<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
--- THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR
--- 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-17947
HAVERFIELD CORPORATION
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-1606726
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
Terminal Tower, 50 Public Square, Suite 444, Cleveland, Ohio 44113-2203
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 348-2800
Former name, former address and former fiscal year, if changed since last
report: Not Applicable
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
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Shares, $0.01 par value 1,906,591
- --------------------------------------------------------------------------------
(Class) (Outstanding at July 25, 1996)
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<TABLE>
<CAPTION>
HAVERFIELD CORPORATION
INDEX
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PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Consolidated Statements of Financial Condition
June 30, 1996, December 31, 1995 and June 30, 1995 3
Consolidated Statements of Income
Three Months Ended June 30, 1996 and 1995 4
Six Months Ended June 30, 1996 and 1995 5
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1996 and 1995 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition and
Results of Operations 16
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings 23
Item 2 - Changes in Securities 23
Item 3 - Defaults Upon Senior Securities 23
Item 4 - Submission of Matters to a Vote of Security Holders 23
Item 5 - Other Information 23
Item 6 - Exhibits and Reports on Form 8-K 23
</TABLE>
2
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PART I - FINANCIAL INFORMATION
HAVERFIELD CORPORATION
Consolidated Statements of Financial Condition (unaudited)
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(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995 June 30, 1995
------------- ----------------- -------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 5,215 $ 7,647 $ 6,372
Due from banks-interest bearing 100 100 200
Federal funds sold 3,155 4,396 22,846
Investment securities:
Available for sale, at fair value (amortized cost of 28,570 47,184 30,926
$29,267, $47,034, and $30,889, respectively)
Mortgage-backed securities:
Available for sale, at fair value (amortized cost of 2,444 2,754 3,052
$2,396, $2,672, and $2,973, respectively)
Loans (net of allowance for loan losses of $2,777,
$2,734 and $2,710, respectively) 285,740 283,560 280,572
Premises and equipment 3,938 3,953 4,024
Accrued interest and other assets 5,002 4,745 4,786
Cost in excess of fair value of net assets acquired 62 166 579
-------- -------- --------
TOTAL $334,226 $354,505 $353,357
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Passbook/statement accounts $ 42,140 $ 45,564 $ 50,530
Non-interest-bearing NOW accounts 8,369 11,072 10,045
Interest bearing NOW accounts 17,016 13,804 13,277
Money market fund accounts 59,147 53,876 40,335
Certificates of deposit 162,391 193,463 203,545
-------- -------- --------
Total deposits 289,063 317,779 317,732
Advances from Federal Home Loan Bank 8,000 -- --
Advances by borrowers for taxes and insurance 719 5,740 257
Accrued interest and other liabilities 8,030 2 928 8,043
-------- -------- --------
Total liabilities 305,812 326,447 326,032
-------- -------- --------
Preferred stock; 1,000,000 shares authorized;
none issued -- -- --
Common stock, par value $.01 per share; 5,000,000
shares authorized; issued: 1,915,893 shares,
1,894,475 shares and 1,721,235 shares, respectively 19 19 17
Capital in excess of par value 16,510 16,353 13,831
Retained earnings 12,433 11,669 13,512
Net unrealized appreciation (depreciation) in the fair
value of securities (net of deferred income taxes of
$(221), $79 and $40, respectively) (430) 153 77
Common shares in treasury, at cost (9,301 shares,
11,790 shares and 9,006 shares, respectively) (118) (136) (112)
-------- -------- --------
Total shareholders' equity 28,414 28,058 27,325
-------- -------- --------
TOTAL $333,226 $354,505 $353,357
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
3
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HAVERFIELD CORPORATION
Consolidated Statements of Income (unaudited)
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(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1996 1995
---- ----
Interest income:
<S> <C> <C>
Loans $6,096 $5,860
Investments and other 549 744
Mortgage-backed securities 49 62
------ ------
Total interest income 6,694 6,666
------ ------
Interest expense:
Deposits 3,437 3,847
Advances from Federal Home Loan Bank 64 2
------ ------
Total interest expense 3,501 3,849
------ ------
Net interest income 3,193 2,817
Provision for loan losses 34 30
------ ------
Net interest income after provision for loan losses 3,159 2,787
------ ------
Noninterest income:
Servicing income 114 136
Service fees and other charges 272 304
Other income 76 32
------ ------
Total noninterest income 462 472
------ ------
Noninterest expense:
Employee compensation and benefits 994 977
Occupancy and equipment 479 468
Advertising 202 123
Insurance premiums 201 183
Amortization of intangibles 31 207
Data processing fees 80 87
Other expenses 664 532
------ ------
Total noninterest expense 2,651 2,577
------ ------
Income before income taxes 970 682
Provision for income taxes 330 229
------ ------
Net income $ 640 $ 453
====== ======
Net income per common share $ .33 $ .24
====== ======
Cash dividend paid per common share $ .135 $ .127
====== ======
<FN>
See notes to consolidated financial statements.
</TABLE>
4
<PAGE> 5
HAVERFIELD CORPORATION
Consolidated Statements of Income (unaudited)
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(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1996 1995
---- ----
Interest income:
<S> <C> <C>
Loans $12,129 $11,428
Investments and other 1,332 1,065
Mortgage-backed securities 102 126
------- -------
Total interest income 13,563 12,619
------- -------
Interest expense:
Deposits 7,241 6,958
Advances from Federal Home Loan Bank 64 57
------- -------
Total interest expense 7,305 7,015
------- -------
Net interest income 6,258 5,604
Provision for loan losses 68 61
------- -------
Net interest income after provision for loan losses 6,190 5,543
------- -------
Noninterest income:
Service fees and other charges 605 629
Servicing income 235 278
Other income 143 43
------- -------
Total noninterest income 983 950
------- -------
Noninterest expense:
Employee compensation and benefits 1,983 2,043
Occupancy and equipment 967 953
Advertising 286 267
Insurance premiums 401 366
Amortization of intangibles 115 414
Data processing fees 174 181
Other expenses 1,310 1,020
------- -------
Total noninterest expense 5,236 5,244
------- -------
Income before income taxes 1,937 1,249
Provision for income taxes 659 422
------- -------
Net income $ 1,278 $ 827
======= =======
Net income per common share $ .67 $ .44
======= =======
Cash dividend paid per common share $ .270 $ .254
======== ========
<FN>
See notes to consolidated financial statements.
</TABLE>
5
<PAGE> 6
HAVERFIELD CORPORATION
Consolidated Statements of Cash Flows (unaudited)
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(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1996 1995
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,278 $ 827
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 68 61
Amortization of intangibles 115 414
Depreciation 343 400
Amortization of deferred loan fees (143) (80)
Federal Home Loan Bank stock dividends (92) (80)
Net change in other assets and other liabilities 4,659 4,518
Net change in accrued interest receivable and
accrued interest payable 202 (318)
Other (11) (94)
------- ------
Net cash provided by operating activities 6,419 5,648
------- ------
INVESTING ACTIVITIES:
Disbursements on loans originated (48,250) (33,254)
Proceeds from:
Loan repayments and maturities 49,432 33,200
Mortgage-backed security repayments and maturities 272 150
Investment security calls and maturities 23,000 1,000
Sale of real estate owned 218 --
Purchases of:
Loans (3,714) (775)
Investment securities (5,099) (20,093)
Premises and equipment (328) (87)
Decrease (increase) in federal funds sold 1,242 (15,946)
Other 452 84
------- ------
Net cash provided by (used in) investing activities 17,225 (35,721)
------- ------
FINANCING ACTIVITIES:
Net increase (decrease) in passbook, NOW and money
market fund accounts 2,355 (4,317)
Net increase (decrease) in certificates of deposit (31,071) 42,781
Net increase in short-term advances 8,000 --
Repayments of borrowings -- (2,016)
Net decrease in mortgage escrow deposits (5,021) (5,787)
Proceeds from exercise of stock options 142 8
Payment of cash dividends (514) (480)
Resale (purchase) of treasury shares 33 (39)
------- ------
Net cash provided by (used in) financing activities (26,076) 30,150
------- ------
Net increase (decrease) in cash and due from banks (2,432) 77
Cash and due from banks at beginning of period 7,647 6,295
------- ------
Cash and due from banks at end of period $ 5,215 $ 6,372
======= =======
<FN>
See notes to consolidated financial statements.
</TABLE>
6
<PAGE> 7
HAVERFIELD CORPORATION
Notes to Consolidated Financial Statements
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1. The accounting policies of Haverfield Corporation ("Haverfield" or the
"Company") conform to generally accepted accounting principles and prevailing
practices within the banking and thrift industry. A summary of the more
significant policies follows:
NATURE OF OPERATIONS - Haverfield is a unitary savings and loan holding company
whose principal operating subsidiary is Home Bank, F.S.B. (the "Bank"). The
Company is principally engaged in the business of attracting deposits from the
general public and using such deposits, together with borrowings and other
funds, to make loans secured by real estate, various types of consumer loans and
commercial loans in its market area. The Company's principal market area
consists of suburban communities of Cleveland, and the Company's business is
conducted through its corporate office located in Cleveland, Ohio and ten branch
offices located in Beachwood, Brooklyn, Cleveland, Euclid, Lakewood, Mayfield
Village, Mentor, Rocky River, University Heights, and Westlake, Ohio. Loans and
deposits are primarily generated from the areas where its banking offices are
located. The Company's income is derived predominantly from interest on loans
and investments and, to a lesser extent, noninterest income. The Company's
principal expenses are interest paid on deposits and borrowings, and normal
operating costs. The Company's operations are principally in the savings
industry, which constitutes a single industry segment. The Bank's subsidiaries
engage in real estate development activities and investment counseling which are
not material to its operations as a whole and are not significant enough to
constitute a business segment.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - 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.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of the Company, the Bank, and its wholly-owned subsidiaries. All
material intercompany accounts and transactions have been eliminated. In the
opinion of management, the accompanying unaudited financial statements include
all adjustments (consisting only of normal recurring accruals) which the
Company considers necessary for a fair presentation of (a) the results of
operations for the three-month and six-month periods ended June 30, 1996 and
1995, (b) the financial position at June 30, 1996, December 31, 1995 and June
30, 1995, and (c) cash flows for the six-month periods ended June 30, 1996 and
1995. The results of operations for the period ended June 30, 1996 are not
necessarily indicative of the results which may be expected for a full year.
Certain amounts previously reported in the prior years consolidated financial
statements have been reclassified to conform with the current presentation.
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES - At the time of purchase,
securities are classified as either held for trading, available for sale or held
for investment, based upon management's intent. Securities held for trading are
carried at estimated market value with the adjustment, if any, reflected in the
statement of income. Securities classified as available for sale are also
carried at estimated market value; however, the adjustment, if any, is reflected
in shareholders' equity. Securities held for investment continue to be carried
at amortized cost. Gains or losses on the sale of securities, representing the
difference between net proceeds and carrying value, are recorded in noninterest
income on the trade date using the specific identification method.
LOANS - At the time of origination or purchase, loans are classified as held for
sale or held for investment, based upon management's intent. Critical to the
proper classification of, and accounting for, loans as investments is the intent
and ability to hold them to maturity. Loans held for sale are accounted for at
the lower of cost or market, with any unrealized loss included in income. Loans
held for investment are stated at the principal amount outstanding adjusted for
amortization of premiums and accretion of discounts using the interest method.
Interest is accrued as earned. Transfers of loans held for sale to the
investment portfolio are recorded at the lower of cost or market value on the
transfer date.
On January 1, 1995, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a
Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosures," which impose certain requirements on the
measurement of impaired loans. The Company has previously measured such loans in
accordance with the methods prescribed in SFAS No. 114. Conse-
7
<PAGE> 8
quently, no additional loss provisions were required by the adoption of these
statements. SFAS No. 114 also requires that impaired loans for which
foreclosure is probable should be accounted for as loans. The amounts of
impaired loans, as defined by SFAS No. 114, and impaired loans for which
foreclosure is probable are not significant and have not changed materially
since December 31, 1995. The initial adoption of SFAS No. 114 and SFAS No. 118
did not have a material effect on the financial condition or results of
operations of the Company.
The Company's policy for recognition of interest on impaired loans, including
how cash receipts are recorded, is essentially unchanged as a result of the
adoption of SFAS Nos. 114 and 118. A loan (including a loan impaired under SFAS
No. 114) is classified as nonaccrual when collectability is in doubt (this is
generally when the borrower is 90 days past due on contractual principal or
interest payments). A loan may be considered impaired, but remain on accrual
status, when the borrower demonstrates (by continuing to make payments) a
willingness to keep the loan current. When a loan is placed on nonaccrual
status, unpaid interest is reversed and an allowance is established by a charge
to interest income equal to all accrued interest. Income is subsequently
recognized only to the extent that cash payments are received. Loans are
returned to accrual status when, in management's judgment, the borrower has the
ability and intent to make periodic principal and interest payments (this
generally requires that the loan be brought current in accordance with its
original contractual terms).
A loan is considered to be impaired when, based on current information and
events, it is probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement. In general, the Bank
considers a loan on income-producing properties to be impaired when the debt
service ratio is less than 1.0. Loans on non-income producing properties are
considered impaired whenever fair value is less than book value. The Bank
performs a review of all loans over $500,000 to determine if the impairment
criteria have been met. If the impairment criteria have been met, a reserve is
calculated according to the provisions of the SFAS No. 114. For loans which are
individually not significant ($500,000 or less) and represent homogeneous
populations, the Bank evaluates impairment based on the level and extent of
delinquencies. Such loans include all mortgage loans secured by 1-4 family
residential property, all consumer loans, and certain multi-family real estate
loans, nonresidential real estate loans, business loans and leases. The Bank
charges principal off at the earlier of (1) when a total loss of principal has
been deemed to have occurred as a result of the book value exceeding the fair
value or net realizable value or (2) when collection efforts have ceased.
NONPERFORMING LOANS - Loans considered to be nonperforming include nonaccrual,
accruing loans delinquent 90 days or more, and restructured loans. Loans are
classified as nonaccrual when, in management's judgment, the borrower no longer
has the ability and intent to make periodic interest and principal payments.
Loans are classified as accruing loans delinquent 90 days or more when the loan
is 90 days or more past due, is fully secured, and, in management's judgment,
the borrower has the ability and intent to make periodic interest and principal
payments. Loans are classified as restructured when concessions are made to
borrowers with respect to the principal balance, interest rate or the term due
to the inability of the borrower to meet the obligation under the original
terms.
LOAN FEES - Loan origination fees received for loans held for investment, net of
certain direct origination costs, are deferred and amortized to interest income
over the contractual life of the loan using the level yield method. Loan
origination fees received for loans held for sale, net of certain direct
origination costs, are deferred and recognized as an adjustment of the basis on
sale of the loans. Fees received for loan commitments that are expected to be
drawn, based on the Bank's experience with similar commitments, are deferred
and amortized over the life of the loan using the level yield method. Fees for
other loan commitments are deferred and amortized over the loan commitment
period on a straight-line basis. Unamortized deferred loan fees related to loans
paid off are included in interest income in the period the loan is paid off.
Amortization of net deferred fees is discontinued for loans that are deemed to
be nonperforming.
ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is established at an
amount necessary to reduce the recorded balances of loans receivable to their
estimated net realizable value, and is increased by charges to income and
decreased by charge-offs (net of recoveries). The allowance for loan losses is
based on management's estimate of the value of the collateral, considering the
current and currently anticipated future operating or sales conditions, as well
as the Bank's past loan loss experience, known and inherent risks in the
portfolio, adverse situations which may affect the borrower's ability to repay,
and current economic conditions. Consequently, these estimates are particularly
susceptible to changes that could result in a material adjustment to results of
operations. Recovery of the carrying value of such loans is dependent on
economic, operating, and other conditions that are beyond the control of the
Company. In the opinion of management, the allowance for loan losses is recorded
in accordance with generally accepted accounting principles.
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REAL ESTATE OWNED - Real estate owned consists of property acquired in
settlement of foreclosed loans. Real estate owned is carried at the lower of
fair value less estimated costs to sell or cost. Costs relating to the
development and improvement of property are capitalized, whereas those relating
to holding and maintaining the property are charged to expense.
PREMISES AND EQUIPMENT - Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is computed using the
straight-line method over the useful lives of the related assets for financial
reporting purposes. For tax purposes, depreciation on certain assets is computed
using accelerated methods.
INTANGIBLE ASSETS - Cost in excess of fair value of net assets acquired is being
amortized to expense using the interest method over a period of 3 to 12 years.
The amortization periods for intangible assets are continually monitored to
determine if events and circumstances require such periods to be reduced.
FEDERAL INCOME TAXES - The Company and its subsidiaries file a consolidated
income tax return. Deferred income taxes reflect the temporary tax consequences
on future years of differences between the tax and financial statement basis of
assets and liabilities at the balance sheet date. Within certain limits, an
allowance for bad debts based on a percentage of taxable income before such a
deduction may be deducted from taxable income. The amount deductible is limited
to 8% of taxable income.
EARNINGS PER COMMON SHARE - Earnings per common share was computed using the
weighted average number of common shares outstanding for the period. The
weighted average shares used in the computation of earnings per common share was
1,904,376 shares and 1,884,111 shares during the three-month periods ended June
30, 1996 and 1995, respectively. The weighted average shares used in the
computation of earnings per common share was 1,895,648 shares and 1,884,742
shares during the six-month periods ended June 30, 1996 and 1995, respectively.
On August 23, 1995, the Board of Directors of the Company declared a 10% stock
dividend payable to shareholders of record on September 15, 1995. The stock
dividend was distributed on October 1, 1995. Earnings per common share for
prior periods has been computed giving retroactive effect to the stock dividend.
CONSOLIDATED STATEMENTS OF CASH FLOWS - For purposes of reporting cash flows,
cash and cash equivalents include cash and due from banks. Federal Reserve Board
regulations require depository institutions to maintain certain minimum reserve
balances. Included in cash and demand deposits were required deposits at the
Federal Reserve of $716,000 and $779,000 at June 30, 1996 and 1995,
respectively.
Income tax payments made for the six months ended June 30, 1996 and 1995 were
$900,000 and $550,000, respectively. Interest paid on deposits and other
borrowings totaled $7,347,000 and $6,885,000 for the six months ended June 30,
1996 and 1995, respectively. There were no loans made to finance the sale of
foreclosed real estate during the six months ended June 30, 1996 and 1995. There
were no acquisitions of real estate property through foreclosure during the six
months ended June 30, 1996 and 1995.
NEW ACCOUNTING STANDARDS - During March, 1995, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." This statement
requires that long-lived assets and certain intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. SFAS No. 121 is effective
for 1996 with impairment losses resulting from its application being reported
in the period in which the recognition criteria are first applied and met.
During May, 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights." This statement requires that the right to service loans,
acquired either through the purchase or origination of the loan and retained
after the loans have been sold or securitized, shall be recognized as an asset
by allocating the total cost of the loans to mortgage servicing rights and loans
based on the relative fair values. The provisions of this statement shall be
applied prospectively beginning in 1996, to transactions in which mortgage loans
are sold or securitized with servicing rights retained and to impairment
evaluations of all amounts capitalized as mortgage servicing rights, including
those purchased before the adoption of this statement.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." This standard is effective for fiscal years beginning after
December 15, 1995. The standard presents financial accounting and reporting
standards for stock-based employee compensation plans including stock purchase
plans, stock options and restricted
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stock. SFAS No. 123 establishes a fair value based method of accounting for such
plans, rather than the intrinsic value based method that is contained in
Accounting Principles Board Opinion 25, "Accounting for Stock Issued to
Employees" ("APB 25"). SFAS No. 123 does not require an entity to adopt the new
fair value based method for purposes of preparing its basic financial
statements. While the SFAS No. 123 fair value based method is considered by the
FASB to be preferable to the APB 25 method, entities are allowed to continue to
use the APB 25 method. Entities not adopting the fair value method under SFAS
No. 123 are required to present pro forma net income and earnings per share, in
the notes to the annual financial statements, as if the fair value based method
had been adopted. Management has elected to continue the use of the APB 25
method.
Management adopted these statements on January 1, 1996. The impact of adopting
these statements on the financial condition and results of operations of the
Company was not significant.
In June, 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
standard is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996. This
statement supersedes SFAS No. 122. The impact of adopting this statement on the
financial condition and results of operations of the Company is not expected to
be significant.
2. Amortized cost, estimated market values and weighted average
end-of-period yields of investment securities classified as available for sale
by contractual maturity are summarized as follows:
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995 June 30, 1995
------------------------- ---------------------------- -----------------------------
Amortized Market Amortized Market Amortized Market
Cost Value Yield Cost Value Yield Cost Value Yield
------- ------- ----- ------- ------- ----- ------- ------- -----
(Dollars in thousands)
U.S. Government obligations:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Due in one year or less $ 1,000 $ 1,007 7.25% $ 2,000 $ 2,016 5.81% $ 4,375 $ 4,373 5.98%
Due after 1 year through 5 years 9,984 9,867 6.20% 23,977 24,055 6.81% 17,490 17,532 7.06%
Due after 5 years through 10 years 15,478 14,892 6.90% 18,443 18,499 6.97% 6,500 6,497 7.57%
------- ------- ------- ------- ------- -------
Total 26,462 25,766 6.65% 44,420 44,570 6.83% 28,365 28,402 7.01%
------- ------- ------- ------- ------- -------
Marketable equity securities 100 99 6.41% -- -- -- -- -- --
Federal Home Loan Bank stock 2,705 2,705 7.00% 2,614 2,614 7.00% 2,524 2,524 6.63%
------- ------- ------- ------- ------- -------
Total $29,267 $28,570 6.68% $47,034 $47,184 6.84% $30,889 $30,926 6.98%
======= ======= ======= ======= ======= =======
</TABLE>
Investment securities totaling $5.8 million at June 30, 1996, were pledged as
collateral for deposits and a standby letter of credit commitment, and the
Federal Home Loan Bank stock was pledged as collateral for the advances from the
Federal Home Loan Bank of Cincinnati.
Gross unrealized gains and gross unrealized losses are summarized as follows:
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995 June 30, 1995
----------------------- ----------------------- -----------------------
Gross Gross Gross Gross Gross Gross
Unrealized Unrealized Unrealized Unrealized Unrealized Unrealized
Gains Losses Gains Losses Gains Losses
---------- ---------- ---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government obligations $8 $704 $175 $25 $106 $69
Marketable equity securities - 1 -- -- -- --
Federal Home Loan Bank stock - -- -- -- -- --
--- ---- ---- --- ---- ---
Total $8 $705 $175 $25 $106 $69
=== ==== ==== === ==== ===
</TABLE>
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<PAGE> 11
3. Loans may be exchanged for mortgage-backed securities guaranteed by
government agencies. Although long-term and fixed-rate in nature,
mortgage-backed securities are more liquid than real estate loans since a
large and active secondary market exists.
Amortized cost, estimated market values, and weighted average end-of-period
yields of mortgage-backed securities classified as available for sale by
contractual maturity are summarized as follows:
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995 June 30, 1995
--------------------------- --------------------------- ----------------------------
Amortized Market Amortized Market Amortized Market
Cost Value Yield Cost Value Yield Cost Value Yield
--------- ------ ----- --------- ------ ----- --------- ------ -----
(Dollars in thousands)
Pass-through certificates:
Federal Home Loan Mortgage
Corporation:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Due after 5 years through 10 years $ 12 $ 12 7.50% $ 14 $ 14 7.50% $ 16 $ 16 7.50%
Due after 10 years 1,927 1,976 8.62% 2,085 2,168 8.62% 2,317 2,400 8.63%
------ ------ ------ ------ ----- ------
Total 1,939 1,988 8.61% 2,099 2,182 8.61% 2,333 2,416 8.63%
------ ------ ------ ------ ----- ------
Government National Mortgage
Association:
Due after 1 year through 5 years 119 118 9.09% 1 1 8.35% 1 1 8.36%
Due after 1 years through 10 years 76 76 9.16% 250 249 9.20% 272 268 9.27%
------ ------ ------ ------ ----- ------
Total 195 194 9.12% 251 250 9.20% 273 269 9.27%
------ ------ ------ ------ ----- ------
Collateralized mortgage obligations:
Due in 1 year or less 156 156 5.19% 201 201 5.47% -- -- --
Due after 1 year through 5 years -- -- -- -- -- -- 233 233 5.41%
Due after 10 years 106 106 6.06% 121 121 5.68% 134 134 6.06%
------ ------ ------ ------ ----- ------
Total 262 262 5.54% 322 322 5.55% 367 367 5.65%
------ ------ ------ ------ ----- ------
Total $2,396 $2,444 8.32% $2,672 $2,754 8.30% $2,973 $3,052 8.32%
====== ====== ====== ====== ====== ======
</TABLE>
At June 30, 1996, mortgage-backed securities totaling $871,000 were pledged as
collateral for public funds on deposit with the Bank.
Gross unrealized gains and gross unrealized losses are summarized as follows:
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995 June 30, 1995
----------------------- ----------------------- -----------------------
Gross Gross Gross Gross Gross Gross
Unrealized Unrealized Unrealized Unrealized Unrealized Unrealized
Gains Losses Gains Losses Gains Losses
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Pass-through certificates:
Federal Home Loan Mortgage
Corporation $49 $- $83 $-- $83 $--
Government National Mortgage
Association - 1 - 1 - 4
Collateralized mortgage obligations - - - - - -
--- -- --- --- --- ---
Total $49 $1 $83 $1 $83 $4
=== == === === === ===
</TABLE>
11
<PAGE> 12
4. The loan portfolio is comprised primarily of residential and, to a
lesser extent, commercial real estate loans granted to customers residing in
northeastern Ohio. Although the Bank has a diversified loan portfolio, its
debtors' ability to honor their contracts is to a degree dependent upon the
general economic conditions of the region.
All loans are classified as held for investment at June 30, 1996. The
composition of the loan portfolio is as follows:
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995 June 30, 1995
------------- ----------------- -------------
(In thousands)
<S> <C> <C> <C>
Real estate loans - mortgage $ 236,866 $ 238,181 $ 242,123
Real estate loans - construction 4,963 1,616 2,173
Land 3,839 4,461 4,080
Business loans 5,519 4,758 1,794
Consumer and other loans 41,717 40,055 35,550
------- ------- -------
292,904 289,071 285,720
LESS:
Undisbursed portion of loans in process (3,326) (1,711) (1,448)
Unearned income on consumer loans (11) (18) (33)
Amount due other financial institutions
relating to wrap around mortgage loans (141) (145) (150)
Deferred loan fees (909) (903) (807)
Allowance for loan losses (2,777) (2,734) (2,710)
------- ------- -------
$ 285,740 $ 283,560 $ 280,572
======= ======= =======
</TABLE>
At June 30, 1996, December 31, 1995 and June 30, 1995, loans serviced for others
amounted to $125.6 million, $139.5 million and $151.3 million, respectively.
Servicing loans for others generally consists of collecting mortgage payments,
maintaining escrow accounts, disbursing payments to investors and foreclosure
processing.
5. The following table summarizes nonaccrual, past due and repossessed
assets.
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995 June 30, 1995
------------- ----------------- -------------
(Dollars in thousands)
<S> <C> <C> <C>
Nonaccrual loans $1,259 $1,303 $1,167
Loans past due 90 days and accruing 15 21 33
Repossessed assets 459 737 567
------ ------ ------
Total nonperforming assets $1,733 $2,061 $1,767
====== ====== ======
Percent of nonperforming loans to total loans .43% .46% .42%
Percent of nonperforming assets to total assets .52% .58% .50%
</TABLE>
The loans included above are secured by real estate or other collateral which
limits the Company's exposure to loss. At June 30, 1996, there were no
significant commitments outstanding to lend additional funds to borrowers with
nonperforming loans. For all periods presented, there have been no troubled debt
restructurings which involve forgiving a portion of interest or principal on any
loans or making loans at a rate materially less than market rates.
In addition to the loans disclosed in the table above, the Bank has a $1.1
million loan secured by a strip shopping center located in Northeast Ohio. The
shopping center has experienced higher-than-expected vacancies, and the cash
flow from the property has not been sufficient to meet the principal and
interest due on the loan. The borrower has maintained the loan current through
June 30, 1996. The borrower is working to cure the vacancies; however, continued
high vacancies and cash flow shortages could cause management to place this loan
on nonaccrual status.
12
<PAGE> 13
6. In the normal course of business, various commitments and contingent
liabilities arise, including commitments to originate real estate loans and
commitments to extend credit. Commitments to borrowers for unused lines of
credit and to originate loans are summarized below:
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995 June 30, 1995
------------- ----------------- -------------
(In thousands)
Commitments to originate:
<S> <C> <C> <C>
Fixed rate loans $ 3,063 $ 856 $ 1,349
Variable rate loans 7,087 2,765 3,046
Unused line of credit 66,751 57,134 49,939
</TABLE>
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since some of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Each customer's creditworthiness is
evaluated on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company upon the credit extension, is based on management's
credit evaluation of the counter-party. The Company generally extends credit
only on a secured basis. Collateral held usually includes residential and
commercial real estate.
The Bank is a 19.6% participant in a standby letter of credit totaling $10.2
million, which expires on September 1, 1996. This standby letter of credit was
issued to guarantee the payment of principal and interest on multi-family
housing revenue bonds, issued to finance a 240-unit apartment complex in
Stone Mountain, Georgia. The Bank had outstanding commitments under this
standby letter of credit of $2.1 million at June 30, 1996, December 31, 1995 and
June 30, 1995. The Bank has established a $322,000 liability for credit loss
for this standby letter of credit. On July 15, 1996, this standby letter of
credit was called and the entire $2.1 million plus interest was advanced. The
property is in the process of sale. The Bank does not anticipate any material
loss due to this transaction.
During the first quarter of 1996, the Housing and Urban Development ("HUD")
Mortgagee Review Board proposed that the Bank indemnify HUD for HUD/FHA
insurance claims and associated costs paid against insured properties affected
by the indictment and guilty plea of a former loan originator of the Bank on
charges of fraud relating to loan activities from 1991. A settlement of these
claims has been reached under which the Bank paid $545,000 to HUD in July, 1996.
The Bank has submitted a proof of loss to its insurer. The insurer has not yet
determined whether there is coverage. Management believes that this claim by HUD
is covered by insurance maintained by the Bank; however, no assurances can be
given as to the outcome of this request for indemnification. The Bank has
recorded a loss provision in the amount of $200,000 in connection with this
matter.
7. The composition of premises and equipment is as follows:
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995 June 30,1995
------------- ----------------- ------------
(In thousands)
<S> <C> <C> <C>
land and improvements $ 672 $ 669 $ 997
Buildings and improvements 1,716 1,658 2,402
Furniture and fixtures 5,117 5,023 4,946
Leasehold improvements 1,972 1,799 1,564
----- ----- -----
9,477 9,149 9,909
Accumulated depreciation
and amortization 5,539 5,196 5,885
----- ----- -----
$3,938 $3,953 $4,024
===== ===== =====
</TABLE>
In December, 1995, the Bank completed the sale of its Madison Office which
resulted in an after-tax gain of $204,000.
13
<PAGE> 14
8. Accrued interest and other assets consists of the following:
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995 June 30, 1995
------------- ----------------- -------------
(In thousands)
<S> <C> <C> <C>
Accrued interest $2,359 $2,602 $2,144
Real estate owned 459 737 567
Other assets 2,184 1,406 2,075
------ ------ ------
$5,002 $4,745 $4,786
====== ====== ======
</TABLE>
9. Accrued interest and other liabilities consists of the following:
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995 June 30, 1995
------------- ----------------- -------------
(In thousands)
<S> <C> <C> <C>
Accrued interest payable $ 635 $ 676 $ 882
Collections on loans serviced 503 465 564
Other liabilities 6,892 1,787 6,597
------ ------ ------
$8,030 $2,928 $8,043
====== ====== ======
</TABLE>
10. Advances from the Federal Home Loan Bank (the "FHLB") at June 30, 1996
consist of:
<TABLE>
<CAPTION>
Maturity Date Balance Rate
- ------------- ------- ----
(In thousands)
<S> <C> <C>
August 16, 1996 $1,000 5.45%
August 22, 1996 2,000 5.45%
September 25, 1996 2,000 5.40%
December 18,1996 1,000 5.60%
June 20, 1997 2,000 5.55%
-----
$8,000
=====
</TABLE>
Advances from the FHLB are secured by qualifying real estate loans with a fair
market value equal to approximately 175% of the advances outstanding and stock
in the FHLB. These advances are subject to restrictions or penalties in the
event of prepayment.
On April 4, 1995, the Bank repaid a $2 million advance from the FHLB, including
a prepayment penalty of $16,000. The advance had an interest rate of 10.30% and
a maturity date of June 26, 1995.
The Company has a one-year revolving credit facility from a third-party lender
in the amount of $1 million. The interest rate associated with this credit
facility is based on the prime rate. The Company has not drawn on this credit
facility.
11. Under the current capital regulations, the Bank must have: (i) core capital
equal to 3.0% of adjusted total assets, (ii) tangible capital equal to 1.5% of
adjusted total assets, and (iii) total capital equal to 8.0% of risk-weighted
assets. Risk-weighted assets are comprised primarily of financial instruments,
mortgage-backed securities, loans and real estate owned. The risk-weighted
assets are assigned a risk weighting from 0-100% based on their relative risk.
The Bank was in compliance with these regulatory capital regulations on June
30, 1996, December 31, 1995 and June 30, 1995.
14
<PAGE> 15
The following is a summary of the Bank's capital levels at June 30, 1996:
<TABLE>
<CAPTION>
Core Capital Tangible Capital Risk-Based Capital
------------ ---------------- ------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total regulatory capital $24,368 7.30% $24,368 7.30% $27,083 11.39%
Regulatory capital required 10,018 3.00% 5,009 1.50% 19,015 8.00%
------- ---- ------ ---- ------ -----
Regulatory capital excess $14,350 4.30% $19,359 5.80% $ 8,068 3.39%
======= ==== ====== ==== ====== =====
</TABLE>
Management believes that, under current regulations, the minimum capital
requirements will continue to be met in the foreseeable future. However, events
beyond the control of management, such as increased general interest rates or a
downturn in the local economy of northeastern Ohio where the Bank has most of
its loans, could adversely affect future earnings and, consequently, the ability
to meet its future minimum capital requirements.
15
<PAGE> 16
HAVERFIELD CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Net income for the six months ended June 30, 1996 was $1.3 million, compared
to $827,000 for the six months ended June 30, 1995. This increase resulted
mainly from a 12% improvement in net interest income, which increased $654,000
from 1995, and a $72,000 increase in fee income attributable to the Bank's
financial services subsidiary. Return on average assets for the six months
ended June 30, 1996 was .76% compared with .50% in the same period of 1995.
Return on average equity was 8.89% for the first six months of 1996, compared
with 6.01% in the same period of 1995.
Net income for the three months ended June 30, 1996 and 1995 was $640,000 and
$453,000, respectively. Return on average assets for the three months ended
June 30, 1996 was .75% compared with .53% in the same period of 1995. Return on
average equity was 8.91% for the three months ended June 30, 1996, compared
with 6.52% in the same period of 1995.
NET INTEREST INCOME
- --------------------------------------------------------------------------------
Net interest income for the six months ended June 30, 1996 totaled $6.3 million,
compared to $5.6 million for the first six months of 1995. The interest rate
spread increased 30 basis points to 3.35%. Due to a general increase in interest
rates, the weighted average yield on earning assets increased 40 basis points,
while the yield paid on interest-bearing liabilities increased 10 basis points.
An analysis of net interest income is presented in the following table. For each
major category of interest-earning assets and interest-bearing liabilities, the
average balance of funds employed during the period indicated is shown along
with the interest earned or paid on that balance for the period and the weighted
average annualized rate earned or paid for that category. Average balances are
determined on a daily basis.
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------------------------------------------------------------
1996 1995
------------------------------------ -----------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $286,829 $ 12,129 8.46% $284,728 $11,428 8.04%
Investments and other 41,408 1,332 6.38 36,043 1,065 5.89
Mortgage-backed securities 2,602 102 7.81 3,097 126 8.14
-------- -------- ---- -------- ------- ----
Total interest-earning assets 330,839 13,563 8.20 323,868 12,619 7.80
-------- ---- ------- ----
Noninterest-earning assets 7,272 7,792
-------- --------
Total assets $338,111 $331,660
======== ========
Interest-bearing liabilities:
Passbook/statement accounts $ 43,880 540 2.47 $ 53,129 650 2.47
NOW accounts 24,805 111 .90 24,842 123 1.00
Money market fund accounts 57,270 1,386 4.87 35,551 890 5.05
Certificates of deposit 174,835 5,204 5.99 183,181 5,295 5.83
-------- -------- ---- -------- ------- ----
Total deposits 300,790 7,241 4.84 296,703 6,958 4.73
FHLB advances 2,363 64 5.37 1,160 57 9.93
-------- -------- ---- -------- ------- ----
Total interest-bearing liabilities 303,153 7,305 4.85 297,863 7,015 4.75
-------- ---- ------- ----
Noninterest bearing liabilities 6,065 6,047
-------- --------
Total liabilities 309,218 303,910
Shareholders' equity 28,893 27,750
-------- --------
Total liabilities and shareholders' equity $338,111 $331,660
======== ========
Net interest income/interest rate spread $ 6,258 3.35% $ 5,604 3.05%
========= ==== ======= ====
Net interest margin 3.80% 3.49%
==== ====
</TABLE>
16
<PAGE> 17
The sensitivity of the Company's net interest income to general economic
conditions and the effect on net interest income due to changes in interest
rates and changes in amounts of interest-earning assets and interest-bearing
liabilities for the six months ended June 30, 1996 versus June 30, 1995 is shown
in the following table. Changes in interest due to both rate and volume have
been allocated to change due to volume and change due to rate in proportion to
the absolute amounts of the change in each.
<TABLE>
<CAPTION>
Six Months June 30, 1996 vs. Six Months June 30, 1995
-----------------------------------------------------
Change Due To
------------------
Total Change Volume Rate
------------ ------ ----
(In thousands)
<S> <C> <C> <C>
Interest income:
Loans $ 701 $ 83 $ 618
Investments and other 267 167 100
Mortgage-backed securities (24) (19) (5)
----- ----- -----
Total 944 231 713
----- ----- -----
Interest expense:
Deposits 283 97 186
FHLB advances 7 41 (34)
----- ----- -----
Total 290 138 152
----- ----- -----
Increase (decrease) in net interest income $ 654 $ 93 $ 561
===== ===== =====
</TABLE>
Net interest income was $3.2 million for the three month period ended June 30,
1996 compared to $2.8 million for the three month period ended June 30, 1995.
The interest rate spread for the three months ended June 30, 1996 increased 56
basis points to 3.48%. An analysis of net interest income is presented in the
following table. For each major category of interest-earning assets and
interest-bearing liabilities, the average balance of funds employed during the
period indicated is shown along with the interest earned or paid on that
balance for the period and the weighted average annualized rate earned or paid
for that category. Average balances are determined on a daily basis.
<TABLE>
<CAPTION>
Three Months Ended June 30,
-------------------------------------------------------------------------------
1996 1995
------------------------------------ -----------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $288,177 $ 6,096 8.47% $285,491 $5,860 8.21%
Investments and other 35,379 549 6.16 48,595 744 6.09
Mortgage-backed securities 2,512 49 7.74 3,090 62 8.07
------- ----- ---- ------- ----- ----
Total interest-earning assets 326,068 6,694 8.21 337,176 6,666 7.90
----- ---- ----- ----
Noninterest-earning assets 7,295 7 742
------- -------
Total assets $333,363 $344,918
Interest-bearing liabilities: ======= =======
Passbook/statement accounts $ 43,125 266 2.48 $ 51,811 319 2.47
NOW accounts 25,281 53 .84 25,027 62 .99
Money market fund accounts 58,617 696 4.78 35,998 462 5.14
Certificates of deposit 166,037 2,422 5.87 197,142 3,004 6.11
------- ----- ---- ------- ----- ----
Total deposits 293,060 3,437 4.72 309,978 3,847 4.98
FHLB advances 4,725 64 5.37 66 2 13.73
------- ----- ---- ------- ----- ----
Total interest-bearing liabilities 297,785 3,501 4.73 310,044 3,849 4.98
----- ---- ----- ----
Noninterest bearing liabilities 6,695 6,995
------- -------
Total liabilities 304,480 317,039
Shareholders' equity 28,883 27,879
------- -------
Total liabilities and shareholders' equity $333,363 $344,918
======= =======
Net interest income/interest rate spread $ 3,193 3.48% $2,817 2.92%
===== ==== ===== ====
Net interest margin 3.94% 3.35%
==== ====
</TABLE>
17
<PAGE> 18
The sensitivity of the Company's net interest income to general economic
conditions and the effect on net interest income due to changes in interest
rates and changes in amounts of interest-earning assets and interest-bearing
liabilities for the three months ended June 30, 1996 versus June 30, 1995 is
shown in the following table. Changes in interest due to both rate and volume
have been allocated to change due to volume and change due to rate in
proportion to the absolute amounts of the change in each.
<TABLE>
<CAPTION>
Three Months June 30, 1996 vs. Three Months June 30, 1995
---------------------------------------------------------
Change Due To
----------------
Total Change Volume Rate
------------ ------ ----
(In thousands)
<S> <C> <C> <C>
Interest income:
Loans $ 236 $ 55 $ 181
Investments and other (195) (206) (2)
Mortgage-backed securities (13) (11) 11
----- ----- -----
Total 28 (162) 190
----- ----- -----
Interest expense:
Deposits (410) (204) (206)
FHLB advances 62 64 (2)
----- ----- -----
Total (348) (140) (208)
----- ----- -----
Increase (decrease) in net interest income $ 376 $ (22) $ 398
===== ===== =====
</TABLE>
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. 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 Company
maintains a portion of the allowance to cover potential losses inherent in the
portfolio which have not been specifically identified. Activity in the loan
loss allowance for the six months ended June 30, 1996 and 1995 is presented
below.
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1996 1995
---- ----
(Dollars in thousands)
<S> <C> <C>
Balance, January 1 $ 2,734 $ 2,665
Provision charged to expense 68 61
Loans charged off (29) (18)
Recoveries 4 2
--------- ---------
Balance, June 30 $ 2,777 $ 2,710
========= =========
Average loans $ 286,829 $ 284,728
Loans at end-of-period $ 292,904 $ 285,720
Allowance/average loans .97% .95%
Allowance/end-of-period loans .95% .95%
Allowance/nonperforming loans 217.97% 225.83%
Allowance/nonperforming assets 160.24% 153.37%
</TABLE>
Although management believes that it uses the best information available in
determining the adequacy of the allowance for loan losses, future adjustments to
reserves may be necessary, and net income could be significantly affected, if
circumstances and/or economic conditions differ substantially from the
assumptions used in making the initial determinations. Management believes that
the allowance for loan losses is adequate at June 30, 1996.
18
<PAGE> 19
Nonperforming assets at June 30, 1996, December 31, 1995 and June 30, 1995 are
presented in Note 5 of the consolidated financial statements.
ASSET/LIABILITY MANAGEMENT
- --------------------------------------------------------------------------------
The function of asset/liability management is to monitor the maturities and
repricing schedules of the components of the balance sheet, and to initiate
actions to minimize the Company's vulnerability to changing interest rates while
maximizing current and expected net interest yield. Asset/liability management
seeks to ensure that assets and liabilities respond to interest rate changes in
a similar time frame.
The following tables sets forth at June 30, 1996 the amounts of interest-earning
assets and interest-bearing liabilities scheduled to mature or reprice within a
specified period. No prepayment assumptions or deposit decay rates have been
incorporated. The table shows the excess or shortfall of interest-earning assets
less interest-bearing liabilities. This excess or shortfall is called the "gap."
<TABLE>
<CAPTION>
Scheduled Maturity or Repricing
--------------------------------------------
1 Year 1 Year More than
or less to 3 Years 3 Year Total
------- ---------- --------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest-earning assets:
Real estate loans:
Conventional:
Fixed-rate $ 3,857 $ 8,527 $ 60,016 $ 72,400
Adjustable-rate 108,066 50,949 5,451 164,466
Construction 3,464 1,499 -- 4,963
Land loans 3,839 -- -- 3,839
Consumer loans 40,889 642 186 41,717
Business loans 5,496 7 16 5,519
Loans in process, allowance
for loan losses and net
deferred loan fees -- -- (7,164) (7,164)
------- ------- ------- -------
Total loans(1) 165,611 61,624 58,505 285,740
Mortgage-backed securities 372 218 1,854 2,444
Other interest-earning assets 6,242 1,497 24,086 31,825
------- ------- ------- -------
Total interest-earning assets $172,225 $63,339 $84,445 $320,009
======= ======= ======= =======
Interest-bearing liabilities:
Deposits:
Passbook and NOW accounts (2) $ -- $ -- $59,156 $ 59,156
Money market fund accounts 59,147 -- -- 59,147
Certificates of deposit 101 640 42,981 17,770 162,391
------- ------- ------- -------
Total deposits 160,787 42,981 76,926 280,694
FHLB advances 8,000 -- -- 8,000
------- ------- ------- -------
Total interest bearing liabilities $168,787 $42,981 $76,926 $288,694
======= ======= ======= =======
GAP $ 3,438 $20,358 $ 7,519 $ 31,315
Cumulative GAP $ 3,438 $23,796 $31,315
Cumulative GAP as a percentage of
total assets 1.03% 7.12% 9.37%
<FN>
(1) Contractual maturities of loans do not reflect the actual term of the loan
portfolio. The average life of real estate loans is substantially less than
their contractual terms because of loan prepayments and due-on-sale
clauses.
(2) Management believes that a significant amount of passbook and NOW accounts
are core deposits.
</TABLE>
19
<PAGE> 20
NONINTEREST INCOME
- --------------------------------------------------------------------------------
Noninterest income increased to $983,000 for the six months ended June 30,
1996, compared to $950,000 for the same period in 1995, and noninterest income
for the three months ended June 30, 1996 totaled $462,000, compared to $472,000
for the same period in 1995. Other income for the six-month period increased
$100,000 due mainly to an increase in the income earned by the Bank's financial
services subsidiary. Servicing income decreased $43,000 due to the decreased
amount of loans serviced for others.
NONINTEREST EXPENSE
- --------------------------------------------------------------------------------
Noninterest expense totaled $5.2 million for both the six months ended June 30,
1996 and the same period in 1995. Employee compensation and benefits decreased
$60,000 resulting from a reduction in the full-time equivalent number of
employees. A $299,000 decrease in amortization of intangibles was offset by
increases in other expenses. The composition of other expenses is as follows:
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------
1996 1995
---- ----
(In thousands)
<S> <C> <C>
Business and management development $ 56 $ 98
Examination/audit expense 95 115
OTS assessment 44 40
Postage 82 75
Supplies 56 46
Telephone 71 66
Franchise/sales tax 193 180
Director fees 48 45
Consulting fees 17 24
Legal fees 52 36
Provision for HUD indemnification claim 200 --
Provision for real estate owned losses 80 44
Miscellaneous expenses 316 253
----- -----
$1,310 $1,020
===== =====
</TABLE>
The majority of the increase in other expenses is related to the provision for
HUD indemnification claim which is discussed in Note 6.
During the first quarter of 1996, a provision for loss on real estate owned was
recorded in connection with a commercial property which is carried in Real
Estate Owned. The Bank is currently negotiating a sale of the property. The loss
provision effectively reduces the Bank's recorded investment in the property to
the expected net realizable value of the property.
Noninterest expense for the three month period ended June 30, 1996 totaled $2.7
million, compared to $2.6 million for the same period in 1995.
20
<PAGE> 21
The composition of other expenses is as follows:
<TABLE>
<CAPTION>
Three months ended June 30,
---------------------------
1996 1995
---- ----
(In thousands)
<S> <C> <C>
Business and management development $ 29 $ 50
Examination/audit expense 48 60
OTS assessment 22 20
Postage 35 26
Supplies 24 15
Telephone 37 33
Franchise/sales tax 97 90
Director fees 25 23
Consulting fees 5 9
Legal fees 6 25
Provision for HUD indemnification claim 183 -
Provision for real estate owned losses - 44
Miscellaneous expenses 153 137
--- ---
$664 $532
=== ===
</TABLE>
FINANCIAL CONDITION
- --------------------------------------------------------------------------------
Total assets decreased from $353.4 million at June 30, 1995 to $334.2 million at
June 30, 1996. The majority of this decrease was in the investment portfolio, as
deposit funds declined due to disintermediation. Shareholders' equity increased
from $27.3 million at June 30, 1995 to $28.4 million at June 30, 1996. The
following table shows shareholders' equity per share and tangible shareholders'
equity per share.
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995 June 30, 1995
------------- ----------------- -----------
<S> <C> <C> <C>
Shareholders' equity per share $14.90 $14.90 $14.51
Tangible shareholders' equity per share $14.87 $14.82 $14.20
</TABLE>
The Board of Directors declared a second quarter dividend of $.135 per share
which was paid on June 28, 1996.
FORWARD-LOOKING STATEMENTS
- --------------------------------------------------------------------------------
Various discussions in this Quarterly Report filed with the Securities and
Exchange Commission include certain forward-looking statements based on
management's current expectations. Those factors which could cause future
results to vary from these expectations include, and are not limited to, i)
general market rates, ii) general economic conditions, iii)
legislative/regulatory changes, iv) monetary and fiscal policies of the U.S.
Treasury and the Federal Reserve, v) changes in the quality or composition of
the Company's loan and investment portfolios, vi) demand for loan products, vii)
deposit flows, viii) competition, ix) demand for financial services in the
Company's markets, and x) changes in accounting principles, policies or
guidelines.
REGULATORY ISSUES
- --------------------------------------------------------------------------------
The Bank is subject to extensive regulation, supervision and examination by the
Office of Thrift Supervision (the "OTS"), as its chartering authority and
primary federal regulator, and by the Federal Deposit Insurance Corporation (the
"FDIC"), which insures its deposits up to applicable limits. Such regulation and
supervision establishes a comprehensive framework of activities in which an
institution can engage and is intended primarily for the protection of the
insurance fund and depositors. In connection with an examination of the Bank,
the Bank entered into a written agreement with the OTS dated June 4, 1993 (the
"Supervisory Agreement") providing for measures to address the regulatory
compliance concerns of the OTS regarding the Bank's policies and procedures with
respect to certain matters. Pursuant to the Supervisory Agreement, the Board of
Directors of the Bank has provided reports to the OTS documenting the actions
taken under the Supervisory Agreement.
21
<PAGE> 22
The regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities. Any
change in such regulation, whether by the OTS, the FDIC or the Congress could
have a material impact on the Bank and its operations. Management cannot
predict what, if any, future legislation may be enacted or regulations adopted
or what impact any such actions may have on the Company or the Bank. However,
management is not aware of any current recommendations by the regulatory
authorities which, if implemented, would have a material effect on the Bank or
the Company.
The Bank's deposits are insured by the Savings Association Insurance Fund
("SAIF") of the FDIC. Deposit insurance premiums to both the SAIF and the Bank
Insurance Fund ("BIF") of the FDIC were identical when both funds were created
in 1989. In August 1995, the FDIC determined that the BIF had achieved its
designated reserve ratio and lowered BIF deposit insurance premium rates for all
but the riskiest institutions. Effective January 1, 1996, BIF deposit insurance
premiums for well-capitalized banks were further reduced to the statutory
minimum of $2,000 per institution per year. Because the SAIF remains
significantly below its designated reserve ratio, SAIF deposit insurance
premiums were not reduced and remain at 0.23% to 0.31% of deposits, based upon
an institution's supervisory evaluations and capital levels. The current
discrepancy in deposit insurance premiums between the BIF and the SAIF could
place the Bank at a competitive disadvantage to BIF insured institutions.
The current financial condition of the SAIF has resulted in proposed legislation
to recapitalize the SAIF through a one-time special assessment. After the
special assessment, it is expected that the SAIF would achieve its designated
reserve ratio and that SAIF premium rates would then become comparable to BIF
rates. The proposed legislation also contemplates a merger of the SAIF into the
BIF, which would require separate legislation. The Company is unable to predict
whether this legislation will be enacted or the amount or applicable
retroactive date of any one-time assessment or the rates that would then apply
to assessable SAIF deposits.
LIQUIDITY
- --------------------------------------------------------------------------------
The Company's liquidity is a measure of its ability to fund loans, withdrawals
of deposits and other cash outflows in a cost-effective manner. Deposits,
scheduled amortization and prepayments of loan principal, maturities of
investment securities and mortgage-backed securities, borrowings, and funds
provided by operations are the principal sources of funds. While loan payments
and maturing investment and mortgage-backed securities are relatively
predictable sources of funds, deposit flows and loan prepayments are greatly
influenced by general interest rates, economic conditions and competition.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments. If
the Company requires funds beyond its ability to generate them internally,
borrowing agreements exist with the Federal Home Loan Bank of Cincinnati (the
"FHLB"), which provide an additional source of funds. Under these borrowing
agreements, the maximum level of advances available is generally limited to 25%
of the Bank's total assets; however, the FHLB may approve advances in excess of
this limit based upon the Bank meeting all of its regulatory capital
requirements. At June 30, 1996, the Company had $8.0 million in outstanding
borrowings from the FHLB.
Currently, the Company anticipates that it will have sufficient funds to meet
its existing loan commitments. At June 30, 1996, the commitments to borrowers
for unused lines of credit and to originate loans totaled $76.9 million.
As a member of the FHLB, the Bank is required to maintain specific levels
of "liquid" investments. Regulations currently in effect require liquid assets
of not less than 5% of net withdrawable accounts plus short-term borrowings to
assure that demands for repayment of debt and withdrawals are met. This
requirement may be changed from time to time to reflect current economic
conditions. The Bank was in compliance with these regulations at June 30, 1996
and anticipates remaining in compliance. It is the intention of the Company's
cash management efforts to keep liquidity levels within regulatory guidelines,
but at minimal levels in order to maximize interest income from investing in
loans versus lower yielding short-term investment securities.
22
<PAGE> 23
PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
As previously reported, the Company has been negotiating with the HUD Mortgagee
Review Board regarding indemnification of HUD for HUD/FHA insurance claims. A
settlement of these claims was recently reached under which the Company paid
$545,000 to HUD in July, 1996. The Bank has submitted a proof of loss to its
insurer. The insurer has not yet determined whether there is coverage.
ITEM 2. CHANGES IN SECURITIES
- --------------------------------------------------------------------------------
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- --------------------------------------------------------------------------------
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- --------------------------------------------------------------------------------
At the Annual Meeting of Shareholders of the Registrant held on April 24, 1996,
the appointment of Deloitte & Touche LLP as the Registrant's independent
auditors for 1996 was approved. The following votes were recorded:
The proposal to ratify appointment of Deloitte & Touche LLP for fiscal year
ending December 31, 1996.
FOR 1,601,290 AGAINST 33,919 ABSTAIN 2,871
--------- ------ -----
ITEM 5. OTHER INFORMATION
- --------------------------------------------------------------------------------
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------
(a) Exhibits
27 FINANCIAL DATA SCHEDULE (EDGAR ONLY)
(b) Reports on Form 8-K
NONE
23
<PAGE> 24
HAVERFIELD CORPORATION
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.
HAVERFIELD CORPORATION
/s/ William A. Valerian
-------------------------------------
Dated: July 26, 1996 William A. Valerian
President and Chief Executive Officer
/s/ Richard C. Ebner
-------------------------------------
Dated: July 26, 1996 Richard C. Ebner
Executive Vice President, Chief
Operating Officer, Chief Financial
Officer and Treasurer
24
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF HAVERFIELD CORPORATION INCLUDED IN THE FORM
10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934, FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996 AND IS QUALFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1996
<CASH> 5,215
<INT-BEARING-DEPOSITS> 100
<FED-FUNDS-SOLD> 3,155
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 31,014
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 288,517
<ALLOWANCE> 2,777
<TOTAL-ASSETS> 334,226
<DEPOSITS> 289,063
<SHORT-TERM> 8,000
<LIABILITIES-OTHER> 8,749
<LONG-TERM> 0
<COMMON> 19
0
0
<OTHER-SE> 28,395
<TOTAL-LIABILITIES-AND-EQUITY> 334,226
<INTEREST-LOAN> 12,129
<INTEREST-INVEST> 1,332
<INTEREST-OTHER> 102
<INTEREST-TOTAL> 13,563
<INTEREST-DEPOSIT> 7,241
<INTEREST-EXPENSE> 7,305
<INTEREST-INCOME-NET> 6,258
<LOAN-LOSSES> 68
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,236
<INCOME-PRETAX> 1,937
<INCOME-PRE-EXTRAORDINARY> 1,278
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,278
<EPS-PRIMARY> .67
<EPS-DILUTED> .67
<YIELD-ACTUAL> 3.80
<LOANS-NON> 1,259
<LOANS-PAST> 15
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,059
<ALLOWANCE-OPEN> 2,734
<CHARGE-OFFS> 29
<RECOVERIES> 4
<ALLOWANCE-CLOSE> 2,777
<ALLOWANCE-DOMESTIC> 2,251
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 526
</TABLE>
