1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
COMMISSION FILE NUMBER: 000-22201
EMERALD FINANCIAL CORP.
-----------------------
(Exact name of registrant as specified in its charter)
OHIO 34-1842953
------------------------------ -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
14092 PEARL ROAD
STRONGSVILLE, OHIO 44136
------------------ -----
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (440) 238-7311
CAPITAL STOCK, WITHOUT PAR VALUE
--------------------------------
Title of Class
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Capital Stock, No Par Value 11,034,551
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(Class) (Outstanding at April 30, 1999)
2
EMERALD FINANCIAL CORP.
TABLE OF CONTENTS
-----------------
PART I. FINANCIAL INFORMATION PAGE
Item I. Financial Statements:
Consolidated Statements of Financial
Condition as of March 31, 1999, (unaudited)
and December 31, 1998.......................................................... 2
Consolidated Statements of Income for
the Three Month Periods Ended March
31, 1999 and 1998 (unaudited).................................................. 3
Consolidated Statements of Cash Flows
for the Three Month Periods Ended March
31, 1999 and 1998 (unaudited).................................................. 4
Notes to Consolidated Financial Statements (unaudited)......................... 5
Selected Financial Information........................................................... 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................................. 9
Tables......................................................................... 19
Item 3. Qualitative and Quantitative Disclosures
about Market Risk.............................................................. 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................................. 23
Item 2. Changes in Securities.......................................................... 23
Item 3. Defaults on Senior Securities.................................................. 23
Item 4. Submission of Matters to a Vote of Shareholders................................ 23
Item 5. Other Information.............................................................. 23
Item 6. Exhibits and Reports on Form 8-K............................................... 23
SIGNATURES ...................................................................................... 24
EXHIBIT INDEX ................................................................................... 25
1
3
EMERALD FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
MARCH 31, DECEMBER 31,
1999 1998
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(Dollars in thousands, except per share data)
ASSETS:
CASH AND CASH EQUIVALENTS
Cash and deposits with banks $ 7,122 $ 9,980
Interest bearing deposits with banks 1,581 62
INVESTMENT SECURITIES
Held-to-maturity (fair values of $2,602 and $4,603 at
March 31, 1999 and December 31, 1998, respectively) 2,693 4,694
Available for sale (amortized cost of $42,035 and $46,779 at
March 31, 1999 and December 31, 1998, respectively) 41,736 46,499
MORTGAGE-BACKED SECURITIES
Available for sale (amortized cost of $39,169 and $44,980 at
March 31, 1999 and December 31, 1998, respectively) 39,189 44,963
LOANS-NET
(Including allowance for loan losses of $1,843 and $1,778 at
March 31, 1999 and December 31, 1998, respectively) 540,427 526,197
Loans held for sale 11,263 5,873
Accrued interest receivable 3,757 3,449
Federal Home Loan Bank stock, at cost 3,889 3,823
Premises and equipment, net 5,069 4,948
Cash surrender value of life insurance 16,599 16,404
Prepaid expenses and other assets 3,730 1,567
- --------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 677,055 $ 668,459
====================================================================================================================
LIABILITIES:
Deposits $ 562,413 $ 559,235
Federal Home Loan Bank advances 46,570 48,232
Deferred federal income tax 1,966 1,911
Advance payments by borrowers 1,043 1,847
Accrued interest payable 851 861
Accounts payable and other 2,530 1,589
- --------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 615,373 613,675
SHAREHOLDERS' EQUITY
Common stock, no par value, 20,000,000 shares authorized,
11,012,051 issued and outstanding at March 31, 1999 and
10,308,964 shares issued and 10,283,164 shares outstanding
at December 31, 1998. 10,097 10,074
Treasury stock at cost, 25,800 shares at December 31, 1998 - (267)
Accumulated other comprehensive income (loss) (185) (197)
Retained earnings 51,770 45,174
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TOTAL SHAREHOLDERS' EQUITY 61,682 54,784
- --------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 677,055 $ 668,459
====================================================================================================================
See notes to unaudited consolidated financial statements
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4
EMERALD FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED MARCH 31,
1999 1998
- --------------------------------------------------------------------------------------------------------------------
(Dollars In thousands, except per share data)
INTEREST INCOME
Loans $ 10,488 $ 9,411
Investment securities 736 683
Mortgage-backed securities 626 869
Other 132 243
- --------------------------------------------------------------------------------------------------------------------
11,982 11,206
INTEREST EXPENSE
Deposits 6,628 6,518
Advances from the Federal Home Loan Bank 644 416
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7,272 6,934
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NET INTEREST INCOME 4,710 4,272
Provision for loan losses 22 114
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NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 4,688 4,158
NON-INTEREST INCOME
Gain on sale of loans and other assets 92 374
Loan service fees 217 200
Other 465 415
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774 989
NON-INTEREST EXPENSE
Salaries and employee benefits 1,474 936
Net occupancy and equipment 431 406
Franchise tax 149 163
Federal deposit insurance 81 81
Amortization of goodwill 25 28
Other 737 779
- --------------------------------------------------------------------------------------------------------------------
Non-interest expense 2,897 2,393
INCOME BEFORE FEDERAL INCOME TAXES 2,565 2,754
Provision for federal income taxes 833 898
- --------------------------------------------------------------------------------------------------------------------
NET INCOME $ 1,732 $ 1,856
====================================================================================================================
Basic earnings per common share $ 0.16 $ 0.18
Diluted earnings per common share $ 0.16 $ 0.17
See notes to unaudited consolidated financial statements
3
5
EMERALD FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED MARCH 31,
1999 1998
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(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,732 $ 1,856
Adjustments to reconcile net income to net cash
provided (used) by operating activities
Provision for loan losses 22 114
Gain from sale of loans and other assets (92) (374)
Accretion of discounts and other deferred yield items (551) (830)
Depreciation and amortization 213 183
Effect of change in accrued interest receivable & payable (318) 525
Federal Home Loan Bank stock dividends (66) (63)
Deferred federal income taxes 49 (28)
Net change in other assets and liabilities (1,442) 1,015
Proceeds from sale of loans originated for sale 7,206 35,289
Disbursements on loans originated for sale (12,571) (28,897)
- --------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (5,818) 8,790
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans (13,645) (1,695)
Purchases of:
Mortgage-backed securities available for sale - (5,593)
Investment securities available for sale (1,977) (15,202)
Investment securities held to maturity (2,350) (8,600)
Premises and equipment (303) (82)
Proceeds from:
Principal repayments and maturities of:
Mortgage-backed securities available for sale 5,811 5,423
Mortgage-backed securities held to maturity - 1,980
Investment securities available for sale 2,110 9,168
Investment securities held to maturity 4,351 11,144
Sales of available for sale investment securities 4,616 1,995
- --------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (1,387) (1,462)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 3,178 8,682
Payments on advances from the Federal Home Loan Bank (16,662) (314)
Proceeds from advances from the Federal Home Loan Bank 15,000 -
Net decrease in escrows (804) (787)
Effect of stock options exercised 5,379 767
Decrease in treasury shares 267 -
Shares purchased by dividend reinvestment plan 23 -
Payment of dividends on common stock (515) (358)
- --------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,866 7,990
- --------------------------------------------------------------------------------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,339) 15,318
CASH AND CASH EQUIVALENTS, AT BEGINNING OF THE PERIOD 10,042 10,762
- --------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, AT END OF THE PERIOD $ 8,703 $ 26,080
====================================================================================================================
See notes to unaudited consolidated financial statements
4
6
EMERALD FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. NATURE OF OPERATIONS
--------------------
Emerald Financial Corp. (Emerald or Company) is a unitary
thrift holding company formed in 1996 which became the parent company of The
Strongsville Savings Bank (Strongsville or Bank) on March 6, 1997, through a
tax-free exchange of shares of Strongsville for shares of Emerald. The Company's
primary holding is The Strongsville Savings Bank. The Bank conducts its
principal activities from its Community Financial Centers ("Offices") located in
southwestern Cuyahoga County, Lorain County and Medina County. The Bank's
principal activities include residential lending and retail banking.
2. BASIS OF PRESENTATION
---------------------
The consolidated financial statements of the Company include
the accounts of Emerald and the accounts of its wholly owned subsidiary, The
Strongsville Savings Bank. All significant inter-company transactions have been
eliminated. In the opinion of management, the accompanying unaudited financial
statements include all adjustments (consisting only of normal recurring
accruals) which the Company considers necessary for a fair presentation of (a)
the financial condition at March 31, 1999, and December 31, 1998; (b) the
results of operations for the three month periods ended March 31, 1999 and 1998;
and (c) the statements of cash flows for the three month periods ended March 31,
1999 and 1998. The results of operations for the three month period ended March
31, 1999 are not necessarily indicative of the results that may be expected for
a full year.
Certain prior period data has been reclassified to conform to
current year presentation.
3. STATEMENTS OF CASH FLOWS
------------------------
For purposes of the Statements of Cash Flows, Emerald
considers all cash and deposits with banks with maturities of less than three
months to be cash equivalents.
Income tax payments of $-0- and $20,000 were made during the
three month periods ended March 31, 1999 and 1998, respectively. Interest paid
totaled $7,282,000 and $6,587,000 for the three month periods ended March 31,
1999 and 1998, respectively. There were transfers from loans to real estate
owned of $198,000 with $298,000 in loans made to finance the sale of real estate
owned during the three month period ended March 31, 1999. There were transfers
from loans to real estate owned of $233,000 with $371,000 in loans made to
finance the sale of real estate owned during the three month period ended March
31, 1998.
5
7
5. EARNINGS PER SHARE
------------------
Basic and diluted earnings per share are presented in accordance with
Statement of Accounting Standards No. 128, Earnings per Share. The following
table reconciles the weighted average shares outstanding and the income
available to common shareholders used for basic and diluted earnings per share.
QUARTER ENDED MARCH 31,
--------------------------------------------------
1998 1998
------------------------- ------------------------
Weighted average number of common
shares outstanding used in basic
earnings per common share calculation 10,576,887 10,198,618
Net dilutive effect of stock options 111,072 549,056
------------------------- ------------------------
Weighted average number of shares
outstanding adjusted for effect of
dilutive securities 10,687,959 10,747,674
========================= ========================
Net income $1,732,000 $1,856,000
========================= ========================
Basic earnings per common share $ 0.16 $ 0.18
========================= ========================
Diluted earnings per common share $ 0.16 $ 0.17
========================= ========================
6. COMPREHENSIVE INCOME
--------------------
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income, was issued in June 1997 and became effective on January 1,
1998. This statement requires companies to report all items that are recognized
as components of comprehensive income under accounting standards. The Company's
comprehensive income for the quarters ended March 31, 1999 and 1998 are as
follows:
FOR THE QUARTER ENDED MARCH 31,
1999 1998
----------------------- ------------------------
(In thousands)
Net income $1,732 $1,856
Unrealized holding gains arising in the period 41 106
Tax effect (14) (36)
Less reclassification adjustment of gains in net income (23) 1
Tax effect 8 --
----------------------- ------------------------
Comprehensive income $1,744 $1,927
======================= ========================
6
8
7. NEW ACCOUNTING STANDARDS
------------------------
The Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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 adopted
by the Company on January 1, 1999. 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. The Company does not currently
securitize mortgage loans and retain the mortgage-backed security. Therefore,
there is currently no impact on the Company's consolidated financial statements
as a result of the adoption of SFAS No. 134.
7
9
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SELECTED FINANCIAL INFORMATION
THREE MONTHS ENDED MARCH 31,
1999 1998
- -----------------------------------------------------------------------------------------------
Unaudited
(Dollars in thousands, except per-share data)
ANNUALIZED RETURNS AND OPERATING RATIOS
Basic earnings per share $ 0.16 $ 0.18
Diluted earnings per share $ 0.16 $ 0.17
Return on Average Assets 1.03% 1.23%
Return on Average Equity 11.88% 14.93%
Noninterest expense to
average assets 1.71% 1.57%
Efficiency ratio 53.26% 48.40%
OTHER SELECTED FINANCIAL RATIOS
Interest rate spread 2.72% 2.64%
Net yield on interest-earning assets 2.95% 2.95%
Yield on average interest-earning assets 7.51% 7.73%
Cost of average interest-bearing liabilities 4.79% 5.09%
Non-performing loans to total loans-net 0.37% 0.40%
Non-performing assets to total assets 0.35% 0.45%
Net recoveries (charge-offs) to average loans 0.03% 0.00%
Capital ratios:
Tangible capital ratio 8.47% 7.94%
Core capital ratio 8.47% 7.94%
Risk-based capital ratio 13.20% 13.21%
Dividends per share $ 0.050 $ 0.035
Annualized total asset growth 5.14% 7.84%
Average total assets $ 672,336 $ 602,211
Average loans, net (includes held for sale) 537,950 465,972
Average interest-earning assets 638,626 578,926
Average deposits 557,350 517,254
Average advances from the FHLB 49,611 27,912
Average shareholders' equity 58,333 49,731
Weighted average shares outstanding-Basic 10,576,887 10,198,618
Weighted average shares outstanding-Diluted 10,687,959 10,747,674
Shares outstanding at period end 11,012,051 10,262,288
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8
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Part I, Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
- -------
Emerald Financial Corp. (Emerald or Company), a unitary thrift holding
company, became the holding company of The Strongsville Savings Bank
(Strongsville or Bank) in a tax-free exchange of shares of the Bank for shares
of Emerald on March 6, 1997. As a result, Emerald owns and operates the Bank.
The Bank was founded in 1961 as an Ohio-chartered, federally insured savings
association whose business activities are concentrated in the greater Cleveland,
Ohio area. The Company conducts its business through its home office in
Strongsville and its thirteen additional full-service Community Financial
Centers located in Cuyahoga, Lorain and Medina counties.
The Company's principal business has historically been attracting
deposits from the general public and making loans secured by first mortgage
liens on residential and other real estate. The Bank and the banking industry in
general are significantly affected by prevailing economic conditions, the
general level and trend of interest rates as well as by government policies and
regulations concerning, among other things, fiscal affairs, housing and
financial institutions.
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.
Emerald shareholders will vote on the Merger Agreement at shareholder meetings
on July 8, 1999 at 10:30 AM in Strongsville, Ohio. For additional information
regarding the merger of Emerald with and into Fifth Third, the Merger Agreement
and the Shareholder Support Agreement executed by Joan M. Dzurilla, see Annexes
A and E to the prospectus/proxy statement and the form S-4 filed by Fifth Third
on April 29, 1999.
9
11
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- ---------------------------------------------
The Company's total assets at March 31, 1999, were $677.1 million,
representing an increase of $8.6 million, or 5.1%, annualized, for the three
month period and of $61.3 million, or 9.9% for the twelve month period ended
March 31, 1999. The increase in assets was primarily concentrated in loans.
The Company's deposits were $562.4 million at March 31, 1999,
representing an increase of $3.2 million, or 2.3%, annualized, during the three
month period and of $33.0 million, or 6.2% during the twelve month period ended
March 31, 1999.
Net interest income was $4.7 million for the quarter ended March 31,
1999, an increase of $0.5 million over the first quarter of 1998. The increase
in interest-earning assets combined with an increase in interest rate spread,
caused the improvement. Average interest-earning assets increased $58.7 million
from $579.9 million for the first quarter of 1998 to $638.6 million for the
first quarter of 1999. The Bank's interest rate spread increased 8 basis points
from 2.64% during the first quarter of 1998 to 2.72% during the first quarter of
1999.
Net income for the first quarter of 1999, at $1.7 million, was $0.1
million less than the $1.8 million for the same period in 1998. The decrease was
primarily due to the decrease in loan sales during the first quarter of 1999 and
increased salaries and employee benefits.
10
12
Table 1 presents information regarding the average balances of
interest-earning assets and interest-bearing liabilities, the total dollar
amount of interest income from interest-earning assets and their average yields
and the total dollar amount of interest expense on interest-bearing liabilities
and their average rates. Table 1 also presents net interest income,
interest-rate spread, net interest margin and the ratio of average
interest-earning assets to average interest-bearing liabilities. Interest-rate
spread represents the difference between the weighted average yield on
interest-earning assets and the weighted average cost of interest-bearing
liabilities. Net interest margin represents net interest income as a percent of
average interest-earning assets. Average balance calculations were based on
daily and monthly balances. Assets available for sale are included in the major
asset category as if they were held-to-maturity.
- --------------------------------------------------------------------------------------------------------------------------
TABLE 1
AVERAGE BALANCE TABLE
FOR THE THREE MONTHS ENDED MARCH 31,
1999 1998
YIELD/ AVERAGE YIELD/
AVERAGE BALANCE INTEREST RATE BALANCE INTEREST RATE
- --------------------------------------------------------------------------------------------------------------------------
(In thousands)
INTEREST-EARNING ASSETS
Loans, net (1) $ 537,950 $ 10,488 7.80% $ 465,972 $ 9,411 8.08%
Investment securities 49,638 736 5.93% 45,343 683 6.03%
Mortgage-backed securities 41,817 626 5.99% 52,621 869 6.61%
Other interest-earning assets 9,220 132 5.72% 15,923 243 6.10%
- --------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 638,625 11,982 7.51% 579,859 11,206 7.73%
Noninterest-earning assets 33,710 22,352
- --------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 672,335 $ 602,211
==========================================================================================================================
INTEREST-BEARING LIABILITIES
Deposits (2) $ 557,350 $ 6,628 4.76% $ 517,254 $ 6,518 5.04%
Advances from FHLB 49,611 644 5.20% 27,912 416 5.96%
- --------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 606,961 7,272 4.79% 545,166 6,934 5.09%
Noninterest-bearing liabilities 7,041 7,314
Shareholders' equity 58,333 49,731
- --------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 672,335 $ 602,211
==========================================================================================================================
Net interest income $ 4,710 $ 4,272
Interest-rate spread 2.72% 2.64%
Net interest margin 2.95% 2.95%
Ratio of average interest-earning
assets to average interest-bearing
liabilities 105.22% 106.36%
- --------------------------------------------------------------------------------------------------------------------------
(1) Average balances include non-accrual loans. Interest income includes
deferred loan fee amortization of $412,000 and $390,000 for the three
months ended March 31, 1999 and 1998, respectively.
(2) Deposits include noninterest-bearing demand accounts which were
$14,919,000 and $12,718,000 at March 31, 1999 and 1998, respectively.
11
13
Table 2 presents certain information regarding changes in interest income and
interest expense of the Company for the three month periods ended March 31, 1999
and 1998. The table shows the changes in interest income and interest expense by
major category attributable to changes in the average balance (volume) and the
changes in interest rates. The net change not attributable to either rate or
volume is allocated on a prorata basis to the change in rate or volume. Assets
available for sale are included in the major asset category as if they were
held-to-maturity.
TABLE 2
- ----------------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCE TABLE
1999 COMPARED TO 1998 1998 COMPARED TO 1997
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 $ 1,389 $ (312) $ 1,077 $ 690 $ (43) $ 647
Investment securities 31 22 53 (125) (50) (175)
Mortgage-backed securities (167) (76) (243) (87) (108) (195)
Other (97) (14) (111) 4 58 62
- ----------------------------------------------------------------------------------------------------------------------------------
Total 1,156 (380) 776 482 (143) 339
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE ON INTEREST-BEARING LIABILITIES
Deposits 387 (277) 110 262 (101) 161
Advances from FHLB 3,159 (2,931) 228 20 26 46
- ----------------------------------------------------------------------------------------------------------------------------------
Total 3,546 (3,208) 338 282 (75) 207
- ----------------------------------------------------------------------------------------------------------------------------------
CHANGE IN NET INTEREST INCOME $(2,390) $2,828 $ 438 $ 200 $ (68) $ 132
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME
- --------------------------------------------------------------------------------
Net interest income is the primary component of net income and is
determined by the characteristics of interest-earning assets and
interest-bearing liabilities, including the spread, or the difference between
the yields earned and the rates paid on those assets and liabilities. Net
interest income is the difference between interest income and interest expense.
Three months ended March 31, 1999
-----------------------------------------
(Dollars in thousands)
Net interest income:
Current period $ 4,710
Prior period 4,272
-----------------------------------------
Dollar change from prior period $ 438
-----------------------------------------
Percent change from prior period 10.25%
=========================================
12
14
Interest income
- ---------------
Interest income for the three months ended March 31, 1999, was $12.0
million, compared to $11.2 million for the first quarter of 1998, an increase of
$0.8 million or 6.93%. This increase was primarily due to the increase in
average interest-earning assets as demonstrated on Table 2. Average
interest-earning assets increased to $638.6 million for the first quarter of
1998 from $579.9 million for the first quarter of 1998. The effect of the
increase in interest-earning assets was offset somewhat by the 22 basis point
decline in the average yield on interest-earning assets to 7.51% for the first
quarter of 1999 from 7.73% for the like period in 1998.
Interest expense
- ----------------
Interest expense increased during the quarter ended March 31, 1999,
compared to the same period in 1998 primarily due to an increase in average
interest-bearing liabilities of $61.8 million, or 11.34%, offset by a decrease
in the average cost of interest-bearing liabilities. Average interest-bearing
liabilities were $607.0 million and $545.2 million for the first quarters of
1999 and 1998, respectively. The average cost of interest-bearing liabilities
decreased 30 basis point to 4.79% for the first quarter of 1999 from 5.09% for
the same period in 1998. This decrease partially offset the effect of the
increase in interest-bearing liabilities.
Provision for loan losses
- -------------------------
The provision for loan losses for the three months ended March 31,
1999, was $22,000 compared to $114,000 for the same period in 1998. The
provisions for both periods were commensurate with management's estimate of the
credit risk in the loan portfolio. Economic conditions in the Bank's market area
were stable.
Further discussion and other information relating to loan losses and
nonperforming assets are included in the section titled "Asset Quality."
NONINTEREST INCOME
- --------------------------------------------------------------------------------
Three months ended March 31, 1999
-----------------------------------------
(Dollars in thousands)
Noninterest income:
Current period $ 774
Prior period 989
-----------------------------------------
Dollar change from prior period $ (215)
-----------------------------------------
Percent change from prior period (21.71)%
=========================================
Noninterest income consists primarily of fees earned for servicing
loans and providing services for customers, gains on loan sales and earnings
credited to bank owned life insurance. The decrease in noninterest income is
primarily due to a decrease in gains on sales of loans. Gains on the sale of
loans were $81,000 during the first quarter of 1999
13
15
compared to $367,000 for the first quarter of 1998. The 1998 gain was higher
because more loans were sold during the first quarter of 1998 than the same
period in 1999.
NONINTEREST EXPENSE
- --------------------------------------------------------------------------------
Three months ended March 31, 1999
-----------------------------------------
(Dollars in thousands)
Noninterest expense:
Current period $ 2,897
Prior period 2,393
-----------------------------------------
Dollar change from prior period $ 504
-----------------------------------------
Percent change from prior period 21.02%
=========================================
The increase in noninterest expense is due to the increases in salaries
and employee benefits. The increases in salaries and employee benefits are
attributed to accruals for annual bonuses and profit sharing plan contributions;
and to decreases in deferred salaries caused by fewer loan originations in the
first quarter of 1999 as compared to 1998.
FEDERAL INCOME TAXES
- --------------------------------------------------------------------------------
The Bank provided $833,000 for federal income tax during the first
quarter of 1999 and $898,000 during the like period in 1998. Income before the
provision for federal income taxes decreased for the compared periods resulting
in a corresponding decrease in the provision for federal income taxes.
FINANCIAL RESOURCES AND LIQUIDITY
- --------------------------------------------------------------------------------
Financial institutions, such as Strongsville Savings, must ensure that
sufficient funds are available to meet deposit withdrawals, loan commitments and
expenses. Management of cash flows requires the anticipation of deposit flows
and loan payments. The Company's primary sources of funds are deposits, and loan
payments. The Bank uses the funds from deposit inflows and loan payments
primarily to originate loans and to purchase investment securities.
At March 31, 1999, loans-in-process to be funded over a future period
of time totaled $42 million, and loan commitments or loans committed but not
closed totaled $50 million. 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 of Cincinnati whereby the Bank can obtain advances. The Bank had $47
million in advances outstanding at March 31, 1999.
14
16
For an analysis of Emerald's cash flows, refer to the Consolidated
Statements of Cash Flows on page 4. Management believes the Company has adequate
resources to meet its normal funding requirements.
SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Shareholders' equity was $61.7 million at March 31, 1999, an increase
of $6.9 million, or 12.59%, during the first quarter of 1999. This increase was
primarily the result stock options exercised and of net income. Emerald paid
dividends in the first quarter of 1999 of 5.0(cent) per share, an increase of
42.86% over the 3.5(cent) per share dividend paid in the first quarter of 1998.
The Company's return on average assets was 1.03% and return on average
equity was 11.88% for the first quarter of 1999.
At March 31, 1999, the Bank was in excess of all capital requirements
specified by federal regulations as shown by the following table.
TIER 1 LEVERAGE TIER 1 RISK-BASED TOTAL RISK-BASED
CAPITAL CAPITAL CAPITAL
------------------------------------------------------------
(Dollars in thousands)
Capital amount -- Actual $ 57,248 $ 57,248 $ 59,091
Capital amount -- Well capitalized 33,783 26,859 44,766
------------------------------------------------------------
Amount in excess of requirement $23,465 $30,389 $14,325
============================================================
Capital ratio -- Actual 8.47% 12.79% 13.20%
Capital ratio -- Well capitalized 5.00% 6.00% 10.00%
------------------------------------------------------------
Amount in excess of requirement 3.47% 6.79% 3.20%
============================================================
Strongsville Savings' capital levels at March 31, 1999, qualify it as a
"well-capitalized" institution, the highest of five tiers under applicable
federal definitions.
15
17
QUALIFIED THRIFT LENDER TEST
- --------------------------------------------------------------------------------
Savings associations insured by the Savings Association Insurance Fund
of the Federal Deposit Insurance Corporation (FDIC) are required to maintain 65%
of total portfolio assets in Qualified Thrift Investments. As of March 31, 1999,
the Bank had 83.61% of total assets invested in Qualified Thrift Investments.
YEAR 2000 ISSUE
- --------------------------------------------------------------------------------
The Company is aware of the issues associated with the programming code
in existing computer systems as the year 2000 approaches. The Year 2000 (Y2K)
problem is pervasive and complex as virtually every computer operation will be
affected in some way by the rollover of the two digit year value to 00. The
issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause the system to
fail.
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 was March 31, 1999. The Company has
identified and remediated its mission critical systems. 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 March 31, 1999, the Company has expensed incremental
remediation costs of $50,000. 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.
16
18
ASSET QUALITY
- --------------------------------------------------------------------------------
Table 3 sets forth information regarding non-performing assets at March
31, 1999, December 31, 1998, and March 31, 1998.
- ----------------------------------------------------------------------------------------
TABLE 3
NON-PERFORMING ASSETS ANALYSIS
MARCH 31, DECEMBER 31, MARCH 31,
1999 1998 1998
- ----------------------------------------------------------------------------------------
(Dollars In thousands)
NON-ACCRUING LOANS
1-4 family - permanent $ 997 $ 777 $ 507
1-4 family - construction 655 654 459
Multi-family and Commercial
real estate - - -
Land and development - 181 181
Commercial non-real estate 120 120 371
Consumer and other 25 7 38
- ----------------------------------------------------------------------------------------
Total 1,797 1,739 1,556
LOANS DELINQUENT 90 DAYS OR MORE
AND STILL ACCRUING
1-4 family - permanent 117 210 304
1-4 family - construction - - -
Multi-family and Commercial
real estate 52 52 -
Land and development - - -
Commercial non-real estate 59 - -
Consumer and other - - -
- ----------------------------------------------------------------------------------------
Total 228 262 304
Total non-performing loans 2,025 2,001 1,860
Investments, net of allowance for credit
losses of $162,000 at March 31, 1999
December 31,1998 343 344 446
Real estate owned - - 493
- ----------------------------------------------------------------------------------------
Total non-performing assets $2,368 $2,345 $2,799
========================================================================================
Allowances for loan losses $1,843 $1,778 $1,740
========================================================================================
Non-performing loans to total loans-net 0.37% 0.38% 0.40%
Non-performing assets to total assets 0.35% 0.35% 0.45%
Allowance for loan losses to ending
loan balance (before allowance) 0.34% 0.33% 0.37%
Allowance for loan losses to
non-performing loans 91.02% 88.87% 93.55%
- ----------------------------------------------------------------------------------------
Table 4 presents information concerning activity in the allowance for
loan losses during the quarters ended March 31, 1999 and 1998.
17
19
- --------------------------------------------------------------------------------------
TABLE 4
ACTIVITY IN THE ALLOWANCE FOR LOAN LOSSES
FOR THE THREE MONTHS ENDED
MARCH 31,
1999 1998
- --------------------------------------------------------------------------------------
(Dollars in thousands)
Allowance at the beginning of the period $ 1,778 $ 1,625
Provision charged to expense 22 114
Charge-offs:
1-4 family - permanent - -
1-4 family - construction - -
Multi-family and Commercial
real estate - -
Land and development - -
Commercial non-real estate - -
Consumer and other - -
- --------------------------------------------------------------------------------------
- -
Recoveries
1-4 family - permanent - -
1-4 family - construction - -
Multi-family and Commercial
real estate - -
Land and development - -
Commercial non-real estate 42 -
Consumer and other 1 1
- --------------------------------------------------------------------------------------
43 1
- --------------------------------------------------------------------------------------
Net recoveries (charge-offs) 43 1
- --------------------------------------------------------------------------------------
Allowance at the end of the period $ 1,843 $ 1,740
======================================================================================
Net (charge-offs) recoveries during the
period to average loans outstanding during
the period (Annualized) 0.03% 0.00%
- --------------------------------------------------------------------------------------
The amount of the allowance for loan losses is based on management's
analysis of risks inherent in the various segments of the loan portfolio,
management's assessment of known or potential problem credits which have come to
management's attention during the ongoing analysis of credit quality, historical
loss experience, current economic conditions, and other factors. Loan loss
estimates are reviewed periodically, and adjustments, if any, are reported in
earnings in the period in which they become known.
18
20
Table A sets forth the composition of the Bank's loan portfolio at
March 31, 1999, December 31, 1998, and March 31, 1998.
- -------------------------------------------------------------------------------------------------------------------------------
TABLE A
LOAN PORTFOLIO COMPOSITION
MARCH 31, 1999 DECEMBER 31, 1998 MARCH 31, 1998
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
- -------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE MORTGAGE LOANS: (Dollars In thousands)
Permanent first mortgage
loans:
1-4 family $ 369,965 68.45% $ 358,765 68.18% $ 321,019 69.18%
Multi-family 482 0.09% 506 0.10% 868 0.19%
Commercial real estate 53,293 9.86% 51,845 9.85% 49,372 10.63%
Land 480 0.09% 621 0.12% 453 0.10%
- -------------------------------------------------------------------------------------------------------------------------------
Total permanent mortgage loans 424,220 78.49% 411,737 78.25% 371,712 80.10%
- -------------------------------------------------------------------------------------------------------------------------------
Construction first mortgage loans:
Residential development 88,826 16.43% 88,206 16.76% 62,499 13.46%
1-4 family 40,301 7.46% 41,485 7.88% 38,698 8.34%
Multi-family 375 0.07% 375 0.07% 1,050 0.23%
Commercial real estate 7,721 1.43% 8,816 1.68% 7,777 1.68%
- -------------------------------------------------------------------------------------------------------------------------------
Total construction loans 137,223 25.39% 138,882 26.39% 110,024 23.71%
- -------------------------------------------------------------------------------------------------------------------------------
Total mortgage loans 561,443 103.88% 550,619 104.64% 481,736 103.81%
- -------------------------------------------------------------------------------------------------------------------------------
OTHER LOANS
Commercial 8,246 1.53% 6,656 1.26% 6,169 1.33%
Consumer 18,427 3.41% 18,297 3.48% 16,189 3.49%
- -------------------------------------------------------------------------------------------------------------------------------
Total other loans 26,673 4.94% 24,953 4.74% 22,358 4.82%
- -------------------------------------------------------------------------------------------------------------------------------
Total loans 588,116 108.82% 575,572 109.38% 504,094 108.63%
Less:
Loans in process 42,035 7.78% 43,547 8.27% 35,039 7.55%
Allowance for loan losses 1,843 0.34% 1,778 0.34% 1,740 0.38%
Deferred yield items 3,811 0.71% 4,050 0.77% 3,258 0.70%
- -------------------------------------------------------------------------------------------------------------------------------
47,689 8.82% 49,375 9.38% 40,037 8.63%
- -------------------------------------------------------------------------------------------------------------------------------
Total loans held for investment, net $ 540,427 100.00% $ 526,197 100.00% $ 464,057 100.00%
===============================================================================================================================
1-4 Family loans held for sale $ 11,618 $ 5,997 $ 1,808
Deferred yield items 355 124 10
- -------------------------------------------------------------------------------------------------------------------------------
Real estate loans held for sale $ 11,263 $ 5,873 $ 1,798
===============================================================================================================================
- -------------------------------------------------------------------------------------------------------------------------------
19
21
Table B sets forth the activities in the Bank's loan portfolio for the
three month periods ended March 31, 1999, and 1998.
- ---------------------------------------------------------------------
TABLE B
ACTIVITY IN THE LOAN PORTFOLIO
FOR THE QUARTER ENDED
MARCH 31,
1999 1998
- ---------------------------------------------------------------------
(In thousands)
PERMANENT MORTGAGE LOAN ORIGINATIONS
1-4 family $ 36,101 $ 42,958
Multi-family - -
Commercial real estate 1,085 919
Land 1,067 500
- ---------------------------------------------------------------------
38,253 44,377
CONSTRUCTION FIRST MORTGAGE LOAN ORIGINATIONS
Residential development 8,659 19,304
1-4 family 10,553 11,618
Multi-family - -
Commercial real estate 950 1,315
- ---------------------------------------------------------------------
20,162 32,237
NONMORTGAGE LOANS
Commercial 2,011 628
Consumer 3,815 3,540
- ---------------------------------------------------------------------
5,826 4,168
- ---------------------------------------------------------------------
TOTAL LOAN ORIGINATIONS 64,241 80,782
PURCHASED LOANS
Commercial real estate - -
- ---------------------------------------------------------------------
TOTAL NEW LOANS 64,241 80,782
LESS
Principal repayments 38,758 43,571
Loan sales 7,319 35,751
- ---------------------------------------------------------------------
46,077 79,322
- ---------------------------------------------------------------------
NET INCREASE IN LOANS $ 18,164 $ 1,460
=====================================================================
- ---------------------------------------------------------------------
20
22
Table C sets forth the composition of the Bank's deposits by interest
rate category at March 31, 1999, December 31, 1998, and March 31, 1998.
- -----------------------------------------------------------------------------------------------------------------------------
TABLE C
DEPOSIT COMPOSITION
-------------------------------------------------------------------------------------------
MARCH 31, 1999 DECEMBER 31, 1998 MARCH 31, 1998
WTD AVG WTD AVG WTD AVG
COST AMOUNT PERCENT COST AMOUNT PERCENT COST AMOUNT PERCENT
- -----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
PASSBOOK ACCOUNTS 2.79% $ 60,583 10.77% 2.78% $ 59,894 10.71% 2.90% $ 51,180 9.67%
NOW ACCOUNTS 1.76% 38,465 6.84% 1.76% 37,610 6.73% 1.96% 33,462 6.32%
CHECKING ACCOUNTS 0.00% 1,930 0.34% 0.00% 1,832 0.33% 0.00% 1,025 0.19%
MONEY MARKET DEPOSIT ACCOUNTS 2.27% 14,046 2.50% 2.27% 14,222 2.54% 2.53% 18,406 3.48%
COMMERCIAL ACCOUNTS 0.00% 12,989 2.31% 0.00% 17,749 3.17% 0.00% 11,665 2.20%
- -----------------------------------------------------------------------------------------------------------------------------
2.10% 128,013 22.76% 2.02% 131,307 23.48% 2.25% 115,738 21.86%
CERTIFICATES OF DEPOSIT:
4.50% and less 4.00% 35,576 6.33% 4.19% 27,868 4.98% 4.00% 23,158 4.37%
4.51% to 5.50% 5.36% 168,974 30.04% 5.32% 131,876 23.58% 5.36% 57,328 10.83%
5.51% to 6.50% 6.05% 175,076 31.13% 5.97% 210,366 37.62% 6.05% 273,777 51.72%
6.51% to 7.50% 7.36% 49,757 8.85% 7.36% 50,506 9.03% 7.36% 51,761 9.78%
7.51% and greater 8.95% 5,017 0.89% 8.96% 7,312 1.31% 8.95% 7,611 1.44%
- -----------------------------------------------------------------------------------------------------------------------------
5.80% 434,400 77.24% 5.87% 427,928 76.52% 6.05% 413,635 78.14%
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS 4.95% $562,413 100.00% 4.96% $559,235 100.00% 5.22% $ 529,373 100.00%
=============================================================================================================================
- -----------------------------------------------------------------------------------------------------------------------------
21
23
Part I, Item 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's asset and liability management program is intended to
minimize the impact of significant changes in interest rates on net interest
income and net portfolio value. The Executive Committee of the Bank, which
includes representatives from the Board and from senior management, monitors and
evaluates methods for managing interest rate risk within acceptable levels as
determined by the Board of Directors. If projected changes in the Bank's net
portfolio value are not within the limits established by the Board, the Board
may direct management to change the asset and liability mix to bring interest
rate risk within such approved limits. Management believes the keys to
successful interest rate and credit risk management include the monitoring and
management of interest rate sensitivity and the quality of assets, discussed
above. Interest rate risk is the risk that net interest income or net portfolio
value will decline significantly in periods of changing interest rates.
Strongsville Savings has endeavored to buffer net income from the
effect of changes in interest rates by reducing the maturity or repricing
mismatch between its interest-earning assets and interest-bearing liabilities.
The Bank's strategy includes originating adjustable rate mortgage (ARM) loans,
selling certain fixed-rate residential mortgage loans to the Federal Home Loan
Mortgage Corporation (Freddie Mac) and investing in securities with short to
medium terms.
The Company's investment portfolio consists primarily of investment
grade corporate debt, government agency debt and mortgage-backed securities
issued by government agencies. Substantially all of the corporate debt and
government agency debt mature in three years or less.
The Company's strategy to reduce the maturity or repricing mismatch
between its interest rate sensitive assets and liabilities includes reducing the
terms to maturity of its long-term interest-earning assets, as noted above, and
lengthening the terms to repricing or maturity of its interest-bearing
liabilities.
A common industry measure of a financial institution's general
sensitivity to interest rates is called the gap (the GAP). The GAP represents
the difference between the Company's interest-earning assets and
interest-bearing liabilities maturing within certain time frames as a percent of
the Company's total assets. Management believes there have been no significant
changes in the Company's GAP during the quarter ended March 31, 1999.
22
24
PART II
ITEM 1 Legal Proceedings
-----------------
There were no legal proceedings requiring disclosure during the
quarter.
ITEM 2 Changes in Securities
---------------------
There were no changes in securities during the quarter.
ITEM 3 Defaults of Senior Securities
-----------------------------
There were no defaults of senior securities during the quarter.
ITEM 4 Submission of Matters to a Vote of Security Holders
----------------------------------------------------
There were no items submitted to a vote by security holders during the
quarter.
ITEM 5 Other Information
-----------------
There is no other information to be reported.
ITEM 6 Exhibits and Reports on Form 8-K
--------------------------------
(a) Not applicable
(b) Form 8-K was filed on March 2, 1999 to report the Merger
Agreement between Emerald and Fifth Third. The 8-K also
reported the Shareholder Support Agreement between Joan M.
Dzurilla and Fifth Third related to the Merger.
23
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EMERALD FINANCIAL CORP.
-----------------------
(Registrant)
Date May 10, 1999 /s/ THOMAS P. PERCIAK .
------------ --------------------------------------------
Thomas P. Perciak,
President & Chief Executive Officer
Date May 10, 1999 /s/ JOHN F. ZIEGLER .
------------ --------------------------------------------
John F. Ziegler,
Executive Vice President &
Chief Financial Officer
24
26
INDEX TO EXHIBITS
Page No.
--------
Exhibit 11. COMPUTATION OF EARNINGS PER SHARE 26
Exhibit 27. FINANCIAL DATA SCHEDULE 27
25