surrender value of life insurance (5,000) (10,000) --
Proceeds from:
Maturities and principal repayments of
Securities available for sale 12,806 19,746 17,906
Securities held to maturity 36,671 51,491 32,318
Mortgage-backed securities available for sale 21,937 5,738 2,604
Mortgage-backed securities held to maturity 5,098 6,712 8,035
Sales of available for sale securities 15,095 15,710 --
Sales of available for sale mortgage-backed securities 9,939 1,299 6,744
Sales of premises and equipment -- -- 645
Other 683 (683) --
-------- -------- --------
Net cash used in investing activities (63,945) (22,788) (85,715)
-------- -------- --------
Cash flows from financing activities:
Net increase in deposits 38,545 27,219 60,908
Proceeds from advances from Federal Home Loan Bank 35,000 26,900 73,650
Payments on advances from Federal Home Loan Bank (14,906) (23,996) (61,749)
Increase in advance payments by borrowers for taxes and insurance 273 72 280
Exercise of stock options 954 106 --
Payment of dividends on common stock (2,004) (1,215) (1,190)
Purchase of treasury shares (267) -- --
Dividend reinvestment plan shares issued 243 -- --
-------- -------- --------
Net cash provided by financing activities 57,838 29,086 71,899
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (720) 3,210 (7,957)
Cash and cash equivalents at beginning of year 10,762 7,552 15,509
-------- -------- --------
Cash and cash equivalents at end of year $ 10,042 10,762 7,552
======== ======== ========
(Continued)
60
62
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997, and 1996
(dollars in thousands)
1998 1997 1996
------- ------- -------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $28,877 27,839 24,333
Income taxes 3,507 2,944 1,863
======= ======= =======
Supplemental disclosure of noncash investing activities:
Transfer from mortgage loans to real estate owned $ 233 1,794 696
Loans made to finance the sale of real estate owned 710 1,237 600
======= ======= =======
See accompanying notes to consolidated financial statements.
61
63
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(1) Summary of Significant Accounting Policies
(a) Nature of Operations
Emerald Financial Corp. (Emerald or Company) is a unitary thrift
holding company whose wholly owned subsidiary is The Strongsville
Savings Bank (Bank). Emerald became the Bank's holding company in a
tax-free exchange of shares of the Bank for shares of Emerald
consummated on March 6, 1997. The Company formed Emerald Development
Corp., a wholly owned subsidiary, on June 3, 1997. The development
company was formed to take advantage of opportunities to develop
real estate as well as to enter into joint real estate development
ventures in the future. Also, the Bank has an inactive wholly owned
subsidiary, Dennis Financial Corp. The Bank conducts its principal
activities from its Community Financial Centers located in
southwestern Cuyahoga, Lorain, and Medina counties. The Bank's
principal activities include residential lending and retail banking.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its Subsidiaries. All material intercompany transactions
and balances have been eliminated in consolidation.
(c) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
(d) Securities
The Company classifies debt and equity securities into one of three
categories: held to maturity, available for sale, or trading.
Securities held to maturity are limited to debt securities that the
Company has the positive intent and ability to hold to maturity;
these securities are reported at amortized cost. Securities held for
trading are limited to debt and equity securities that are held to
be sold in the near term; these securities are reported at fair
value, and unrealized gains and losses are reflected in income.
Securities held as available for sale consist of all other
securities; these securities are reported at fair value, and
unrealized gains and losses, net of deferred income taxes, are
reflected as a separate component of accumulated other comprehensive
income in shareholders' equity until realized.
Realized gains or losses on the sale of securities are reported in
the consolidated statements of income on the trade date. The cost of
securities sold is based on the specific identification method.
62
64
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(e) Loans
Interest income on loans is based on the principal balance
outstanding. Interest is accrued and credited to income as earned
unless there is a distinct indication that the borrower's cash flow
or collateral may not be sufficient to meet contractual obligations.
Loans are also placed on nonaccrual status when principal or
interest is past due more than 90 days, unless the loan is well
secured and in the process of collection. When a loan is placed on
nonaccrual status, all previously accrued and unpaid interest is
charged against income. Interest is subsequently recognized only to
the extent that cash payments are received. When the borrower has
demonstrated the intent and ability to make scheduled principal and
interest payments, the loan may be returned to accrual status.
Loan origination fees, net of certain direct loan origination costs,
are deferred and amortized over the life of the related loans as a
yield adjustment for loans originated for investment. Loan
origination fees, net of certain direct loan origination costs, are
deferred and recognized as a basis adjustment for loans held for
sale. Loan commitment fees are deferred and recognized as yield
adjustments over the estimated life of the related loans or
recognized immediately if a commitment expires unexercised.
Residential mortgage loans held for sale are valued at the lower of
aggregate cost or market value. Gains or losses on sales are
recognized upon settlement date.
In June 1996, the Financial Accounting Standards Board (FASB) issued
SFAS No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities, and was effective for
transactions entered into on or after January 1, 1997. The adoption
of SFAS No. 125 did not have a material impact on the Bank's
consolidated financial position or results of operations.
Impaired loans include all non-one-to-four family residential
mortgage loans greater than $500,000 on nonaccrual status. Loan
impairment is measured as the present value of expected future cash
flows discounted at the loan's initial effective interest rate, the
fair value of the collateral of an impaired collateral-dependent
loan, or an observable market price.
(f) Federal Income Taxes
Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the
year in which the temporary differences are expected to be recovered
or settled, and the effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that
includes the enactment date.
(g) Allowance for Loan Losses
The allowance for loan losses is maintained at a level management
considers adequate to absorb loan losses. Loans charged-off are
charged to, and recoveries are credited to, the allowance.
Provisions for loan losses are based on management's review of the
historical loan loss experience, known and inherent risks in the
portfolio, current economic conditions, and such other factors that,
in management's judgment, are relevant.
63
65
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(h) Premises and Equipment
Bank premises and equipment, including leasehold improvements, are
stated at cost less accumulated depreciation and amortization.
Depreciation is computed on the straight-line method over the
estimated useful lives of the related assets. Amortization of
leasehold improvements is computed on the straight-line method over
the lives of the related leases or the useful lives of the related
assets, whichever is shorter. Maintenance, repairs, and minor
improvements are charged to operating expenses as incurred.
(i) Intangible Assets
Cost in excess of the fair value of net assets acquired (goodwill)
is stated net of accumulated amortization and is included in prepaid
expenses and other assets in the consolidated statements of
financial condition. Goodwill resulting from acquisitions is
amortized over 25 years on a straight-line basis. For acquisitions
in which the fair value of liabilities assumed exceeds the fair
value of tangible and identifiable intangible assets acquired,
goodwill is amortized by the level-yield method based upon the
outstanding balances, and over the estimated remaining lives, of the
long-term assets acquired. Management periodically reviews goodwill
and the related estimated useful lives for impairment, or for events
or changes in circumstances that may indicate the carrying amount of
the asset may not be recoverable, and would write goodwill down, if
necessary.
(j) Real Estate Acquired in Settlement of Loans
Real estate acquired in settlement of loans represents real estate
acquired through foreclosure, or deed in lieu of foreclosure, and is
initially recorded at the lower of cost or fair value less estimated
selling costs. Valuations are performed periodically by management
and an allowance for loan losses is established if the carrying
value of the property exceeds its fair value less estimated selling
costs.
64
66
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(k) 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:
Year Ended December 31,
----------------------------------------
1998 1997 1996
-------------- ---------- ----------
Weighted average number of common
shares outstanding in basic earnings per
common share calculation 10,263,081 10,130,312 10,123,200
Net dilutive effect of stock options 482,180 300,272 98,326
-------------- ---------- ----------
Weighted average number of shares
outstanding adjusted for effect
of dilutive securities 10,745,261 10,430,584 10,221,526
============== ========== ==========
Income before cumulative effect of a change
in accounting principle $ 7,639,000 6,141,000 3,548,000
Cumulative effect of a change in accounting
principle, net of related income taxes 117,000 -- --
-------------- ---------- ----------
Net income $ 7,756,000 6,141,000 3,548,000
============== ========== ==========
Basic earnings per common share:
Income before cumulative effect of a
change in accounting principle $ 0.75 0.61 0.35
Cumulative effect of a change in
accounting principle, net of related
income tax 0.01 -- --
-------------- ---------- ----------
Basic earnings per common share $ 0.76 0.61 0.35
============== ========== ==========
Diluted earnings per common share:
Income before cumulative effect of a
change in accounting principle $ 0.71 0.59 0.35
Cumulative effect of a change in accounting
principle, net of related income taxes 0.01 -- --
-------------- ---------- ----------
Diluted earnings per common share $ 0.72 0.59 0.35
============== ========== ==========
65
67
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(l) Consolidated Statements of Cash Flows
For purposes of the consolidated statements of cash flows, the Bank
considers all cash and deposits with banks maturing in three months
or less to be cash equivalents.
(m) Comprehensive Income
On January 1, 1998, the Company adopted the provisions of SFAS No.
130, Reporting Comprehensive Income. This Statement establishes
standards for reporting and display of comprehensive income and its
components. Accumulated other comprehensive income consists of net
income and the net unrealized holding gains and losses on securities
available-for-sale, net of the related tax effect. Prior year
financial statements have been reclassified to conform to the
requirements of the Statement.
(n) New Accounting Pronouncements
The Company adopted Statement of Financial Accounting 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 public 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 established standards for
related disclosures about products and services, geographic areas,
and major customers. The Company has determined that the adoption of
SFAS No. 131 has no effect on its consolidated financial statements
as the Company's activities are considered to be in a single
industry segment.
The Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, in
June 1998. The statement is effective for quarters of fiscal years
beginning after June 15, 1999, with earlier application encouraged.
The statement requires that all derivatives be recognized as either
assets or liabilities in the statement of financial condition and
those instruments be measured at fair value. The statement also
requires certain criteria to be met to apply hedge accounting. The
Company adopted the statement on July 1, 1998, and during the third
quarter reclassified $20,727,000 in securities from held to maturity
to available for sale. Of these, $5,944,000 were sold during the
third quarter, resulting in a net gain of $177,000 which is recorded
as a cumulative effect of a change in accounting principle in the
consolidated statements of income.
SFAS No. 134, Accounting for Mortgage-Backed Securities Retained
after Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise was issued in October 1998 and is effective for
the first fiscal quarter beginning after December 15, 1998. This
statement amends SFAS No. 65 to require that after the
securitization of mortgage loans held for sale, an entity engaged in
mortgage banking activities must classify the resulting
mortgage-backed securities or other retained interests based on its
ability and intent to sell or hold those investments. After the
securitization of a mortgage loan held for sale, any retained
mortgage-backed securities shall be classified in accordance with
the provisions of SFAS No. 115. However, a mortgage banking
enterprise must classify as trading any retained mortgage-backed
securities that it commits to sell before or after the
securitization process. At the present time, the Company has not
fully analyzed the effect of the adoption of SFAS No. 134 on its
consolidated financial statements. However, management does not
believe that the adoption of
(Continued)
66
68
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
SFAS No. 134 will have a significant impact on the Company's
consolidated financial statements.
(o) Reclassifications
Certain amounts in the accompanying 1997 and 1996 consolidated
financial statements have been reclassified to conform to the 1998
presentation.
(2) Securities
Securities held to maturity as of December 31, 1998 and 1997, consist of
the following (dollars in thousands):
Gross Gross Estimated
Amortized unrealized unrealized fair
December 31, 1998 cost gains losses value
--------- ---------- ---------- ---------
U.S. government and
agency obligations $ 4,350 -- -- 4,350
Other 344 -- (91) 253
------- ------- ------- -------
$ 4,694 -- (91) 4,603
======= ======= ======= =======
December 31, 1997
U.S. government and
agency obligations $ 7,750 -- -- 7,750
Corporate bonds 5,816 1 -- 5,817
Other 665 -- (195) 470
------- ------- ------- -------
$14,231 1 (195) 14,037
======= ======= ======= =======
The weighted average yield on securities held to maturity was 5.35% and
5.76% as of December 31, 1998 and 1997, respectively.
Securities held to maturity at December 31, 1998, mature within one year.
(Continued)
67
69
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
Securities available for sale as of December 31, 1998 and 1997, consist of
the following (dollars in thousands):
Gross Gross Estimated
Amortized unrealized unrealized fair
December 31, 1998 cost gains losses values
--------- ---------- ---------- ---------
U.S. government and
agency obligations $ 9,432 46 (13) 9,465
Corporate bonds 32,465 64 (185) 32,344
Other 4,882 8 (200) 4,690
------- ------- ------- -------
$46,779 118 (398) 46,499
======= ======= ======= =======
December 31, 1997
U.S. government and
agency obligations $10,852 1 (6) 10,847
Corporate bonds 20,403 245 (15) 20,633
Other 985 -- -- 985
------- ------- ------- -------
$32,240 246 (21) 32,465
======= ======= ======= =======
The weighted average yield on securities available for sale was 5.94% and
6.55% as of December 31, 1998 and 1997, respectively.
The amortized cost and estimated market value of securities available for
sale at December 31, 1998, by contractual maturity, are shown below
(dollars in thousands). Expected maturities may differ from contractual
maturities because certain securities contain provisions which permit the
issuer to repay, at par, the obligation prior to the stated maturity.
Estimated
Amortized fair
cost value
--------- -------
Due in one year or less $19,043 18,895
Due after one year through five years 11,618 11,653
Due in more than five years 16,118 15,951
------- -------
$46,779 46,499
======= =======
There were no sales of securities held to maturity in 1998, 1997, or 1996.
Gross proceeds from sales of investment securities available for sale
during the years ended December 31, 1998 and 1997, totaled $15,095,000 and
$15,710,000, respectively; gross realized gains on these sales of
investment securities available for sale totaled $509,000 and $6,000 in
1998 and 1997, respectively. There were no sales of investment securities
available for sale in 1996.
(Continued)
68
70
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
At December 31, 1998 and 1997, securities with a book value of $2,350,000
and $7,750,000, respectively, were pledged as collateral for public funds
and treasury, tax, and loan deposits.
(3) Mortgage-Backed Securities
Mortgage-backed securities held-to-maturity as of December 31, 1997
consisted of the following (dollars in thousands):
Gross Gross Estimated
Amortized unrealized unrealized fair
December 31, 1997 cost gains losses value
--------- ---------- ---------- ---------
Mortgage-backed securities
Federal Home Loan Mortgage
Corporation (FHLMC) partici-
pation certificates $ 3,223 49 (5) 3,267
Federal National Mortgage
Association (FNMA) 758 -- (2) 756
Government National Mortgage
Association (GNMA) 4,883 201 -- 5,084
Other 3,823 26 -- 3,849
------- ------- ------- -------
12,687 276 (7) 12,956
Real estate mortgage investment
trusts and collateralized mortgage
obligations
FHLMC participation
certificates 2,778 28 -- 2,806
FNMA 6,421 238 -- 6,659
Other 3,939 59 (3) 3,995
------- ------- ------- -------
13,138 325 (3) 13,460
------- ------- ------- -------
$25,825 601 (10) 26,416
======= ======= ======= =======
(Continued)
69
71
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
Mortgage-backed securities available for sale as of December 31, 1998 and
1997, consist of the following (dollars in thousands):
Gross Gross Estimated
Amortized unrealized unrealized fair
December 31, 1998 cost gains losses value
--------- ---------- ---------- ---------
Mortgage-backed securities:
Federal Home Loan Mortgage
Corporation (FHLMC) partici-
pation certificates $ 1,599 13 -- 1,612
Federal National Mortgage
Association (FNMA) 1,367 2 (4) 1,365
Government National Mortgage
Association (GNMA) 4,324 117 (9) 4,432
Other 2,632 -- (4) 2,628
------- ------- ------- -------
9,922 132 (17) 10,037
Real estate mortgage investment
trusts and collateralized mortgage
obligations:
FHLMC participation
certificates 6,279 23 (4) 6,298
FNMA 12,248 27 (97) 12,178
Other 16,531 16 (97) 16,450
------- ------- ------- -------
35,058 66 (198) 34,926
------- ------- ------- -------
$44,980 198 (215) 44,963
======= ======= ======= =======
December 31, 1997
Mortgage-backed securities:
FHLMC participation
certificates $ 1,363 -- (3) 1,360
------- ------- ------- -------
1,363 -- (3) 1,360
Real estate mortgage investment
trusts and collateralized mortgage
obligations:
FHLMC participation
certificates 12,026 82 (13) 12,095
FNMA 13,489 53 (15) 13,527
Other 331 -- (1) 330
------- ------- ------- -------
25,846 135 (29) 25,952
------- ------- ------- -------
$27,209 135 (32) 27,312
======= ======= ======= =======
(Continued)
70
72
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
There were no sales of mortgage-backed securities held to maturity in
1998, 1997, or 1996. Gross proceeds from sales of mortgage-backed
securities available for sale during the years ended December 31, 1998,
1997, and 1996 totaled $9,939,000, $1,299,000, and $6,744,000,
respectively; gross realized gains on these sales of mortgage-backed
securities available for sale totaled $233,000 (of which $177,000 is
classified as a cumulative effect of a change in accounting principle),
$6,000, and $83,000 in 1998, 1997, and 1996, respectively.
The Bank's portfolio of privately issued mortgage-backed securities is
backed by mortgages on residential and multifamily properties.
(4) Loans
The primary goal of the Bank's lending activities is to provide
residential real estate mortgage loans to homeowners in its lending area.
The Bank's 14 Community Financial Centers are located in Strongsville,
Hinckley, Berea, North Royalton, Medina Township, Wellington, Parma
Heights, Westlake, North Ridgeville, Brecksville, Broadview Heights,
Columbia Station, Avon, and Brunswick.
The composition of the overall loan portfolio is as follows (dollars in
thousands):
December 31,
----------------------
1998 1997
--------- ---------
Real estate mortgage loans:
Permanent first mortgage loans:
One-to-four family $ 358,765 319,796
Multi-family 506 924
Commercial 51,845 52,499
Land 621 553
Construction first mortgage loans:
Acquisition and development (residential) 88,206 56,217
One-to-four family 41,485 37,413
Multi-family 375 1,050
Commercial 8,816 6,879
--------- ---------
Total mortgage loans 550,619 475,331
Other loans:
Commercial business 6,656 5,736
Consumer installment 18,297 15,460
--------- ---------
Total other loans 24,953 21,196
--------- ---------
Total loans 575,572 496,527
(Continued)
71
73
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
December 31,
----------------------
1998 1997
--------- ---------
Less:
Undisbursed portion of loans in process $ (43,547) (30,015)
Deferred loan fees and discounts (4,050) (3,430)
Allowance for loan losses (1,778) (1,625)
--------- ---------
(49,375) (35,070)
--------- ---------
Total loans held for investment, net $ 526,197 461,457
========= =========
Real estate mortgage loans held for sale $ 5,997 7,916
Less deferred loan fees (124) (93)
--------- ---------
Total loans held for sale, net $ 5,873 7,823
========= =========
Adjustable-rate mortgage and other loans represent $264,683,000 and
$231,202,000 of the loans included in the table above at December 31, 1998
and 1997, respectively.
The Bank sells loans to the secondary market in conjunction with certain
loan programs, to provide funding and as a tool for managing interest rate
risk. Loans are sold to the secondary market without recourse and with
servicing retained. The Bank was servicing loans for investors totaling
$265,665,000 and $225,344,000 at December 31, 1998 and 1997, respectively.
Custodial escrow balances maintained in connection with loans serviced for
investors were $3,377,000 and $1,957,000 at December 31, 1998 and 1997,
respectively.
Residential acquisition and development loans are extended to local
builders and developers with whom the Bank has generally had long-standing
business relationships. These loans are secured by land zoned for
residential development located in the Bank's market area.
Under federal regulations, real estate loans to one borrower cannot exceed
15% of unimpaired capital and surplus without a waiver of this requirement
from the OTS. The Bank obtained such a waiver which increases the limit on
loans to one borrower for residential real estate to 30% of unimpaired
capital and surplus.
The Bank's commercial real estate loan portfolio includes permanent and
construction loans. Because commercial real estate loans are dependent on
income production or future development for repayment, management believes
these loans present somewhat greater risk of default than conventional
mortgage loans. The Bank's commercial real estate loan portfolio consists
of loans collateralized by property located in the Bank's primary lending
area. The Bank's aggregate commercial real estate loans may not exceed
400% of its core capital. As of December 31, 1998, the Bank could lend an
additional $153,395,000 before reaching the $214,056,000 limit.
(Continued)
72
74
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
The following table summarizes the Bank's commercial real estate and
commercial construction loan portfolios by type of collateral (dollars in
thousands):
December 31, 1998 December 31, 1997
-------------------- ---------------------
Amount % Amount %
------- ------- ------- -------
Permanent:
Industrial/warehouse $11,520 18.99% 7,481 12.60%
Retail 18,630 30.71 17,973 30.27
Office buildings 14,110 23.26 18,902 31.83
Churches 2,171 3.58 1,922 3.24
Other 5,414 8.93 6,221 10.47
------- ------- ------- -------
51,845 85.47 52,499 88.41
Construction:
Retail 3,463 5.71 2,600 4.38
Office buildings 848 1.40 850 1.43
Industrial/warehouse 2,025 3.34 -- --
Churches 1,780 2.93 -- --
Other 700 1.15 3,429 5.78
------- ------- ------- -------
8,816 14.53 6,879 11.59
------- ------- ------- -------
$60,661 100.00% 59,378 100.00%
======= ======= ======= =======
Activity in the allowance for loan losses is as follows (dollars in
thousands):
Year ended December 31,
---------------------------
1998 1997 1996
------- ------- -------
Balance at beginning of year $ 1,625 1,423 1,168
Provision charged to expense 710 215 305
Loans charged-off (563) (19) (60)
Recoveries 6 6 10
------- ------- -------
$ 1,778 1,625 1,423
======= ======= =======
(Continued)
73
75
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
Nonaccrual loans totaled $1,739,000 and $1,428,000 at December 31, 1998
and 1997, respectively. Interest income that would have been recorded
under the original terms of all nonaccrual loans during each period and
the interest income actually recognized for each period are summarized
below (dollars in thousands):
Year ended December 31,
---------------------------
1998 1997 1996
------- ------- -------
Interest income that would have been recorded $ 202 119 101
Interest income recognized 23 112 9
------- ------- -------
Interest income foregone $ 179 7 92
======= ======= =======
The Bank is not committed to lend additional funds to debtors whose loans
have been placed on nonaccrual status.
At December 31, 1998 and 1997, there were no loans which were considered
to be impaired.
(5) Premises and Equipment
Premises and equipment consist of the following (dollars in thousands):
December 31,
----------------------
1998 1997
--------- ---------
Land $ 612 612
Buildings and leasehold improvements 3,703 3,384
Furniture, fixtures, and equipment 3,918 3,844
--------- ---------
8,233 7,840
Less accumulated depreciation and
amortization 3,285 3,581
--------- ---------
$ 4,948 4,259
========= =========
Depreciation and amortization expense related to Bank premises and
equipment was $633,000 in 1998; $617,000 in 1997; and $682,000 in 1996.
(Continued)
74
76
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
The Bank has entered into a number of noncancelable operating leases with
respect to office space. Rental expense for all leases was $298,000 in
1998; $294,000 in 1997; and $251,000 in 1996. The following is a schedule
of future minimum annual lease commitments as of December 31, 1998
(dollars in thousands):
1999 $ 304
2000 272
2001 265
2002 266
2003 266
Thereafter 592
--------
$ 1,965
========
(6) Deposits
Deposit account balances are summarized as follows (dollars in thousands):
December 31, 1998 December 31, 1997
---------------------------------------- ---------------------------------------
Weighted Weighted
average average
Deposit Type rate Amount % rate Amount %
- ----------------------------- ----------- -------- ----------- ----------- -------- -----------
Passbook accounts 2.78% $ 59,894 10.71 2.93% $ 51,629 9.91
Negotiable order of
withdrawal (NOW) 1.76 37,610 6.73 2.02 33,229 6.52
Checking accounts
(non-interest bearing) -- 1,832 0.33 -- 747 --
Commercial accounts
(non interest bearing) -- 17,749 3.17 -- 12,992 2.50
Money market deposit
accounts 2.27 14,222 2.54 2.53 15,506 2.98
-------- ----------- -------- -----------
2.02 131,307 23.48 2.27 114,103 21.91
Certificates of deposit
4.50% and less 4.19 27,868 4.98 4.01 26,391 5.07
4.51% to 5.50% 5.32 131,876 23.58 5.38 52,424 10.07
5.51% to 6.50% 5.97 210,366 37.62 6.04 264,388 50.78
6.51% to 7.50% 7.36 50,506 9.03 7.36 55,516 10.66
7.51% and greater 8.96 7,312 1.31 8.92 7,868 1.51
-------- ----------- -------- -----------
5.87 427,928 76.52 6.06 406,587 78.09
-------- ----------- -------- -----------
4.96% $559,235 100.00% 5.23% $520,690 100.00%
======== =========== ======== ===========
(Continued)
75
77
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
The maturity periods of certificates of deposit were as follows (dollars
in thousands):
December 31, 1998 December 31, 1997
----------------------- -----------------------
Amount % Amount %
-------- -------- -------- --------
Within six months $153,252 35.81% $139,626 34.34%
Six months to one year 144,069 33.67 119,841 29.48
One to five years 100,065 23.38 115,317 28.36
Over five years 30,542 7.14 31,803 7.82
-------- -------- -------- --------
$427,928 100.00% $406,587 100.00%
======== ======== ======== ========
Deposits over $100,000 at December 31, 1998 and 1997, totaled $107,996,000
and $82,306,000, respectively. The Bank does not enter into brokered
deposit arrangements and had no brokered deposits at December 31, 1998 or
1997.
Interest expense on deposits is summarized as follows (dollars in
thousands):
Year ended December 31,
---------------------------
1998 1997 1996
------- ------- -------
Passbook accounts $ 1,596 1,391 1,328
NOW accounts 621 571 505
Money market deposit accounts 362 413 499
Certificates of deposit 24,200 24,200 21,184
------- ------- -------
Interest expense $26,779 26,575 23,516
======= ======= =======
(7) Advances from Federal Home Loan Bank
Advances from the Federal Home Loan Bank (FHLB) consist of $18.7 million
with a weighted average variable rate of 5.49% and $29.5 million with a
weighted average fixed rate of 5.38% at December 31, 1998 and $20.5
million with a weighted average variable rate of 5.90% and $7.6 million
with a weighted average fixed rate of 6.84% at December 31, 1997.
Although individual loans are not specifically pledged, the FHLB requires
that the Bank have mortgage loans which are, among other things, clear of
pledges, liens, and encumbrances and equal to at least 150% of the
advances from the FHLB amounting to $72,347,264. The stock of the FHLB
owned by the Bank is also pledged as collateral for these borrowings.
(Continued)
76
78
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
Scheduled payments on FHLB advances at December 31, 1998 are as follows
(dollars in thousands):
1999 $ 1,294
2000 19,380
2001 1,558
2002 3,000
2003 -
Beyond 23,000
--------
$ 48,232
========
(8) Federal Income Taxes
Emerald and its wholly owned Subsidiaries file a consolidated federal
income tax return. A summary of the provision for federal income taxes is
as follows (dollars in thousands):
Year ended December 31,
---------------------------
1998 1997 1996
------- ------- -------
Current $ 3,344 3,039 1,790
Deferred 248 131 151
Cumulative effect adjustment 60 -- --
------- ------- -------
Total $ 3,652 3,170 1,941
======= ======= =======
A reconciliation between the expected income tax expense (benefit) using
the statutory federal rate and the actual consolidated income tax
provision follows (dollars in thousands):
Year ended December 31,
---------------------------------------------------------------
1998 1997 1996
------------------- ------------------ -----------------
% of % of % of
pretax pretax pretax
Amount income Amount income Amount income
------ ------ ------ ------ ------ ------
Tax expense at
statutory rate $ 3,993 35.0% 3,259 35.0% 1,921 35.0%
Other (341) (3.0) (89) (1.0) 20 .4
------- ---- ------- ---- ------- ----
$ 3,652 32.0% 3,170 34.0% 1,941 35.4%
======= ==== ======= ==== ======= ====
(Continued)
77
79
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
The Company's net deferred tax liability is as follows (dollars in
thousands):
1998 1997
--------- ---------
Deferred tax assets:
Loan loss allowances $ 662 $ 608
Other 92 54
--------- ---------
Total deferred tax assets 754 662
Deferred tax liabilities:
Deferred loan fees 790 645
FHLB stock dividends 575 486
Mortgage servicing rights 116 115
Bad debt reserves over base year
reserves 918 1,102
Depreciation and amortization 230 168
Other 36 21
--------- ---------
Total deferred tax liabilities 2,665 2,537
--------- ---------
Net deferred tax liability $ 1,911 $ 1,875
========= =========
Retained earnings include $2,383,000 at December 31, 1998 for which no
provision for federal income taxes has been made. This amount represents
allocations of income during years prior to 1988 to bad debt deductions
for tax purposes only. These qualifying and nonqualifying base year
reserves and supplemental reserves will be recaptured into income in the
event of certain distributions and redemptions. Such recapture would
create income for tax purposes only, which would be subject to the then
current corporate income tax rate. Recapture would not occur upon the
reorganization, merger, or acquisition of the Bank, nor if the Bank is
merged or liquidated tax-free into a bank or undergoes a charter change.
If the Bank fails to qualify as a bank or merges into a nonbank entity,
these reserves will be recaptured into income.
The favorable reserve method previously afforded to thrifts was repealed
for tax years beginning after December 31, 1995. Large thrifts were
switched to the specific charge-off method of Section 166. In general, a
thrift is required to recapture the amount of its qualifying and
nonqualifying reserves in excess of its qualifying and nonqualifying base
year reserves. As the Bank has previously provided deferred taxes on the
recapture amount, no additional financial statement tax expense will
result from the recapture.
(Continued)
78
80
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(9) Long-Term Incentive Plan
Options have been granted under the Emerald Financial Corp. 1994 Long-Term
Incentive Plan (Plan) and the Emerald Financial Corp. 1998 Stock Option
and Incentive Plan to key employees and directors of the Bank. Options
awarded under the Plans are vested over a one to ten year schedule after
the date granted. Following is activity under the plans during the years
ended December 31, 1998, 1997, and 1996:
1998 1997 1996
--------- ------- -------
Options outstanding, beginning of year 978,000 836,000 836,000
Exercised at $4.56 per share (88,088) -- --
Exercised at $4.82 per share (50,000) (22,000) --
Exercised at $7.13 per share (4,100) -- --
Forfeited -- -- --
Granted 345,000 164,000 --
--------- ------- -------
Options outstanding, end of year 1,180,812 978,000 836,000
========= ======= =======
Exercisable at $13.31 per share, expiring 4/18/2003 4,000 -- --
Exercisable at $13.31 per share, expiring 4/18/2008 341,000 -- --
Exercisable at $4.82 per share, expiring 10/18/2004 84,000 134,000 156,000
Exercisable at $7.13 per share, expiring 6/1/2007 159,900 164,000 --
Exercisable at $4.56 per share, expiring 1/11/99 16,000 16,000 16,000
Exercisable at $4.56 per share, expiring 1/11/2004 575,912 664,000 664,000
--------- ------- -------
1,180,812 978,000 836,000
========= ======= =======
Options available for grant, end of year 155,000 -- 164,000
========= ======= =======
SFAS No. 123, Accounting for Stock-Based Compensation, encourages, but
does not require, adoption of a fair-value-based accounting method for
employee stock-based compensation arrangements and was effective January
1, 1996. Management has elected to continue to use the Accounting
Principles Board Opinion 25, Accounting for Stock Issued to Employees,
intrinsic value method for measurement and recognition of stock-based
compensation. Accordingly, no compensation cost has been recognized. Had
compensation cost for the Company's plan been determined consistent with
SFAS 123, the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below (in thousands, except per
share amounts):
(Continued)
79
81
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
1998 1997 1996
------- ------- -------
Net income:
As reported $ 7,756 6,141 3,548
Pro forma 6,900 5,832 3,310
Earnings per common shares:
Basic:
As reported 0.76 0.61 0.35
Pro forma 0.67 0.58 0.33
Diluted:
As reported 0.72 0.59 0.35
Pro forma 0.64 0.56 0.33
The fair value for each option grant used in the foregoing pro forma
amounts is estimated on the date of grant using an option pricing model.
The model incorporates the following weighted-average assumptions used for
grants in 1998, 1997, and 1996; 2.0% dividend growth; 37.0% to 61.0%
expected volatility; risk-free interest rates ranging from 5.03% to 7.71%;
and expected lives ranging from five to ten years.
(10) Employee Benefit Plans
The Bank has a profit-sharing retirement plan covering substantially all
employees, to which the Bank makes discretionary contributions as
determined annually by its Board of Directors. Contributions were $242,000
in 1998; $144,000 in 1997; and $139,000 in 1996.
The Bank also has a qualified, tax-exempt profit-sharing plan with a cash
or deferred feature qualifying under Section 401(k) of the Internal
Revenue Code; under this plan, the Bank provides matching contributions of
up to 3% of qualifying employees' annual eligible compensation. The Bank's
contributions were $91,000 in 1998; $88,000 in 1997; and $79,000 in 1996.
In addition, the Bank has a nonqualified, Supplemental Executive
Retirement Plan (SERP) that provides certain officers with retirement
benefits. SERP pension costs charged to noninterest expense amounted to
$75,000 in 1997 and $100,000 in 1996. No SERP pension costs were charged
to noninterest expense in 1998.
(11) Savings Association Insurance Fund Assessment
On September 30, 1996, the Omnibus Appropriations Bill was enacted which
imposed a special assessment on Savings Association Insurance Fund (SAIF)
deposits held as of March 31, 1995, to recapitalize the SAIF. Therefore,
the Bank recorded a one-time pretax charge of $2,481,000 representing the
special assessment of 65.7 basis points on the Bank's deposits held as of
March 31, 1995. This assessment was deductible for tax purposes on the
Bank's fiscal year 1996 federal income tax return.
(Continued)
80
82
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(12) Regulatory Matters
Office of Thrift Supervision regulations require savings institutions to
maintain certain minimum levels of regulatory capital. An institution that
fails to comply with its regulatory capital requirements must obtain OTS
approval of a capital plan and can be subject to a capital directive and
certain restrictions on its operations. At December 31, 1998, the minimum
regulatory capital regulations require institutions to have tangible
capital equal to 1.5% of adjusted total assets, a 4% leverage capital
ratio, and an 8% risk-based capital ratio. At December 31, 1998, the Bank
exceeded all of the aforementioned regulatory capital requirements.
The prompt corrective action regulations of the Federal Deposit Insurance
Corporation define specific capital categories based on an institution's
capital ratios. The capital categories, in declining order, are "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." To be considered
"well capitalized," an institution must generally have a leverage ratio of
at least 5%, a Tier 1 risk-based capital ratio of at least 6%, and a total
risk-based capital ratio of at least 10%.
At December 31, 1998 and 1997, the Bank was in compliance with regulatory
capital requirements and is considered "well capitalized" as set forth
below (dollars in thousands):
Tier 1 Total
Core/ risk- risk-
Equity Tangible leverage based based
December 31, 1998 capital capital capital capital capital
----------------- ------- ------- ------- ------- -------
GAAP capital $ 53,869 53,869 53,869 53,869 53,869
Goodwill (552) (552) (552) (552)
Unrealized losses on
securities available for sale 197 197 197 197
General valuation allowances -- -- -- 1,778
-------- -------- -------- --------
Regulatory capital 53,514 53,514 53,514 55,292
Total regulatory assets 667,667
--------
Adjusted total assets 667,414 667,414
-------- --------
Risk-weighted assets 438,842 438,842
-------- --------
Capital ratio 8.07% 8.02% 8.02% 12.19% 12.60%
Regulatory requirement 1.50% 4.00% 8.00%
Regulatory capital category
Well capitalized - equal
to or greater than 5.00% 6.00% 10.00%
(Continued)
81
83
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
Tier 1 Total
Core/ risk- risk-
Equity Tangible leverage based based
December 31, 1997 capital capital capital capital capital
----------------- ------- ------- ------- ------- -------
GAAP capital $ 47,324 47,324 47,324 47,324 47,324
Goodwill (663) (663) (663) (663)
Unrealized gains on
securities available for sale (61) (61) (61) (61)
General valuation allowances -- -- -- 1,625
-------- -------- -------- --------
Regulatory capital 46,600 46,600 46,600 48,225
Total regulatory assets 602,910
--------
Adjusted total assets 602,155 602,155
-------- --------
Risk-weighted assets 375,289 375,289
-------- --------
Capital ratio 7.85% 7.74% 7.74% 12.42% 12.85%
Regulatory requirement 1.50% 3.00% 8.00%
Regulatory capital category
Well capitalized - equal
to or greater than 5.00% 6.00% 10.00%
Management believes, as of December 31, 1998, that the Bank meets all
capital requirements to which it is subject. Events beyond management's
control, such as fluctuations in interest rates or a downturn in the
economy in areas in which the Bank's loans and securities are
concentrated, could adversely affect future earnings and, consequently,
the Bank's ability to meet its future capital requirements.
82
84
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(13) Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
Disclosures About Fair Value of Financial Instruments. The estimated fair
value amounts have been determined by the Bank using available market
information and appropriate valuation methodologies. However, considerable
judgment is necessarily required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are
not necessarily indicative of the amounts the Bank could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair
value amounts.
December 31, 1998 December 31, 1997
----------------- -----------------
Estimated Estimated
Carrying fair Carrying fair
amount value amount value
-------- --------- -------- ---------
(dollars in thousands)
Financial assets:
Cash and cash equivalents $10,042 10,042 10,762 10,762
Investment securities:
Held to maturity 4,694 4,603 14,231 14,037
Available for sale 46,499 46,499 32,465 32,465
Mortgage-backed securities:
Held to maturity -- -- 25,825 26,416
Available for sale 44,963 44,963 27,312 27,312
Loans held for investment, net 526,197 529,474 461,457 458,525
Loans held for sale 5,873 5,892 7,823 7,852
Accrued interest receivable 3,449 3,449 3,343 3,343
Federal Home Loan Bank stock 3,823 3,823 3,504 3,504
Financial liabilities:
Deposits 559,235 563,731 520,690 521,211
Advances from Federal Home
Loan Bank 48,232 47,781 28,138 28,178
Advance payments by borrowers
for taxes and insurance 1,847 1,847 1,574 1,574
Accrued interest payable 861 861 1,002 1,002
(Continued)
83
85
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
The fair value estimates are based on the following methods and
assumptions:
o Cash and cash equivalents, accrued interest receivable, advance
payments by borrowers for taxes and insurance, and accrued interest
payable. The carrying amounts approximate their fair value.
o Investment securities and mortgage-backed securities. Fair values
for securities are based on quoted market prices or dealer quotes;
where such quotes are not available, fair values are based on quoted
market prices of comparable instruments.
o Loans held for investment. The fair values of loans receivable are
estimated using a discounted cash flow calculation that applies
estimated discount rates reflecting the credit and interest rate
risk inherent in the loans to homogeneous categories of loans with
similar financial characteristics; these loan categories are further
segmented into fixed and adjustable rate interest terms.
o Loans held for sale. Fair values are based on actual sales prices
for loans subject to sales commitments; fair values of loans not
subject to sales commitments are based on the market price of loans
with similar characteristics.
o Federal Home Loan Bank stock. This item is valued at cost, which
represents redemption value and approximates fair value.
o Deposits. The fair values of fixed maturity certificate accounts are
estimated using a discounted cash flow calculation that applies
interest rates currently offered for deposits of similar remaining
maturities. The fair values of other deposit accounts (passbook,
NOW, and money market accounts) equal their carrying values (i.e.,
the amount payable on demand at the reporting date).
o Advances from Federal Home Loan Bank. The fair value of FHLB
advances is estimated by discounting future cash flows at rates
currently available for borrowings with similar terms and remaining
maturities.
o Off-balance sheet financial instruments. The fair value of
commitments is estimated using the fees currently charged to enter
similar agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing. For fixed-rate
loan commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The fair
value of undisbursed lines of credit is based on fees currently
charged for similar agreements or on estimated cost to terminate
them or otherwise settle the obligations with the counterparties at
the reporting date. The carrying amount and fair value of
off-balance sheet instruments is not significant as of December 31,
1998 and 1997.
(14) Commitments and Contingencies
In the normal course of business, the Bank enters into commitments with
off-balance sheet risk to meet the financing needs of its customers.
Commitments to extend credit involve elements of credit risk and interest
rate risk in excess of the amount recognized in the consolidated
statements of financial condition. The Bank's exposure to credit loss in
the event of nonperformance by the other party to the commitment is
represented by the contractual amount of the commitment. The Bank uses the
same credit policies in making commitments as it does for on-balance sheet
instruments. Interest
(Continued)
84
86
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
rate risk on commitments to extend credit results from the possibility
that interest rates may have moved unfavorably from the position of the
Bank since the time the commitment was made.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates of 60 days or other
termination clauses and may require payment of a fee. Since some of the
commitments may expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements.
The Bank evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained by the Bank upon extension of
credit is based on management's credit evaluation of the applicant.
Collateral held is generally residential and commercial real estate.
The Bank's lending is concentrated in northeastern Ohio; as a result, the
economic conditions and market for real estate in northeastern Ohio could
have a significant impact on the Bank.
At December 31, 1998, the Bank had commitments to lend $47,356,000, of
which $16,173,000 were for adjustable-rate loans and $31,183,000 were for
fixed-rate loans. At December 31, 1997, the Bank had commitments to lend
$29,974,000, of which $14,492,000 were for adjustable-rate loans and
$15,482,000 were for fixed-rate loans. Adjustable-rate loans generally
reprice with the prime rate or the one- or three-year constant maturity
treasury rate. The interest rates and fees associated with these
commitments were prevailing at the time applications were taken. In
management's opinion, these loans will be funded through normal
operations.
There were no commitments to sell any loans at either December 31, 1998 or
1997.
As of December 31, 1998 and 1997, the Bank had line-of-credit commitments
totaling $14,528,000 and $8,175,000, respectively. Commitments generally
are extended at prime-sensitive interest rates and are secured by real
estate.
There are pending against the Bank various lawsuits and claims which arise
in the normal course of business. In the opinion of management, any
liabilities that may result from pending lawsuits and claims will not
materially affect the consolidated financial position of the Bank.
(Continued)
85
87
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(15) Parent Company Only Financial Statements
The condensed statements of financial condition as of December 31, 1998
and 1997, and related condensed statements of income and cash flows for
the year ended December 31, 1998 and the period from March 6, 1997 through
December 31, 1997 for Emerald Financial Corp. should be read in
conjunction with the consolidated financial statements and the notes
thereto (dollars in thousands).
December 31,
----------------------
Condensed Statement of Financial Condition 1998 1997
--------- ---------
Assets:
Cash $ 106 77
Securities available for sale 5,485 5,372
Note receivable -- 85
Equity in net assets of the Bank 53,869 47,324
Interest receivable on investments 45 104
Other assets 63 83
--------- ---------
Total assets $ 59,568 53,045
========= =========
December 31,
----------------------
1998 1997
--------- ---------
Liabilities and shareholders' equity:
Other liabilities $ 114 130
Notes payable 4,670 4,400
Shareholders' equity 54,784 48,515
--------- ---------
Total liabilities and shareholders' equity 59,568 53,045
========= =========
(Continued)
86
88
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
Period from
Year ended March 6, 1997 to
December 31, December 31,
Condensed Statement of Income 1998 1997
--------- ---------
Income:
Equity in earnings of the Bank $ 7,491 6,175
Interest income 462 328
Gain on sale of securities available for sale 575 --
--------- ---------
Total income 8,528 6,503
--------- ---------
Expenses:
Interest 365 268
Other 247 133
--------- ---------
Total expenses 612 401
--------- ---------
Income before federal income taxes 7,916 6,102
Federal income tax benefit (expense) (160) 39
--------- ---------
Net income $ 7,756 6,141
========= =========
(Continued)
87
89
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
Period from
Year ended March 6, 1997 to
December 31, December 31,
Condensed Statement of Cash Flows 1998 1997
--------------------------------- ------------ ----------------
Cash flows from operating activities:
Net income $ 7,756 6,141
Adjustments to reconcile net income to net cash
used in operating activities:
Equity in earnings of the Bank (7,491) (6,175)
Gain on sale of securities available for sale (575) --
Amortization and accretion 20 18
Deferred federal income taxes 80 (80)
(Decrease) increase in liabilities (12) 102
Change in accrued interest receivable and
payable 58 (104)
Other, net 83 (104)
------- -------
Net cash used in operating activities (81) (202)
------- -------
Cash flows from investing activities:
Purchase of securities available for sale (4,749) (5,137)
Proceeds from sale of securities available for sale 4,975 --
Dividend from the Bank 970 2,180
------- -------
Net cash provided by investing activities 1,196 (2,957)
------- -------
Cash flows from financing activities:
Proceeds from borrowings 270 4,425
Repayment of borrowings -- (80)
Dividend paid (2,004) (1,215)
Proceeds from stock options exercised 672 106
Proceeds from shares issued under DRIP 243 --
Purchase of treasury shares (267) --
------- -------
Net cash provided by financing activities (1,086) 3,236
------- -------
Net increase in cash and cash equivalents 29 77
Cash and cash equivalents at beginning of period 77 --
------- -------
Cash and cash equivalents at end of period $ 106 77
======= =======
(Continued)
88
90
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(16) Shareholders' Equity
The Bank paid dividends of $2,004,000 in 1998; $1,215,000 in 1997; and
$1,190,000 in 1996. The Bank's ability to make capital distributions is
restricted by Office of Thrift Supervision (OTS) regulations. As a Tier 1
Association under OTS regulations, the Bank is granted the greatest
flexibility in capital distributions; the Bank is authorized to distribute
the greater of (1) 100% of year-to-date net income plus 50% of excess
capital at the beginning of the year or (2) 75% of net income over the
most recent four-quarter period. Dividend payments were limited to
$17,583,000 at December 31, 1998.
On May 15, 1998, the Company declared a two-for-one stock split in the
form of a 100% common stock dividend payable May 15, 1998 to stockholders
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.
89
91
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
The information required by Item 304 of Regulation S-K was previously filed as
part of the Company's Current Report on Form 8-K reporting the event of
September 17, 1997 filed on September 23, 1997, as amended on Form 8-K/A filed
on October 3, 1997.
PART III
Item 10. Directors and Executive Officers of the Registrant
Set forth below are the names and ages of the executive officers of the Company,
positions held and the year from which held. These officers are elected annually
by the Board of Directors.
Thomas P. Perciak, 51
Director, Chief Executive Officer and President
Director of Emerald Financial Corp. since its inception in 1996 and of The
Strongsville Savings Bank since 1982. Chief Executive Officer and President of
Emerald Financial Corp. since its inception in 1996 and of The Strongsville
Savings Bank since 1985. Mr. Perciak has been the managing officer of the Bank
since 1979. He is also active in community organizations and serves on the Board
of Trustees of the following organizations: The Strongsville Chamber of
Commerce, Advisory Board of St. Andrew's Abbey, and Southwest Community Health
Center Foundation Board. Mr. Perciak also serves as the Chairman of the
Southwest Health Center Foundation Board.
John F. Ziegler, 46
Director, Chief Financial Officer and Executive Vice President
Director of Emerald Financial Corp. since its inception in 1996 and of The
Strongsville Savings Bank since 1987. Chief Financial Officer and Executive Vice
President of Emerald Financial Corp. since its inception in 1996 and of The
Strongsville Savings Bank since 1992. Mr. Ziegler has been employed by the Bank
since 1975, became the Treasurer in 1983 and has served as Vice President since
1988.
Paula M. Dewey, 54
Secretary and Vice President
Secretary and Vice President of Emerald Financial Corp. since its inception in
1996 and of The Strongsville Savings Bank since 1992. Ms. Dewey has been
employed by the Bank since 1978 and has been Secretary of the Bank since January
1991. She was elected Vice President responsible for construction lending in
January 1992; she has been in charge of construction lending since 1987 and
served as Assistant Vice President from 1987 until January 1992.
90
92
Cynthia W. Gannon, 41
Treasurer and Vice President
Treasurer and Vice President of Emerald Financial Corp. since its inception in
1996 and of The Strongsville Savings Bank since 1994. Mrs. Gannon has served as
the Bank's Treasurer since January 30, 1992. She served as the Bank's Controller
from January 1988 through January 1992 and is a certified public accountant.
William J. Harr, Jr, 36
Vice President
Vice President of Emerald Financial Corp. since 1998 and of The Strongsville
Savings Bank since 1992. Mr. Harr has served as the Vice President responsible
for branch operations since 1992. He served as branch manager of the Bank's main
office in Strongsville from January 1990 to January 1992 and as a loan officer
from July 1986 to January 1990.
Mike Kalinich, Sr., 68
Chairman of the Board of Directors
Chairman of the Board of Emerald Financial Corp. since its inception in 1996 and
of The Strongsville Savings Bank since 1991. Director of Emerald Financial Corp.
since its inception in 1996 and of The Strongsville Savings Bank since 1967. Mr.
Kalinich has been President of the Kalinich Fence Company, Inc. for over 30
years and is active in numerous community organizations. He also serves as a
Director of Southwest Community Health Center, Middleburg Heights, Ohio and as a
Trustee Emeritus of the Strongsville Chamber of Commerce.
Joan M. Dzurilla, 72
Director
Director of Emerald Financial Corp. since its inception in 1996 and of The
Strongsville Savings Bank since 1985. Mrs. Dzurilla served as Vice President of
The Strongsville Savings Bank from 1989 to February 1994. She is a registered
nurse.
Kenneth J. Piechowski, 50
Director
Director of Emerald Financial Corp. since its inception in 1996 and of The
Strongsville Savings Bank since 1996. Mr. Piechowski is director of the
Diaconate of the Diocese of Cleveland, where he has been employed since 1988.
Prior to 1988, he worked with nationally recognized insurance companies.
William A. Fraunfelder, Jr., 55
Director
Director of Emerald Financial Corp. since its inception in 1996 and of The
Strongsville Savings Bank since 1989. Mr. Fraunfelder, a lawyer, has served as
Referee in the Juvenile Division of the Cuyahoga Court of Common Pleas for 30
years.
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George P. Bohnert, Jr., 58
Director
Director of Emerald Financial Corp. since its inception in 1996 and of The
Strongsville Savings Bank since 1993. Mr. Bohnert, a certified public
accountant, has been a partner in the firm Foerster & Bohnert, Ltd. Since its
inception in 1996. He was a partner with a regional accounting firm from 1978 to
1992 and practiced on his own from 1992 to 1996.
John J. Plucinsky, MD, 71
Director
Director of Emerald Financial Corp. since its inception in 1996 and of The
Strongsville Savings Bank since 1978. Dr. Plucinsky has been a doctor of
internal medicine with a specialty in hematology and oncology for over 30 years.
Glenn W. Goist, DDS, 58
Director
Director of Emerald Financial Corp. since its inception in 1996 and of The
Strongsville Savings Bank since 1990. Dr. Goist has practiced dentistry for over
25 years. He maintains a private dental practice in Berea, Ohio.
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Item 11. Executive Compensation
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Item 11: Executive Compensation.
The following table shows the cash compensation paid by The Strongsville
Savings Bank in 1998, 1997 and 1996 to its most highly compensated executive
officers, including its chief executive officer. No other executive officer
received compensation, including salary and bonus, in excess of $100,000 in
1998.
SUMMARY COMPENSATION TABLE
Long-Term Compensation
------------------------------
Annual Compensation Awards Payouts
---------------------------------- ------------------ --------
($)
($) Restricted (#) ($) ($)
Name and ($) (1) ($) Other Annual Stock Securities Underlying LTIP All Other
Principal Position Year Salary Bonus Compensation Awards Options Payouts Compensation
------------------- ---- ------ ----- ------------ ------ ------- ------- ------------
Thomas P. Perciak 1998 219,200 131,515(2) (3) 0 80,000 0 38,185(4)
President and Chief 1997 199,200 103,431 (3) 0 7,000 0 35,268
Executive Officer 1996 191,500 101,274 (3) 0 0 0 12,155
John F. Ziegler 1998 144,000 86,369(2) (3) 0 80,000 0 23,875(4)
Executive Vice 1997 130,900 67,967 (3) 0 6,000 0 20,450
President and Chief 1996 125,800 66,529 (3) 0 0 0 15,081
Financial Officer
William J. Harr, Jr 1998 110,000 22,115(2) (3) 0 20,000 0 17,004(4)
Vice President 1997 88,400 27,524 (3) 0 3,000 0 10,112
1996 85,000 23,804 (3) 0 0 0 9,461
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- ----------
(1) Includes amounts deferred at the election of the named executive officers
pursuant to The Strongsville Savings Bank's 401(k) plan.
(2) The Strongsville Savings Bank gave a 1998 Christmas bonus to each
employee, including the three officers named in the Summary Compensation
Table. The Christmas bonus of each of Messrs. Perciak, Ziegler and Harr
was $4,215, $2,769 and $2,115, respectively. These amounts are included in
the bonus figures in the table. Mr. Harr was also awarded a year-end merit
bonus of $20,000. The bonus amounts reported are earned in the fiscal year
noted even though such amounts may be payable in subsequent years.
(3) Perquisites and other personal benefits have not exceeded the lesser of
$50,000 or ten percent (10%) of a named executive officer's salary and
bonus.
(4) Includes (i) the dollar amount of contributions by The Strongsville
Savings Bank to vested and unvested accounts under The Strongsville
Savings Bank's trusteed profit-sharing retirement plan and 401(k) Plan and
(ii) the current dollar value of the benefit realized or realizable as a
result of The Strongsville Savings Bank's payment of the premiums on
split-dollar life insurance policies. The dollar value of such benefit is
calculated on an actuarial basis for the period between payment of the
premium by The Strongsville Savings Bank and the anticipated date of
repayment to The Strongsville Savings Bank of premiums previously paid for
the split-dollar life insurance policies. The current dollar value of the
benefit to Messrs. Perciak, Ziegler and Harr of the split-dollar life
insurance premiums paid in 1998 is $18,564, $4,254 and $1,482,
respectively. The Strongsville Savings Bank contributed $14,821 to Mr.
Perciak's profit-sharing account in 1998 and made discretionary
contributions of $4,800 to his 401(k) plan account. The bank contributed
$14,821 to Mr. Ziegler's profit-sharing account in 1998 and made
discretionary contributions of $4,800 to his 401(k) plan account. The bank
contributed $11,559 to Mr. Harr's profit-sharing account in 1998 and made
discretionary contributions of $3,963 to his 401(k) plan account.
Stock Options. The following table has to do with options granted in 1998
to the executive officers named in the Summary Compensation Table. The 5% and
10% assumed rates of appreciation are specified by the rules of the Securities
and Exchange Commission. They do not represent Emerald's estimates or
projections of future prices for Emerald's stock. The exercise price of options
granted in 1998 equaled the average of the bid and asked prices of a share of
Emerald common stock on the grant date. The options granted in 1998 to the
identified executive officers were granted under Emerald's 1998 Stock Option and
Incentive Plan.
Potential Realizable
Value at Assumed
Annual Rates of Stock
Individual Grants Price Appreciation for
-------------------------------------------------------------------------- Option Term
Number of Percent of Total ----------------------------
Securities Options Granted to 5% 10%
Underlying Options Employees in Fiscal Exercise or Base
Name Granted (#) Year Price ($/Sh ) Expiration Date
- ---------------------- ------------------ ------------------- ---------------- --------------- ---------------------------
Thomas P. Perciak..... 80,000 25.72% $13.3125 April 18, 2008 $669,773 $1,697,336
John F. Ziegler....... 80,000 25.72% $13.3125 April 18, 2008 $669,773 $1,697,336
William J. Harr, Jr... 20,000 6.43% $13.3125 April 18, 2008 $167,443 $ 424,334
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The following table shows the number and value of unexercised stock
options held on December 31, 1998 by the executive officers named in the Summary
Compensation Table, as well as information concerning their exercises of options
in 1998. Expiring 10 years after the date of grant, the options have exercise
prices per share equal to the average of the closing bid and asked prices of
Emerald stock on the grant date. The options were granted under Emerald's 1998
Stock Option and Incentive Plan and the 1994 Long-Term Incentive Plan.
Securities Underlying Value of Unexercised
Unexercised Options at In-The-Money Options
Shares Fiscal Year End (#) at Fiscal Year End ($) *
Acquired Value ------------------------- -------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
------------------- ----------- -------- ------------------------- -------------------------
(#) ($)
--- ---
Thomas P. Perciak ............. 0 $ 0 214,000 80,000 $1,315,000 $ (195,000)
John F. Ziegler ............... 0 $ 0 156,000 80,000 $ 954,000 $ (195,000)
William J. Harr, Jr ........... 46,000 $ 287,500 40,000 20,000 $ 237,125 $ (48,750)
- ----------
* Represents the aggregate market value of options to purchase Emerald stock
awarded to the named executive officers, based upon (a) the $10.875
estimated fair market value per share of Emerald common stock on December
31, 1998 and (b) the exercise prices of $4.56 and $7.12 for exercisable
options. The $13.3125 exercise price of the unexercisable options exceeded
the estimated year-end fair market value per share of Emerald common
stock.
All options granted to the identified executive officers under the 1994
Long-Term Incentive Plan had become exercisable by December 31, 1998. Options
granted to the identified executive officers under Emerald's 1998 Stock Option
and Incentive Plan were granted on April 17, 1998. A portion of the options
becomes exercisable on April 17, 1999. The remainder becomes exercisable (a)
incrementally over the 10-year term of the options or (b) upon shareholder
approval of the February 27, 1999 Affiliation Agreement between Emerald and
Fifth Third Bancorp, whichever first occurs.
Retirement Plan Information. Neither Emerald nor The Strongsville Savings
Bank has a retirement plan for officers or employees providing defined benefits
based upon salary, years of service or other measures. Instead, The Strongsville
Savings Bank has implemented a profit-sharing plan under which The Strongsville
Savings Bank may make entirely discretionary cash contributions. The
Strongsville Savings Bank has also implemented a 401(k) plan whereby matching
contributions will be made for each participating officer or employee who elects
to defer a portion of his or her salary for investment in the 401(k) plan. The
amount of salary that may be deferred by any individual and the amount (and
vesting) of the matching contributions are subject to limitations (matching
contributions of up to 60% of the deferral, subject to maximum matching
contribution amount; no matching contributions for deferral in excess of 5% of
salary; incremental vesting of the matching contribution over a period of six
years).
Recognizing the importance of building and retaining a competent
management team, effective January 1, 1995 The Strongsville Savings Bank entered
into Executive Supplemental Benefit Agreements with six of its officers,
including the three executive officers identified in the Summary Compensation
Table. The Executive Supplemental Benefit Agreements were adopted
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following Board review of a comprehensive compensation study presented by KPMG
LLP as compensation consultants. The Executive Supplemental Benefit Agreements
provide for payments in the event of retirement, death, disability or a change
in control. Under the terms of each agreement, death, disability and post-
employment/retirement benefits are provided to each covered employee. By
defining the amounts each executive will receive upon formal retirement, each
executive has been given what the Board believes to be a reasonable incentive to
remain with The Strongsville Savings Bank until retirement.
The Executive Supplemental Benefit Agreements of Messrs. Perciak, Ziegler
and Harr provide for payment of an annual benefit upon their retirement.
"Retirement Date" is defined in the Agreements to mean the first day of the
month following the executive officer's 65th birthday on which he or she elects
to retire (or an early retirement date that may be agreed to by the Board of
Directors). The retirement benefit vests ratably each year, becoming fully
vested at age 65 or, if sooner, (i) upon death or permanent disability or (ii)
upon a change in control of Emerald. Rather than receiving annual payments, Mr.
Perciak and Mr. Ziegler may petition the Board of Directors or the appropriate
committee thereof for payment of the entire retirement benefit in one lump sum
(discounted to the present value at that time, using a 6% discount rate). The
benefit payable in the event of a change in control would also be paid in a lump
sum, similarly discounted to present value. Likewise, Mr. Perciak and Mr.
Ziegler may petition for full vesting of benefits if they choose to retire
before reaching age 65.
Mr. Perciak's Executive Supplemental Benefit Agreement dated July 15, 1997
provides for annual payment for 20 years following retirement (assuming full
vesting) based on a July 1997 present value of $645,000 plus earnings or
appreciation thereon. His Executive Supplemental Benefit Agreement dated January
1, 1995, as amended July 15, 1997, provides for annual payment for 20 years
following retirement (assuming full vesting) in amounts ranging from $17,959 for
retirement in 1999 to $134,693 for retirement at age 65, or $269,739 as a lump
sum payment for a change in control in 1999.
Mr. Ziegler's Executive Supplemental Benefit Agreement dated July 15, 1997
provides for annual payment for 20 years following retirement (assuming full
vesting) based on a July 1997 present value of $307,827 plus earnings or
appreciation thereon. His Executive Supplemental Benefit Agreement dated January
1, 1995, as amended July 15, 1997, provides for annual payment for 20 years
following retirement (assuming full vesting) in amounts ranging from $2,565 for
retirement in 1999 to $25,647 for retirement at age 65, or $38,731 as a lump sum
payment for a change in control in 1999.
The retirement benefit payable to Mr. Harr under his Executive
Supplemental Benefit Agreement would be $23,585 annually for 20 years for
retirement at age 65, or a lump sum of $20,568 for a change in control in 1999.
A payment in respect of a change in control would be made under the
Executive Supplemental Benefit Agreements if the executive officer is
involuntarily terminated (except for cause) or voluntarily terminates his or her
employment for "good reason." In general terms, "good reason" is defined to
include a change in the executive officer's status, title or
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responsibilities that does not represent a promotion, a reduction in base
salary, certain relocations or a material reduction in benefits. Following the
1997 holding company reorganization of The Strongsville Savings Bank, the
Executive Supplemental Benefit Agreements' definition of "change in control" was
amended. As amended, a "change in control" includes the following circumstances:
(i) the acquisition by a person or persons acting in concert of the
power to vote 25% or more of a class of Emerald's voting securities,
or the acquisition by a person of the power to direct Emerald's
management or policies, if the Board of Directors or the Office of
Thrift Supervision has made a determination that such acquisition
constitutes or will constitute an acquisition of control for the
purposes of the Savings and Loan Holding Company Act or the Change
in Bank Control Act and the regulations thereunder;
(ii) during any period of two consecutive years, individuals who at the
beginning of the two-year period constitute the Board of Directors
of The Strongsville Savings Bank or Emerald cease for any reason to
constitute at least a majority thereof, unless the election of each
director who was not a director at the beginning of the two-year
period has been approved in advance by directors representing at
least two thirds of the directors then in office who were directors
in office at the beginning of the period;
(iii) Emerald shall have merged into or consolidated with another
corporation, or merged another corporation into Emerald, on a basis
whereby less than 50% of the total voting power of the surviving
corporation is represented by shares held by former shareholders of
Emerald prior to such merger or consolidation; or
(iv) Emerald shall have sold substantially all of its assets to another
person. The term "person" refers to an individual, corporation,
partnership, trust, association, joint venture, pool, syndicate,
sole proprietorship, unincorporated organization or other entity.
Under the Executive Supplemental Benefit Agreement, the benefit payable to
Mr. Perciak would be $269,739 under his January 1, 1995 Executive Supplemental
Benefit Agreement and $645,000 plus related earnings under his July 15, 1997
Executive Supplemental Benefit Agreement for a change in control in 1999 and
involuntary termination (except for cause) or voluntary termination for good
reason within six months thereafter. For Mr. Ziegler, the benefit payable under
similar circumstances would be $38,731 under his January 1, 1995 Executive
Supplemental Benefit Agreement and $307,827 plus related earnings under his July
15, 1997 Executive Supplemental Benefit Agreement in the event of a change in
control in 1999 and involuntary termination (except for cause) or voluntary
termination for good reason within six months thereafter. Lastly, for Mr. Harr
the benefit payable would be $20,568. Change-in-control benefit payments under
the Executive Supplemental Benefit Agreements will be made in a lump sum.
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Although the February 27, 1999 Affiliation Agreement with Fifth Third
Bancorp and the merger contemplated thereby will constitute a change in control
of Emerald under the terms of the Executive Supplemental Benefit Agreements, the
Affiliation Agreement provides in ss.VII.B.7 that Fifth Third will honor, assume
and perform the obligations of Emerald and The Strongsville Savings Bank under
the Executive Supplemental Benefit Agreements of Messrs. Perciak and Ziegler.
Messrs. Perciak and Ziegler have agreed that the change in control represented
by the merger with Fifth Third will not cause accelerated vesting of their
benefits under the Executive Supplemental Benefit Agreements. Accordingly,
Messrs. Perciak and Ziegler will not be entitled to receive at completion of the
merger the change-in-control payments specified in their January 1, 1995 and
July 15, 1997 Executive Supplemental Benefit Agreements. The change-in-control,
retirement, disability or other payments specified in those agreements could,
however, become owing to Messrs. Perciak and Ziegler in the future.
The Strongsville Savings Bank has obtained life insurance policies whose
benefits, payable to The Strongsville Savings Bank as beneficiary, would be
sufficient to satisfy the obligations of The Strongsville Savings Bank and
Emerald under the Executive Supplemental Benefit Agreements. The Strongsville
Savings Bank is the sole owner of and beneficiary under the life insurance
policies, except that Messrs. Perciak, Ziegler and Harr are the owners of the
split-dollar insurance policies on their lives. The split-dollar insurance
policy on Mr. Perciak's life had a net present value of $163,482 at the time of
its acquisition in 1997. Mr. Perciak is the owner of the policy and he and his
successors or assigns are entitled to exercise all rights thereunder. The policy
has been collaterally assigned to The Strongsville Savings Bank. The purpose of
the collateral assignment is to secure repayment to The Strongsville Savings
Bank of premiums paid on the policy, which premiums will be repaid from proceeds
of the policy upon Mr. Perciak's death or earlier termination of the policy. The
split-dollar insurance policy on Mr. Ziegler's life had a net present value of
$71,203 at the time of its acquisition in 1997. Mr. Ziegler is the owner of the
policy and he and his successors or assigns are entitled to exercise all rights
thereunder. This policy has also been collaterally assigned to The Strongsville
Savings Bank.
Although benefits under the Executive Supplemental Benefit Agreements are
payable in the future, the estimated present value of future benefits is being
accrued over the period from the effective date of the agreements until the
expected retirement dates of the participants. The insurance premium expense
under the life insurance policies purchased to fund contractual obligations to
Messrs. Perciak, Ziegler and Harr in 1998, and their approximate cash surrender
value to The Strongsville Savings Bank, are an aggregate of $91,481 and
$306,950, respectively.
Employment Agreements. Each of Mr. Perciak and Mr. Ziegler serves pursuant
to an employment agreement with The Strongsville Savings Bank. The employment
agreements have three-year terms, renewed at each anniversary date for an
additional year based upon a determination of the Board that the performance of
the executive has met the Board's requirements and standards. The effect of the
annual renewal is that each contract then has a new three-year term. Each
contract was renewed for an additional year by Board action on November 18,
1998.
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Under the terms of his employment agreement, Mr. Perciak's base salary,
currently $230,160, is subject to annual adjustment by the Board of Directors.
He is also entitled to annual incentive compensation of 2.5% of Emerald's
pre-tax profits (up to 50% of base salary). If Mr. Perciak (i) is involuntarily
terminated (other than for cause) within six months after a change in control of
Emerald or (ii) voluntarily terminates his employment for good reason within six
months after a change in control of Emerald, he will receive his base salary for
the remaining term of the employment agreement. For purposes of the
change-in-control features of the employment agreement, "change in control" is
defined in the same fashion as "change in control" for purposes of the Executive
Supplemental Benefit Agreements.
Under the terms of his employment agreement, Mr. Ziegler's base salary,
currently $151,200, is likewise subject to annual adjustment by the Board of
Directors. He is also entitled to annual incentive compensation of 1% of
Emerald's pre-tax profits (up to 50% of base salary). Additionally, if Mr.
Ziegler (i) is terminated at any time other than for cause, (ii) voluntarily
terminates his employment for good reason within six months after a change in
control (defined in the same manner as in Mr. Perciak's agreement) or (iii) is
involuntarily terminated within six months following a change in control, he
will receive his base salary for the remaining term of the employment agreement.
Mr. Perciak's and Mr. Ziegler's compensation arrangements also include a
split-dollar life insurance policy and Executive Supplemental Benefit
Agreements.
Although Messrs. Perciak and Ziegler are expected to serve as officers of
Fifth Third Bank, Northwestern Ohio, N.A. after the merger, Fifth Third has
agreed in ss.VII.B.3 of the Affiliation Agreement to honor the change-in-control
provisions of their employment agreements and to pay to them at the effective
time of the merger the change-in-control payments specified therein, except to
the extent any such payment would constitute an "excess parachute payment" under
ss.280(G) of the Internal Revenue Code of 1986. Accordingly, Mr. Perciak expects
to receive a change-in-control payment of approximately $850,591 under his
employment agreement, and Mr. Ziegler expects to receive a change-in-control
payment of approximately $547,717 under his employment agreement.
Change-in-Control Arrangements
Severance Agreements. The Strongsville Savings Bank entered into
severance agreements in 1994 with eight officers other than Messrs. Perciak and
Ziegler, including Mr. William J. Harr, Jr., an executive officer identified in
the Summary Compensation Table and Ms. Deborah A. Perciak, Vice President of The
Strongsville Savings Bank and spouse of Thomas P. Perciak, Emerald's and The
Strongsville Savings Bank's President and Chief Executive Officer. Each
severance agreement has a term of one year, renewable each year for an
additional year upon a determination by the Board of Directors that the
executive has met the Board's performance standards. Each severance agreement
terminates when the executive reaches the retirement age of 65.
Each severance agreement provides that in the event of the involuntary
termination of the
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executive (other than for cause) or the executive's voluntary termination for
good reason within six months after a change in control, the executive would
receive a lump sum payment equal to the executive's annual base salary, plus the
continuation of benefits until the earlier of the executive's employment by
another employer or the expiration of twelve months from the executive's date of
termination. If the executive incurs legal fees or expenses enforcing the
severance agreement, Emerald or The Strongsville Savings Bank would pay all such
fees and expenses if the executive prevails, and an amount up to $25,000 if the
executive does not prevail. Payments to the executives under the severance
agreements would not constitute excess parachute payments under the Internal
Revenue Code.
The definition in the severance agreements of "change in control" was
amended in 1997. As amended, a change in control is defined in the same manner
that term is defined for purposes of the Executive Supplemental Benefit
Agreements.
Although some or all of these officers are expected to continue to serve
as officers of Fifth Third Bank, Northwestern Ohio, N.A. after the merger, Fifth
Third has agreed in ss.VII.B.3 of the Affiliation Agreement to honor the
change-in-control provisions of their severance agreements and to pay to them at
the effective time of the merger the change-in-control payments specified
therein, except to the extent any such payment would constitute an "excess
parachute payment" under ss.280(G) of the Internal Revenue Code of 1986.
Accordingly, Mr. Harr expects to receive a change-in-control payment of
approximately $115,500.
Executive Supplemental Benefit Agreements. The Strongsville Savings
Bank has also entered into Executive Supplemental Benefit Agreements with
Messrs. Perciak and Ziegler and the eight other officers with whom The
Strongsville Savings Bank has entered into severance agreements. The Executive
Supplemental Benefit Agreements provide for payments to the executive officers
in certain events, including involuntary termination (except for cause) or
voluntary termination for good reason (defined in the same fashion as under the
severance agreements) within six months after a change in control.
BOARD REPORT ON EXECUTIVE COMPENSATION
The full Board determines the executive compensation to be paid to the two
most senior executive officers, Messrs. Perciak and Ziegler. Mr. Perciak and Mr.
Ziegler are excluded from discussion and board deliberation regarding
compensation paid to them.
For other officers, the function of administering executive compensation
policies is currently performed by The Strongsville Savings Bank's Wage and
Salary Committee. In this process, officers are evaluated on their performance
during the year compared to The Strongsville Savings Bank's performance, thrift
industry compensation surveys and comparable positions at other thrift
institutions. Because the Board regards Messrs. Perciak and Ziegler as having
the greatest impact on corporate performance, the Board members have established
a compensation philosophy of providing base pay and incentive compensation for
these executive officers reflective of The Strongsville Savings Bank's financial
performance compared to situated thrifts. For individuals other than Messrs.
Perciak and Ziegler, the Wage and Salary Committee
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seeks to establish executive officer base salaries at a level commensurate with
corporate performance, peer group competitors and the individual officers'
performance. The Board and the Wage and Salary Committee continue to review all
elements of executive compensation in order to ensure that the total
compensation program, and each compensation element, meets Emerald's and The
Strongsville Savings Bank's business objectives and philosophy.
As a general rule, it has been the Board of Directors' and the Option
Committee's policy to take into account tax and financial accounting
considerations in connection with the granting of options or other forms of
grants and awards under the 1994 Long-Term Incentive Plan and the 1998 Stock
Option and Incentive Plan. The Board of Directors does not expect that grants or
awards will be made that would exceed the limit on deductibility established by
the Omnibus Budget Reconciliation Act of 1993. In 1993, the Omnibus Budget
Reconciliation Act added Section 162(m) to the Internal Revenue Code, the effect
of which is generally to eliminate the deductibility of compensation over $1
million paid to certain highly compensated executive officers of publicly held
corporations, such as the executive officers identified in the "Summary
Compensation Table." Section 162(m) applies to all remuneration (both cash and
non-cash) that would otherwise be deductible for tax years beginning on or after
January 1, 1994, unless expressly excluded. Although the Board and Option
Committee reserve the right to make grants and awards under the 1994 Long-Term
Incentive Plan and the 1998 Stock Option and Incentive Plan under circumstances
in which the compensation component thereof would not be fully deductible for
federal income tax purposes, they do not currently expect to do so.
COMPENSATION OF CHIEF EXECUTIVE OFFICER
Mr. Perciak received an increase in base salary for 1998 of $20,000, or
approximately 10%. Although the Board generally takes into consideration the
overall performance of The Strongsville Savings Bank, the Board does not use any
specific measures or weighting of that performance in establishing Mr. Perciak's
base salary. Mr. Perciak's compensation package is formalized in an employment
agreement. Mr. Perciak and Executive Vice President Ziegler are eligible to
receive up to 50% of base salary in the form of annual incentive compensation
under the terms of their employment contracts. Mr. Perciak earned incentive
compensation in fiscal year 1998 for the maximum amount possible under his
employment contract.
In reviewing Mr. Perciak's performance as President and Chief Executive
Officer and the justification for renewal of his employment contract for an
additional year, the directors favorably considered Mr. Perciak's performance
relative to the following factors: the increase in fee income, the growth in
deposits, loans and profitability attributable to The Strongsville Savings
Bank's corporate performance (return on assets and return on equity), the volume
of residential acquisition and development lending attributable to Mr. Perciak,
the market share performance of The Strongsville Savings Bank and The
Strongsville Savings Bank's compliance with safe and sound banking principles
and Community Reinvestment Act/consumer regulation requirements. At its November
18, 1998 meeting, the Board determined that each of Messrs. Perciak and Ziegler
had met the standards of the Board for executive officer performance. Therefore,
their employment contracts were renewed for one additional year.
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Submitted by Emerald's Board of Directors: Thomas P. Perciak, John F.
Ziegler, George P. Bohnert, Jr., Joan M. Dzurilla, William A. Fraunfelder,
Jr., Glenn W. Goist, Mike Kalinich, Sr., Kenneth J. Piechowski and John J.
Plucinsky
PERFORMANCE GRAPH
The stock of The Strongsville Savings Bank began trading publicly on
October 5, 1993, having been sold in an initial public offering at the price of
$3.25 per share (adjusted for subsequent stock splits). Effective March 6, 1997,
each share of The Strongsville Savings Bank stock was converted into one share
of Emerald common stock, and The Strongsville Savings Bank became a wholly owned
subsidiary of Emerald. Emerald common stock was approved for designation as a
Nasdaq National Market security on March 6, 1997.
The following graph compares the cumulative total shareholder return on
Emerald common stock to the cumulative total return of (i) a broad index of the
National Association of Securities Dealers, Inc. Automated Quotations System
("Nasdaq") and (ii) the MG Savings and Loan Index, which is comprised of 360
publicly traded savings associations and thrift holding companies. The graph
compares cumulative total shareholder return for the period commencing December
31, 1993 and ending December 31, 1998, assuming that $100 was invested on
December 31, 1993 and that all dividends were reinvested.
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COMPARISON OF THE CUMULATIVE TOTAL RETURN
AMONG EMERALD FINANCIAL CORP.
MG S&L INDEX, AND NASDAQ MARKET INDEX
12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
Emerald Financial $100.00 $105.40 $116.77 $137.83 $276.89 $276.04
NASDAQ $100.00 $104.99 $136.18 $169.23 $207.00 $291.96
MG S&L Peer Group $100.00 $ 95.79 $151.72 $198.00 $332.91 $291.84
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In 1998, The Strongsville Savings Bank's Wage and Salary Committee
consisted of Mrs. Dzurilla and Messrs. Kalinich and Perciak. Neither Mr.
Kalinich nor Mrs. Dzurilla is an officer of Emerald or The Strongsville Savings
Bank. Although Mr. Kalinich was a Vice President of The Strongsville Savings
Bank until 1991, he was an officer in name only, with no operational authority.
Mrs. Dzurilla served as a Vice President of The Strongsville Savings Bank from
1989 until 1994.
The Strongsville Savings Bank refers title insurance business to National
Land Title Insurance Company and City Title Company Agency, Inc. Joseph and
Michael Dzurilla, the adult sons of Director Joan M. Dzurilla, own the stock of
NLTI Financial, which owns 100% of National Land Title Insurance Company. City
Title Company Agency, Inc. is a real estate title insurance agency wholly owned
by National Land Title Insurance Company. City Title Company Agency, Inc.
performs title searches, title examinations and insurability determinations
related to title insurance commitments for mortgage loan transactions insured by
National Land
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Title Insurance Company. City Title Company Agency, Inc. and National Land Title
Insurance Company charge for title business work at a rate consistent with the
standards for that industry. City Title Company Agency, Inc. performed services
in 1998 related to loan transactions such as title insurance and commitments,
title examinations and post-closing services. Borrowers of The Strongsville
Savings Bank paid City Title Company Agency, Inc. $324,447.35 in 1998 for
services related to loan transactions.
DIRECTORS' COMPENSATION
Each nonemployee director received $650 for each Board of Directors
meeting held from January through April 1998, and $700 for each Board meeting
held thereafter. Mr. Kalinich received additional compensation as Chairman of
the Board, totaling $21,167 in 1998. Nonemployee directors serving on
committees, including the Executive Committee, the Wage and Salary Committee and
the Audit Committee, received fees of $300 for attendance at each committee
meeting in 1998.
The foregoing cash compensation of directors has been paid to directors
for their service on the Board of Directors of The Strongsville Savings Bank,
and committees thereof. Since the formation of Emerald, none of its executive
officers or directors has received any cash remuneration from Emerald, except
that directors who serve on Emerald's Option Committee receive fees for
attendance at Option Committee meetings. Because Emerald's business principally
consists of acting as holding company for The Strongsville Savings Bank, Emerald
does not expect that cash compensation will be paid to officers of Emerald in
addition to that paid to them by The Strongsville Savings Bank.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires Emerald's
directors and executive officers, as well as persons who own more than 10% of a
registered class of Emerald's equity securities, to file with the Securities and
Exchange Commission initial reports of ownership and reports of changes in
ownership of Emerald common stock. Based solely on review of the copies of such
reports furnished to Emerald and written representations to Emerald, to the best
of Emerald's knowledge all Section 16(a) filing requirements applicable to its
executive officers, directors and greater than 10% beneficial owners were
complied with in 1998 except as noted below.
Director Piechowski purchased shares 454.545 shares through a voluntary
contribution to the Company's DRIP plan in September 1998; the related Form 4
was received by the Securities and Exchange Commission on October 26, 1998.
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107
Item 12: Security Ownership of Certain Beneficial Owners and Management.
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Item 12: Security Ownership of Certain Beneficial Owners and Management.
The following table shows the share ownership of (1) each director, (2)
each executive officer named in the Summary Compensation Table and (3) all
executive officers and directors of Emerald as a group. The column showing
shares acquirable by exercise of options reflects options granted under
Emerald's 1998 Stock Option and Incentive Plan and The Strongsville Savings Bank
1994 Long-Term Incentive Plan. In connection with the holding company
reorganization of The Strongsville Savings Bank completed on March 6, 1997,
Emerald adopted and assumed all obligations under the 1994 Long-Term Incentive
Plan. Options issued under the 1994 Long-Term Incentive Plan became options to
acquire a like number of shares of Emerald stock, exercisable on the same terms
and conditions. Information in the table below is as of February 28, 1999.
Except as may be noted, all shares are owned directly or indirectly by the named
individuals or by their spouses and minor children, over which shares the named
individuals effectively exercise voting and investment power. Except as
disclosed in the table, no other person is known by management to be the
beneficial owner of more than 5% of Emerald's stock.
Shares Acquirable by
Name and Address of Beneficial Owner Shares Beneficially Owned Exercise of Options (1) Percent of Class
- --------------------------------------------- ------------------------- ----------------------- ----------------
George P. Bohnert............................ 17,412 4,000 (2)
Joan M. Dzurilla............................. 2,464,740 (3) 4,000 22.50%
14092 Pearl Road
Strongsville, OH 44136
William A. Fraunfelder, Jr................... 41,507 (4) 4,000 (2)
Glenn W. Goist............................... 46,900 4,000 (2)
William J. Hart, Jr.......................... 43,237 20,000 (2)
Mike Kalinich, Sr............................ 105,600 10,000 1.05%
Thomas P. Perciak............................ 454,331 (5) 80,000 4.84%
14092 Pearl Road
Strongsville, Ohio 44136
Kenneth J. Piechowski........................ 2,240 20,000 (2)
John J. Plucinsky............................ 204,374 20,000 2.04%
John F. Ziegler.............................. 277,444 (6) 80,000 3.24%
All directors and executive
officers as a group (12 persons)............. 4,054,231 286,000 36.02%
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- ----------
(1) Options to acquire the shares reflected in the table were granted on April
17, 1998. Options granted to directors who are not officers or employees
are currently exercisable in their entirety. A portion of the options held
by executive officers becomes exercisable on April 17, 1999. The remainder
becomes exercisable (a) incrementally over their remaining terms or (b)
upon shareholder approval of the February 27, 1999 Affiliation Agreement
between Emerald and Fifth Third Bancorp, whichever first occurs. The
entire option grant to the named individuals is reflected in the table.
(2) Less than 1%.
(3) Mrs. Dzurilla holds 176,140 shares through the Joan M. Dzurilla Charitable
Remainder Trust, of which she is the settlor and sole trustee. A
charitable organization is the sole beneficiary of the trust.
(4) Does not include 3,800 shares held by Mr. Fraunfelder's spouse. Mr.
Fraunfelder disclaims beneficial ownership of those shares.
(5) Mr. Perciak has sole voting and investment power over 217,831 shares,
including shares held in his 401(k) plan account. Mr. Perciak shares
voting and investment power over 226,000 shares held by the Thomas P.
Perciak Trust, of which he and his spouse are trustees, and 10,000 shares
held jointly by Mr. Perciak and his father. The figures representing Mr.
Perciak's ownership do not include, and he disclaims beneficial ownership
of, 49,422 shares held by his spouse, 20,000 shares acquirable upon
exercise of options held by his spouse, and 36,800 shares held jointly by
his spouse and her parents.
(6) Of these shares, Mr. Ziegler holds 1,900 shares as custodian for his minor
children. Includes 23,400 shares Mr. Ziegler owns jointly with his mother.
The shares shown in the table include shares that are pledged or may be
pledged from time to time by the directors and executive officers of Emerald.
According to a Schedule 13D, Amendment No. 5, beneficial ownership report filed
by Mrs. Dzurilla with the Securities and Exchange Commission on March 4, 1999,
Mrs. Dzurilla has pledged 567,700 shares to a brokerage firm, securing margin
debt of approximately $226,631. According to a Schedule 13D beneficial ownership
report filed by Mr. Perciak with the Securities and Exchange Commission on March
8, 1999, Mr. Perciak incurred indebtedness of approximately $2,256,181 with an
Ohio-based financial institution in connection with his exercise of options to
acquire Emerald common stock. The indebtedness is secured by a pledge of the
214,000 shares acquired by exercise of options. Mr. Ziegler has also pledged to
that institution 156,000 shares as security for a loan of approximately
$1,331,000. Mr. Ziegler acquired those 156,000 shares by exercise of options in
1999, using the proceeds of such loan. Mr. Harr also pledged to that institution
40,000 shares as security for a loan of approximately $362,500. Mr. Harr
acquired those 40,000 shares by exercise of options in 1999, using the proceeds
of such loan. Directors Bohnert, Goist and Fraunfelder and three executive
officers not named in the preceding table have also pledged shares acquired by
exercise of options to the Ohio-based financial institution as security for the
loans they obtained for the purpose of exercising options. The table includes
16,000 shares pledged by Director Bohnert, 16,000 shares pledged by Director
Goist, 16,000 shares pledged by Director Fraunfelder and 80,000 shares pledged
by two executive officers not named in the preceding table, securing
indebtedness of $73,000 of Director Bohnert, $73,000 of Director Goist, $73,000
of Director Fraunfelder and an aggregate of $561,536 of the two executive
officers not named in the preceding table.
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110
Item 13. Certain Relationships and Related Transactions
Some of the directors and officers, as well as firms and companies with which
they are associated, are and have been customers of the Company, and have
engaged in various banking transactions with the Company in 1998. Loan
transactions with these persons were made in the ordinary course of business on
substantially the same terms, including interest rates and collateral,
prevailing at the time for comparable transactions with others, and did not
represent more than a normal risk of collectibility or other unfavorable
features.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Independent Auditors' Report - See Item 8 Financial Statements and
Supplementary Data of this Form 10-K
Consolidated Financial Statements Report - See Item 8 Financial
Statements and Supplementary Data of this Form 10-K
(a) Consolidated Statements of Financial Condition as of December
31, 1998 and 1997
(b) Consolidated Statements of Income for Each of the Years in the
Three Year Period Ended December 31, 1998
(c) Consolidated Statements of Cash Flows for Each of the Years in
the Three Year Period Ended December 31, 1998
(d) Consolidated Statements of Shareholders' Equity for Each of
the Years in the (e) Three Year Period Ended December 31, 1998
(e) Notes to Consolidated Financial Statements
2. All schedules have been omitted as the required information is
either inapplicable or included in the Notes to the Consolidated
Financial Statements.
3. Exhibits and Index to Exhibits
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111
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) 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.
By: /s/ Thomas P. Perciak
--------------------------------------
Thomas P. Perciak
President and Chief Executive Officer
Date: March 29, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Thomas P. Perciak March 29, 1999
- -----------------------------------------------
Thomas P. Perciak
Director, President and Chief Executive Officer
(principal executive officer)
/s/ John F. Ziegler March 29, 1999
- -----------------------------------------------
John F. Ziegler
Director, Executive Vice President
and Chief Financial Officer
(principal accounting and financial officer)
/s/ Mike Kalinich March 29, 1999
- -----------------------------------------------
Mike Kalinich
Director, Chairman of the Board
/s/ Kenneth J. Piechowski March 29, 1999
- -----------------------------------------------
Kenneth J. Piechowski
Director
/s/ Joan M. Dzurilla March 29, 1999
- -----------------------------------------------
Joan M. Dzurilla
Director
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112
/s/ William A. Fraunfelder, Jr. March 29, 1999
- -----------------------------------------------
William A. Fraunfelder, Jr.
Director
/s/ Glenn W. Goist March 29, 1999
- -----------------------------------------------
Glenn W. Goist
Director
/s/ John J. Plucinsky March 29, 1999
- -----------------------------------------------
John J. Plucinsky
Director
/s/ George P. Bohnert, Jr. March 29, 1999
- -----------------------------------------------
George P. Bohnert, Jr.
Director
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The following exhibits are either attached to or incorporated by reference in
this Annual Report on Form 10-K:
Exhibit Attachment
Number Description Number
------ ----------- ----------
(3)(i) Articles of Incorporation, as amended *
(3)(ii) Code of Regulations *
(10)(a) Amendment to Employment Agreement
(Thomas P. Perciak) (b)
(10)(b) Amendment to Employment Agreement
(John F. Ziegler) (b)
(10)(c) The Strongsville Savings Bank 1994 Long-Term
Incentive Plan (a)
(10)(d) Severance Agreement (Dean R. Anaya) (a)
(10)(e) Amended Severance Agreement (Paula M. Dewey) (b)
(10)(f) Amended Severance Agreement (Cynthia W. Gannon) (b)
(10)(g) Amended Severance Agreement (William J. Harr, Jr.) (b)
(10)(h) Amendment to Executive Supplemental Benefit Agreement
(Thomas P. Perciak) (b)
(10)(i) Amendment to Executive Supplemental Benefit Agreement
(John F. Ziegler) (b)
(10)(j) Executive Supplemental Benefit Agreement
(Dean R. Anaya) (a)
(10)(k) Amended Executive Supplemental Benefit Agreement
(Paula M. Dewey) (b)
(10)(l) Amended Executive Supplemental Benefit Agreement
(Cynthia W. Gannon) (b)
(10)(m) Amended Executive Supplemental Benefit Agreement
(William J. Harr, Jr.) (b)
(10)(n) Executive Supplemental Benefit Agreement
(Deborah A. Perciak) (a)
(10)(o) Split Dollar Life Insurance Agreement
(Thomas P. Perciak) (b)
(10)(p) Split Dollar Life Insurance Agreement
(John F. Ziegler) (b)
(10)(q) Executive Supplemental Benefit Agreement
(Thomas P. Perciak) (b)
(10)(r) Executive Supplemental Benefit Agreement
(John F. Ziegler) (b)
(10)(s) Merger Agreement and Shareholder Support Agreement (c)
(11) Computation of earnings per share 11
(21) Subsidiaries 21
(23)(a) Consent KPMG LLP 23(a)
(23)(b) Consent Deloitte & Touche LLP 23(b)
(27) Financial data schedule 27
(99) Additional Exhibits - Report of predecessor
independent accountants 99
112
114
- ----------
* Incorporated by reference to Exhibits 3(i)and 3(ii) of Registrant's
Registration Statement on Form 8-A, filed March 6, 1997.
(a) Incorporated by reference to Exhibit 99(i) of Registrant's
Registration Statement on Form 8-A, filed March 6, 1997.
(b) Incorporated by reference to Exhibit 10 of Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997.
(c) Incorporated by reference to Exhibit 99.1 of Registrant's Form 8-K
filed on March 2, 1999 under Commission file number 000-22201.
(b) None
(c) All required exhibits are filed as attached or incorporated by reference.
(d) No financial statement schedules are required to be filed.
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EMERALD FINANCIAL CORP.
INDEX TO EXHIBITS TO FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998
Exhibit Description
- ----------------------------------------------------------------------------
(11) Computation of earnings per share
(21) Subsidiaries
(23)(a) Consent KPMG LLP
(23)(b) Consent Deloitte & Touche LLP
(27) Financial Data Schedule
(99) Report of Predecessor Independent Accountants
114