<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SCHEDULE 14A
(RULE 14A)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
<TABLE>
<S> <C>
/ / Preliminary Proxy Statement / / CONFIDENTIAL, FOR USE OF THE COMMISSION
ONLY (AS PERMITTED BY RULE 14A-6(E)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
</TABLE>
Haverfield Corporation
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Payment of filing fee (Check the appropriate box):
/X/ $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
HAVERFIELD CORPORATION
TerminalTower
50 Public Square, Suite 444
Cleveland, Ohio 44113-2203
March 18, 1996
Dear Shareholder:
You are cordially invited to attend the 1996 Annual Meeting of Shareholders
(the "Annual Meeting") of Haverfield Corporation, which will be held at the
Ritz Carlton Hotel, 1515 West 3rd Street, Cleveland, Ohio, on April 24, 1996 at
9:00 a.m. local time.
As described in the accompanying Notice and Proxy Statement, you are being
asked to ratify the appointment of Deloitte & Touche LLP as independent
auditors for 1996. Your Board unanimously recommends that you vote "FOR" this
proposal.
As part of our continuing effort to improve the quality and effectiveness
of our financial communications, we again have included Haverfield Corporation's
Management's Discussion and Analysis and audited financial statements for 1995
as Appendix A to the Proxy Statement. Haverfield's 1995 Summary Annual Report
is being mailed to all shareholders of record as of February 29, 1996.
We urge you to mark, sign and date your proxy card today and return it in
the envelope provided, even if you plan to attend the Annual Meeting. This will
not prevent you from voting in person, but will assure that your vote is
counted if you are unable to attend.
We are pleased, as always, with the continued support and interest that
shareholders have displayed in the affairs of Haverfield Corporation.
Sincerely,
/s/ Peter E. Shimrak
Peter E. Shimrak
Chairman of the Board
/s/ William A. Valerian
William A. Valerian
President and Chief Executive Officer
<PAGE> 3
HAVERFIELD CORPORATION
Terminal Tower
50 Public Square, Suite 444
Cleveland, Ohio 44113-2203
(216) 348-2800
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
April 24,1996
Notice is hereby given that the 1996 Annual Meeting of Shareholders (the
"Annual Meeting") of Haverfield Corporation ("Haverfield" or the "Company")
will be held at the Ritz Carlton Hotel, 1515 West 3rd Street, Cleveland, Ohio,
on April 24,1996 at 9:00 a.m. local time for the purpose of considering and
acting upon:
1. The ratification of the appointment of Deloitte & Touche LLP
as the Company's independent auditors for the fiscal year ending
December 31, 1996.
2. The transaction of such other business as may properly come
before the Annual Meeting or any adjournments thereof. The Board of
Directors is not aware of any other business to come before the Annual
Meeting.
Pursuant to Haverfield's Code of Regulations, the Board of Directors has fixed
the close of business on February 29, 1996 as the record date for the
determination of shareholders entitled to notice of and to vote at the Annual
Meeting. Only holders of record of Haverfield Common Stock as of the close of
business on that date have the right to receive notice of and to vote at the
Annual Meeting and any adjournments thereof.
By Order of the Board of Directors,
/s/ Nancy M. Czupik
Nancy M. Czupik
Corporate Counsel and Secretary
Cleveland, Ohio
March 18, 1996
--------------------------------
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. THEREFORE, WHETHER OR NOT
YOU PLAN TO BE PRESENT IN PERSON AT THE ANNUAL MEETING, PLEASE VOTE, SIGN AND
DATE THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE WHICH REQUIRES
NO POSTAGE IF MAILED IN THE UNITED STATES. THIS WILL NOT PREVENT YOU FROM
VOTING IN PERSON IF YOU ARE PRESENT AT THE ANNUAL MEETING.
<PAGE> 4
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
- ------------------------------------------------------
<S> <C>
Solicitation, Voting and Revocability of Proxies 1
Beneficial Ownership 2
Ratification of Independent Auditors 3
The Board of Directors and its Committees 4
Remuneration and Other Information 7
1997 Shareholders' Proposals 14
Appendix A - Financial Information A-1
</TABLE>
<PAGE> 5
HAVERFIELD CORPORATION
Terminal Tower
50 Public Square, Suite 444
Cleveland, Ohio 44113-2203
(216) 348-2800
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
April 24, 1996
SOLICITATION, VOTING AND REVOCABILITY OF PROXIES
This proxy statement (the "Proxy Statement") is furnished, commencing on March
18, 1996, to shareholders, together with the enclosed proxy, in connection with
the solicitation on behalf of the Board of Directors (the "Board") of
Haverfield Corporation ("Haverfield" or the "Company") of proxies to be voted
at the Annual Meeting of Shareholders (the "Annual Meeting") on April 24,1996
and at all adjournments thereof. Only holders of Haverfield's common stock, par
value $.O1 per share ("Haverfield Common Stock"), of record at the close of
business on February 29, 1996 will be entitled to notice of and to vote at the
Annual Meeting. On that date, there were 1,882,685 shares of Haverfield Common
Stock outstanding. Haverfield has no other class of equity securities
outstanding. Each share of Haverfield Common Stock is entitled to one vote on
each matter to be considered.
The Annual Meeting has been called for the following purposes: (1) to ratify
the appointment by the Board of the firm of Deloitte & Touche LLP as
independent auditors of the Company for the fiscal year ending December 31,
1996; and (2) to transact such other business as may properly come before the
Annual Meeting or any adjournments thereof.
The enclosed proxy solicited hereby, if properly signed and returned to
Haverfield and not revoked prior to its use, will be voted in accordance with
the instructions contained therein. If no contrary instructions are given, each
proxy received will be voted FOR the proposals set forth in the proxy and
described herein. The Board knows of no other matters which will be presented
at the Annual Meeting. However, if other matters properly come before the
Annual Meeting or any adjournments thereof, the person or persons voting the
proxies will vote them in accordance with their best judgment on such matters.
Any shareholder giving a proxy has the power to revoke it at any time before it
is exercised by (i) filing written notice thereof with the Secretary of the
Company, Nancy M. Czupik, Haverfield Corporation, Terminal Tower, 50 Public
Square, Suite 444, Cleveland, Ohio 44113-2203; (ii) submitting a duly executed
proxy bearing a later date; or (iii) appearing at the Annual Meeting and
giving the Secretary notice of his or her intention to vote in person. However,
your mere presence at the Annual Meeting will not operate to revoke your proxy.
Proxies solicited hereby may be exercised only at the Annual Meeting and any
adjournments thereof and will not be used for any other meeting.
The cost of solicitation of proxies will be borne by Haverfield. Haverfield
will reimburse brokerage firms and other custodians, nominees and fiduciaries
for reasonable expenses incurred by them in sending proxy materials to the
beneficial owners of Haverfield Common Stock. In addition to solicitation by
mail, directors, officers and employees of Haverfield and its subsidiaries may
solicit proxies personally or by telephone without additional compensation.
1
<PAGE> 6
BENEFICIAL OWNERSHIP
Persons and groups owning in excess of 5% of Haverfield Common Stock are
required to file certain reports regarding such ownership with Haverfield and
the Securities and Exchange Commission (the "SEC"). The Company's directors and
executive officers are also required to file certain reports regarding their
ownership of Haverfield Common Stock with the SEC and the National Association
of Securities Dealers, Inc. Copies of those reports must also be furnished to
the Company. A person is considered the beneficial owner of Haverfield Common
Stock with respect to which such person has or shares voting or investment
power or has the right to acquire ownership at any time within 60 days,
including, without limitation, through the exercise of a stock option, warrant
or right, or the conversion of a security.
<TABLE>
<CAPTION>
Number of Shares Beneficially Percent of
Name and Address of Beneficial Owner Owned as of February 29, 1996(1) Common Stock
- ----------------------------------- ------------------------------- ------------
PERSONS AND GROUPS OWNING IN EXCESS OF 5% OF HAVERFIELD COMMON STOCK
<S> <C> <C>
Haverfield Corporation 149,723(2) 7.95%
Employee Stock Ownership Plan
Harry F. Brockman, Trustee
Terminal Tower
50 Public Square, Suite 444
Cleveland, Ohio 44113-2203
William A. and Diane C. Valerian 129,998(3) 6.60%
18 Lyman Circle
Shaker Heights, Ohio 44122
Peter E. and Patricia J. Shimrak 100,416(4) 5.33%
17897 Captain's Cove
Lakewood, Ohio 44107
Directors and executive officers as 411,717(5) 21.87%
a group (13 individuals)
EXECUTIVE OFFICERS NAMED IN THE SUMMARY COMPENSATION TABLE
William A. Valerian 129,998(3) 6.60%
Richard C. Ebner 43,435(6) 2.27%
Nick J. Nero, Jr. 21,090(7) 1.12%
</TABLE>
- ------------------
1. Information with respect to beneficial ownership is based on filings made
pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). With respect to shares beneficially held by the Haverfield
Corporation Employee Stock Ownership Plan ("ESOP"), including shares
beneficially held by the ESOP for participants therein, the information
provided is as of December 31, 1995.
2. Although the ESOP may be deemed to share dispositive power over the shares
of Haverfield Common Stock which it holds, the trustee disclaims beneficial
ownership of such shares. The ESOP provides that the shares of Haverfield
Common Stock held thereby are voted by the trustee at the direction of
either the participants or the Committee, depending on whether or not the
shares have been allocated to participant accounts. See "Remuneration and
Other Information - Haverfield Corporation Employee Stock Ownership Plan."
3. Includes 72,600 shares held jointly by Mr. Valerian and his wife, Diane,
and 180 shares held by Mr. Valerian as custodian for his son, Peter. Also
includes 45,862 shares issuable upon the exercise of stock options and
11,356 shares beneficially held under the Company's ESOP. Mr. and Mrs.
Valerian disclaim beneficial ownership of any shares held by their two
eldest sons (both of whom are over 21 years of age; one of which resides
separately from his parents).
2
<PAGE> 7
4. Includes 85,167 shares held jointly by Mr. Shimrak and his wife, Patricia,
and 15,249 shares beneficially held under the Company's ESOP. Mr. and Mrs.
Shimrak disclaim beneficial ownership of any shares held by their children
(all of whom are over 21 years of age and reside separately from their
parents).
5. Includes 86,034 shares issuable upon the exercise of stock options and
52,928 shares beneficially held under the Company's ESOP.
6. Includes 28,344 shares issuable upon the exercise of stock options and
6,010 shares beneficially held under the Company's ESOP.
7. Includes 3,699 shares issuable upon the exercise of stock options and
6,314 shares beneficially held under the Company's ESOP. Mr. Nero
disclaims beneficial ownership of all shares held by his two daughters
(both of whom are over 21 years of age and reside separately from Mr.
Nero).
SECTION 16(a) REPORTING DELINQUENCIES
- --------------------------------------------------------------------------------
Section 16(a) of the Exchange Act requires the Company's executive officers and
directors, and persons who own more than ten percent of a registered class of
the Company's equity securities, to file reports of ownership and changes in
ownership with the SEC and the National Association of Securities Dealers, Inc.
Executive officers, directors and greater than ten percent shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
Based solely on a review of the copies of reports furnished to the Company and
written representations that no other reports were required, the Company
believes that during the preceding year all filing requirements applicable to
executive officers and directors have been complied with; except that the
initial Form 3 was filed late by Mr. Mooney.
RATIFICATION OF THE APPOINTMENT OF INDEPENDENT
AUDITORS
(Proposal 1)
The Board, acting upon the recommendation of its Audit Committee, has appointed
Deloitte & Touche LLP as auditors to audit the financial statements of
Haverfield and its subsidiaries for the year 1996. Deloitte & Touche LLP has
conducted the annual audit of Haverfield and its subsidiaries since 1982.
Although shareholder approval of this appointment is not required by law or
binding on the Board, the Board believes that shareholders should be given this
opportunity to express their views. If the shareholders do not ratify the
appointment of Deloitte & Touche LLP as Haverfield's independent auditors, the
Board will consider this vote in determining whether or not to continue the
engagement of Deloitte & Touche LLP.
A representative of Deloitte & Touche LLP will be present at the meeting with
an opportunity to make a statement if he desires to do so and to respond to
appropriate questions.
The affirmative vote of the holders of a majority of the shares of Haverfield
Common Stock present in person or by proxy and entitled to vote at the meeting
will be required for such ratification.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE RATIFICATION
OF THE APPOINTMENT OF DELOITTE & TOUCHE LLP AS INDEPENDENT AUDITORS FOR THE
FISCAL YEAR ENDING DECEMBER 31, 1996.
3
<PAGE> 8
THE BOARD OF DIRECTORS AND ITS COMMITTEES
The Board and its committees are comprised of the same six individuals who
serve on the Board of Directors and its committees of the Company's
wholly-owned subsidiary, Home Bank, F.S.B. (the "Bank"). The Board is divided
into two classes, each with a separate term of office of three years. Under
Ohio law, each class of directors must contain at least three members. There
exists one vacancy in the class of directors whose term expires in 1997. The
authorized number of directors has been fixed at seven. Therefore, Haverfield
has only two classes of directors whose terms, as of the 1996 Annual Meeting,
expire in 1997 and 1998. Because directors are elected for three-year terms,
once in every three years no directors will be elected by shareholders, at
least as long as the Board remains at its current size. In accordance with the
Code of Regulations of the Company, the Board of Directors may fill a vacancy
by the affirmative vote of a majority of the remaining directors. The Board of
Directors intends to review the credentials of qualified candidates prior to
making a determination regarding the filling of the vacancy. The Board, which
is responsible for the overall affairs of the Company, conducts its business
through regular and special meetings and through activities of its committees.
During the year ended December 31, 1995, the Board held a total of twelve
meetings. No director attended fewer than 75% of the meetings held by the Board
and the committees of the Board on which he served.
The Executive Committee is authorized to exercise all the authority of the
Board unless otherwise provided in Haverfield's Code of Regulations. It acts
upon matters requiring Board action during the intervals between Board
meetings. The Executive Committee consists of Messrs. Valerian (Chairman), Gaul,
Magnotto, Pomeroy and Shimrak. The Executive Committee of the Company met once
during 1995.
The Audit Committee recommends the appointment of the independent public
accountants, reviews and approves the audit plan and fee estimate of the
independent public accountants, appraises the effectiveness of the internal and
external audit efforts, evaluates the adequacy and effectiveness of accounting
policies, internal controls and financial and accounting management, assesses
the impact of significant regulatory changes and accounting developments,
reviews and approves the annual financial statements, reviews potential
conflict-of-interest situations where appropriate, and supervises and directs
any special projects or investigations considered necessary. In addition, the
Audit Committee has the responsibility of overseeing that an appropriate review
of all related party transactions is conducted on an ongoing basis. The members
of the Audit Committee are Messrs. Magnotto (Chairman), Gaul and Shimrak. The
Audit Committee of the Company met five times during 1995.
The Compensation Committee, composed entirely of independent directors, is
responsible for the review of and the recommendation to the Board concerning
executive compensation, bonuses and incentives. The Compensation Committee also
functions as administrator of the Management Option Plan and will administer
the Company's stock option plan. These matters are also part of the business of
the Bank and, accordingly, are addressed by the Compensation Committees of the
Boards of both the Company, which met once during 1995, and the Bank, which met
four times during 1995. The membership of these two committees is identical,
consisting of Messrs. Pomeroy (Chairman), Gaul and Magnotto.
The whole Board performs the functions of a nominating committee. Although the
Board will consider nominees recommended by shareholders, it has not actively
solicited recommendations from shareholders of Haverfield for nominees.
Haverfield's Code of Regulations provides, however, that shareholders may make
nominations for election to the Board by submitting such nominations in writing
to the Secretary of Haverfield not less than forty-five days nor more than
ninety days prior to the date of the Annual Meeting, unless less than sixty
days' prior notice of the meeting date is given to shareholders or prior public
disclosure of the date of the meeting is made, in which case such nominations
to be timely must be so received not later than the close of business on the
fifteenth day following the day on which such notice of the date of the meeting
was mailed or such public disclosure was made. Haverfield's Code of Regulations
also provides that any shareholder recommendation for a director-nominee must
contain background information concerning the recommended nominee, including
name, age, business and home address, relationships with the shareholder making
the recommendation, educational background, description of the nominee's
principal occupation and business experience for the last five years,
directorships or trusteeships in public companies, the reasons the
4
<PAGE> 9
person is being recommended, a statement that such person would be able to
serve as a director, the number of shares of Haverfield Common Stock which are
beneficially owned by the nominee, and any other information relating to the
nominee that is required to be disclosed pursuant to the Exchange Act. Any such
shareholder recommendation must also include the name and address, as they
appear on the Company's books, of such shareholder and the number of shares of
Haverfield Common Stock which are beneficially owned by such shareholder.
Haverfield is not required to include such nominations in its proxy statement;
however, if such a nomination is made, ballots will be provided for use by
shareholders at the Annual Meeting bearing the name of such nominee or
nominees.
The following table lists, as of February 29, 1996, as to each director of the
Company, the principal occupation or employment, age, the year in which each
first became a director and the number and percentage of shares of Haverfield
Common Stock beneficially owned. With respect to shares beneficially held under
the Company's ESOP, the information is as of December 31, 1995. Except as
otherwise indicated, each continuing director has had the same principal
occupation or employment during the past five years.
<TABLE>
<CAPTION>
Number and Percentage of
Principal Occupation During Director Shares Beneficially Owned
Name and Age Past Five Years Since as of February 29, 1996
- ------------ --------------------------- --------- ---------------------------
<S> <C> <C> <C> <C>
CONTINUING DIRECTORS WHOSE TERM EXPIRES IN 1997
Michael T. Gaul President of four privately held manu- 1994 2,310 .12%
(Age 49) facturing companies - Ohio Cutter
Grinding Co., Inc.; C&W Grinding Co.,
Inc.; Trident Tube, Inc.; and Kelly
Creswell Co.
William A. Valerian President and Chief Executive Officer 1989 129,998(1) 6.60%
(Age 52) of the Company and the Bank.
CONTINUING DIRECTORS WHOSE TERM EXPIRES IN 1998
Mark R. Magnotto Area Vice President, Insurance 1989 60,356(2) 3.21%
(Age 55) Company of North America.
Robert M. Mooney Private Investor, PMG Partners 1995 3,300 .18%
(Age 49)
Jacques C. Pomeroy President, The Pomeroy Agency, Inc. 1989 11,000 .58%
(Age 60)
Peter E. Shimrak Chairman of the Board of the Company 1989 100,416(3) 5.33%
(Age 63) and the Bank.
<FN>
1. Includes 72,600 shares held jointly by Mr. Valerian and his wife, Diane,
and 159 shares held by Mr. Valerian as custodian for his son, Peter. Also
includes 45,862 shares issuable upon the exercise of stock options and
11,356 shares beneficially held under the Company's ESOP. Mr. and Mrs.
Valerian disclaim beneficial ownership of any shares held by their two
eldest sons (both of whom are over 21 years of age; one of which resides
separately from his parents).
2. Includes 60,062 shares held jointly by Mr. Magnotto and his wife, Pam, and
294 shares held solely in the name of Pam Magnotto. Mr. and Mrs. Magnotto
disclaim beneficial ownership of any shares held by their two daughters
(both of whom are over 21 years of age and reside separately from their
parents).
</TABLE>
5
<PAGE> 10
3. Includes 88,467 shares held jointly by Mr. Shimrak and his wife, Patricia,
and 15,249 shares beneficially held under the Company's ESOP. Mr. and Mrs.
Shimrak disclaim beneficial ownership of any shares held by their children
(all of whom are over 21 years of age and reside separately from their
parents).
BOARD OF DIRECTORS COMPENSATION
- --------------------------------------------------------------------------------
Because the business of the Company currently consists primarily of the business
of the Bank, it is currently the policy of the Company that no separate fees are
paid to the directors of the Company, all of whom are also directors of the
Bank and receive fees as such. The Chairman received $1,250 per month for
performance of his duties as Chairman, received no separate fees for Board
meetings, but was paid $250 for each Committee meeting attended. During 1995,
each member of the Board (other than directors who are executive officers of
Haverfield, which directors receive no director fees) received from the Bank a
stipend of $500 per month, provided at least 80% of the last 12 Board of
Directors' meetings, including the most recent regular monthly meeting, were
attended. In addition, Directors are paid $400 for each meeting of the Board of
Directors attended, and are paid $250 for each Committee meeting attended.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
- --------------------------------------------------------------------------------
Mr. Pomeroy acted as trustee of the ESOP during most of 1995. On December
30,1995, the Board appointed Mr. Harry F. Brockman as trustee of the ESOP
replacing Mr. Pomeroy. As trustee of the Company's ESOP, Mr. Pomeroy, on behalf
of the ESOP, was involved in certain transactions with the Company. As trustee
of the Company's ESOP, Mr. Pomeroy received an annual fee of $1 per $1,000 of
Plan assets subject to a minimum of $1,800 per year. See "Haverfield Corporation
Employee Stock Ownership Plan". Messrs. Pomeroy, Gaul and Magnotto have
obtained loans from the Company which are described in "Certain Transactions"
below.
DIRECTORS' STOCK OPTION PLAN
- --------------------------------------------------------------------------------
The Board of Directors of the Bank adopted and the Bank's shareholders approved
at their 1989 annual meeting the Directors' Stock Option Plan (the "Directors'
Plan") to assist the Bank and its subsidiaries in attracting and retaining
directors of exceptional ability. When the Company became the parent thrift
holding company of the Bank on August 23, 1989, the Company succeeded to the
Bank's obligations under the Directors' Plan. A Committee of not less than two
Directors of the Company, none of whom are eligible to receive benefits under
the Directors' Plan, administers the Directors' Plan.
Each non-employee director or member of any advisory board of the Company or
any subsidiary is eligible to receive options under the Directors' Plan. An
aggregate of 108,900 shares of authorized but unissued Haverfield Common Stock
has been reserved for issuance under the Directors' Plan pursuant to the
exercise of stock options. No options have been granted under the Directors'
Plan. The number of shares is subject to adjustment in the event of a stock
split, stock dividend, merger, consolidation or certain other corporate
transactions or changes in capitalization.
All options granted under the Directors' Plan will have an exercise price per
share equal to the fair market value of a share of Haverfield Common Stock on
the date the option is granted. Each option will become exercisable in three
equal annual installments commencing one year after the date it is granted. Any
option granted under the Directors' Plan if not exercised will expire ten years
after the date of grant. All options will be nontransferable other than by will
or the laws of descent and distribution, and during the non-employee director's
lifetime may be exercised by such director. The purchase price for shares of
Haverfield Common Stock acquired pursuant to the exercise of an option shall be
paid in cash or by check. Options will generally terminate (i) one year after
a non-employee director's directorship terminates due to death or disability,
(ii) three months after the non-employee director's directorship terminates if
such termination is for other than death, disability or cause (as defined in
the Directors' Plan), (iii) upon the termination of the director's directorship
for any other reason, except that a director who becomes a director emeritus
immediately following the expiration of his term will not be considered to have
terminated his directorship, or (iv) ten years after date of grant.
Upon a Change in Control (as defined in the Directors' Plan), all outstanding
options under the Directors' Plan will, for a period of 60 days following the
Change in Control, become immediately and fully exercisable and
6
<PAGE> 11
the non-employee director may, during the 60-day period following the Change in
Control, surrender any option (or portion thereof) which was granted more than
six months prior to such surrender for a cash payment in respect of each share
covered by the option or portion thereof surrendered equal to the excess over
the option price of the greater of the highest price at which the Haverfield
Common Stock traded during the 60-day period preceding the date of the Change
in Control or the highest price per share paid in connection with the
transaction constituting or resulting from the Change in Control.
REMUNERATION AND OTHER INFORMATION
COMPENSATION COMMITTEE REPORT
- --------------------------------------------------------------------------------
The report of the Compensation Committee and the stock performance graph shall
not be deemed incorporated by reference by any general statement incorporating
by reference this proxy statement into any filing under the Securities Act of
1933 or the Exchange Act, except as to the extent that the Company specifically
incorporates this information by reference, and shall not otherwise be deemed
filed under such Acts.
The Compensation Committee of the Board is composed entirely of outside
directors and is responsible for developing and making recommendations to the
Board with respect to the Company's executive compensation policies. In
addition, the Compensation Committee, pursuant to authority delegated by the
Board, determines on an annual basis the compensation to be paid to the Chief
Executive Officer. The Compensation Committee has access to national
compensation surveys and regional compensation information on executives in
companies both larger and smaller than the Company. All of these independent
sources are used by the Compensation Committee in reviewing compensation.
The objectives of the Company's executive compensation program are to:
- - Support the achievement of desired Company performance.
- - Provide compensation that will attract and retain superior talent and
reward performance.
- - Align the executive officers' interests with the success of the Company
by making a portion of their compensation dependent upon corporate
performance.
The executive compensation program is comprised of base salary, annual cash
incentive compensation, long-term incentive compensation in the form of stock
options, and various benefits, including medical and ESOP plans generally
available to all employees of the Company. It provides an overall level of
compensation opportunity that is competitive within the banking industry, as
well as with a broader group of companies of comparable size and complexity.
The Company has no defined benefit pension plan. The Compensation Committee
believes that a significant portion of the total compensation program should be
subject to specific annual performance criteria. Consequently, the incentive
bonus portion of the compensation package payable to the Company's executive
officers is a significant portion of their compensation package.
Executive officers are paid a base salary which generally ranks them below
executives in similar positions for corporations of similar size in the banking
industry. In determining salaries, the Compensation Committee also takes into
account individual experience and performance and specific issues particular to
the Company. The Executive Incentive Compensation Plan provides these
individuals direct financial incentive to increase their compensation to much
more competitive levels with others with similar responsibility in other public
companies, but only if favorable financial results are achieved. Individual
performance may also be taken into account in determining incentive awards, but
no incentive compensation is paid unless a predetermined threshold for return
on average assets has been reached. Threshold, target and maximum goals for
Company performance are set at the beginning of each fiscal year.
The Management Option Plan is the Company's long-term incentive plan for the
benefit of executive officers and full-time employees. The objectives of the
program are to align executive and shareholder long-term interests by creating
a strong and direct link between executive pay and shareholder return, and to
enable executives to develop and maintain a significant, long-term stock
ownership in Haverfield Common Stock. Stock options are granted at an option
price equal to the fair market value of Haverfield Common Stock on the
7
<PAGE> 12
date of grant. Awards are made at a level calculated to be competitive within
the banking industry as well as a broader group of companies of comparable size
and complexity.
Mr. Valerian has been President and Chief Executive Officer since 1990. In
January 1995, Mr. Valerian received a base salary increase of 4.0%. Mr.
Valerian's incentive award for fiscal 1995 determined in accordance with the
Executive Incentive Compensation Plan was $69,375. This figure is based on a
detailed formula including return on assets, return on equity, net interest
margin to earning assets, the Company's rate sensitivity position and the
Company's capital position. The above criteria, as well as other indicators of
Haverfield's performance, are used in determining the incentive awards for
other executive officers.
The Compensation Committee believes Mr. Valerian and the executive officers
have managed the Company well in a challenging business climate. The stock
options granted to these individuals during fiscal 1995 are consistent with the
design of the overall program and are shown in the Summary Compensation Table.
Compensation Committee
----------------------
JACQUES C. POMEROY
MICHAEL T. GAUL
MARK R. MAGNOTTO
PERFORMANCE GRAPH
- --------------------------------------------------------------------------------
Set forth below is a line graph comparing the cumulative total shareholder
return on Haverfield's Common Stock for the last five fiscal years with the
cumulative total return on the NASDAQ Market Index and the SIC Code 6035-
Savings Institutions, Federally Chartered Index over the same period (assuming
investment of $100 in Haverfield's Common Stock and each Index on January 1,
1991, and reinvestment of all dividends).
<TABLE>
<CAPTION>
Havrfld Corp Sav Inst Fed NASDAQ Mkt
<S> <C> <C> <C>
1990 100 100 100
1991 108.11 162.55 128.38
1992 156.61 215.29 129.64
1993 220.68 261.82 155.50
1994 199.02 248.00 163.26
1995 211.85 389.12 211.77
</TABLE>
Source: Media General Financial Services
There can be no assurance that the Company's stock performance will continue
into the future with the same or similar trends depicted in the graph above.
The Company will not make nor endorse any predictions as to future stock
performance.
8
<PAGE> 13
REMUNERATION OF EXECUTIVE OFFICERS
- --------------------------------------------------------------------------------
Because the business of the Company currently consists primarily of the
business of the Bank, it is currently the policy of the Company that no
separate cash compensation is paid to the executive officers of the Company,
all of whom are executive officers of the Bank and receive compensation as
such. The following table sets forth all compensation paid or awarded by the
Bank for the three years ended December 31, 1995 to the Chief Executive Officer
and all other executive officers whose aggregate remuneration exceeded
$100,000:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-term Compensation
--------------------------
Annual Compensation Awards Payouts
-------------------------------- ------------- -----------
Other Number All
Annual Restricted of Other
Compen- Stock Options LTIP Compen-
Name of Individuals Year Salary Bonus(1) sation(2) Awards Awarded(3) Payouts sation(4)
- ------------------- ---- ------ -------- -------- --------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William A.Valerian 1995 $168,369 $ 69,375 -- -- 10,000 $ 12,617
President and Chief 1994 $161,899 -- -- -- 2,675 -- $ 15,747
Executive Officer 1993 $154,150 $ 88,100 -- -- 3,300 $ 20,980
(Age 52)
Richard C. Ebner 1995 $ 97,354 $ 30,056 -- -- 5,000 -- $ 5,164
Executive Vice 1994 $ 93,615 -- -- -- 1,784 -- $ 18,130
President, Chief 1993 $ 89,150 $ 55,600 -- -- 2,200 -- $ 39,711
Operating Officer,
Chief Financial
Officer and Treasurer
(Age 45)
Nick J. Nero, Jr 1995 $ 69,820 $ 28,150 -- -- 1,000 -- $ 5,458
Vice President, 1994 $ 68,490 -- -- -- 334 -- $ 6,738
Operations 1993 $ 66,650 $ 32,000 -- -- 550 -- $ 8,926
(Age 52)
- ----------------------------------
<FN>
1. The amounts indicated were awarded under the Executive Incentive
Compensation Plan.
2. Certain executive officers receive other annual compensation in the form of
perquisites, the amount of which does not exceed established reporting
thresholds and which therefore are not included herein.
3. The number of options indicated were awarded under the Management Option
Plan and, for 1994 and 1993, are adjusted for the 10% stock dividend
distributed on October 1, 1995.
4. Includes split dollar life insurance premium and Company ESOP
contributions. Also includes country club initiation dues for Mr. Ebner in
1994 and 1993.
</TABLE>
EXECUTIVE INCENTIVE COMPENSATION PLAN
- --------------------------------------------------------------------------------
In November 1983, the Board of Directors of the Bank adopted a Management
Incentive Compensation Plan (the "Plan"), which was amended in April 1986, based
on beliefs and guiding principles designed to align compensation with business
strategy, Company values and management initiatives. The Plan rewards
executives for long-term strategic management and the enhancement of
shareholder value through delivering appropriate ownership in the Company,
integrates compensation programs with the Company's annual strategic planning
and measurement processes, supports a performance-oriented environment that
rewards performance with respect to Company goals, and attracts and retains key
executives critical to the long-term success of the Company. Eligibility for
participation in the Plan is limited to those senior level executives and
others recommended by the Chief Executive Officer who are responsible for
directing functions which have a significant bearing on the growth and
profitability of the
9
<PAGE> 14
Company and its subsidiaries. The incentive rewards are based on Haverfield's
annual return on assets, as well as other indicators of Haverfield's
performance. The Compensation Committee determines the aggregate amount of such
cash distributions as well as the specific cash distribution to the Chief
Executive Officer. The Chief Executive Officer allocates the remainder of the
approved cash distributions to participants. The Compensation Committee is not
required to award the entire incentive compensation fund and any unawarded
portion will not be carried forward to future years. The Plan can be amended or
terminated by the Board at any time.
HAVERFIELD CORPORATION EMPLOYEE STOCK OWNERSHIP PLAN
- --------------------------------------------------------------------------------
The Company's ESOP, which incorporates both discretionary employer
contributions and a 401(k) employee salary reduction feature, was approved by
the shareholders of the Company at the 1991 Annual Meeting. The Company's
matching contribution equals fifty percent (50%) of the employee's deferred
compensation. The ESOP covers employees who have attained age 21 and have
completed one year of service with Haverfield, the Bank or Home Financial,
Inc. The ESOP is funded primarily by employer contributions. The assets of the
ESOP are invested primarily in shares of Haverfield Common Stock. A
Registration Statement with respect to 363,000 shares of Haverfield Common
Stock was filed with the SEC in connection with Haverfield Common Stock held by
the ESOP which may be issued to participants.
Haverfield or its subsidiaries may, in any plan year, make discretionary
contributions in either shares of Haverfield Common Stock or cash. During the
year ended December 31, 1995, Haverfield and its subsidiaries made cash
contributions, including the Company's matching contribution, in the amount of
$27,954 to the ESOP. From time to time, the ESOP may purchase additional shares
of Haverfield Common Stock for the benefit of plan participants through
purchases of outstanding shares in the market or upon the sale of treasury
shares by Haverfield. Such purchases, if made, may be funded through borrowings
by the ESOP or further contributions from Haverfield or its subsidiaries. The
timing and amount of future purchases, contributions and borrowings will be
affected by various factors, including the requirements of the Office of Thrift
Supervision and other regulations as to ESOP purchases, requirements of the
Employee Retirement Income Security Act of 1974, as amended, the Code, market
conditions and the earnings and financial condition of Haverfield. During 1995,
a total of 11,078 shares of Haverfield Common Stock were purchased by the ESOP.
Discretionary contributions to the ESOP and shares of Haverfield's Common Stock
are allocated among the participants in proportion to their compensation. All
participants must be employed on the last day of the plan year to be entitled to
share in an allocation with respect to such plan year. Forfeitures are
reallocated among remaining participants in the same manner as contributions. A
participant who has attained the age of 55 and completed ten years of
participation in the ESOP may direct that a percentage of the value of his or
her account balance be distributed in cash. The contributions to be made by
Haverfield and its subsidiaries to the ESOP are not fixed, so benefits payable
under the ESOP cannot be accurately estimated. Participants in the ESOP are
always 100% vested in that part of their account attributable to the
compensation they have deferred through the 401(k) feature of the ESOP.
Participants are not vested in the employer contribution portion of their
accounts until after five years of service, at which time they are 100% vested.
Participants also become fully vested at age 65 or upon their death or
disability. Vested benefits are payable upon the participant's death or other
termination of employment and are generally to be paid in shares of Haverfield
Common Stock.
A Committee appointed by the Board of Haverfield administers the ESOP, and Mr.
Harry F. Brockman, acts as trustee. Under the ESOP, participants may direct
the voting of all shares of Haverfield Common Stock allocated to their
accounts. Unallocated shares are voted according to the instructions of the
Committee. In addition, the ESOP provides that the trustee will respond to a
tender or exchange offer with regard to allocated shares of Haverfield Common
Stock in accordance with the instructions of the participants to whom such
shares have been allocated and shall respond with regard to unallocated shares
in the same proportion as the trustee responds with regard to allocated shares
for which instructions were received. As of December 31, 1995, a total of 138
officers and employees were participants in the ESOP.
The Board may amend or revise the ESOP, except that no such amendment shall be
effective if it: authorizes or permits any part of the assets held in the ESOP
(other than such part as is required to pay taxes and administration expenses)
to be used for or diverted to any purpose other than for the exclusive benefit
of the participants or their beneficiaries or estates; causes any reduction in
the amount credited to the account of any
10
<PAGE> 15
participant; or causes or permits any portion of the assets of the ESOP to
revert to or become property of the Company.
MANAGEMENT STOCK OPTION PLAN
- -------------------------------------------------------------------------------
As a performance incentive and to encourage ownership of Haverfield Common
Stock, the Board adopted the Management Option Plan for the benefit of
executive officers and other employees of the Company and its subsidiaries
whether or not directors of Haverfield or its subsidiaries. Directors who are
not executive officers are not eligible to participate in the Management Option
Plan. The Board, the Compensation Committee and management believe that
significant stock ownership is a major incentive in building shareholders'
wealth and aligning the interests of employees and shareholders. To encourage
growth in shareholder value and focus attention on managing the Company as an
owner with an equity position in the business, senior executives who are in a
position to make a substantial contribution to the long-term success of the
Company should have a significant stake in its on-going success. The 1985
Option Plan, which was approved by the shareholders at their 1985 annual
meeting, terminated on July 23, 1995; however, 67,034 stock options remain
outstanding. No options have been repriced or otherwise adjusted or amended in
the past 10-year period.
The 1995 Stock Option Plan was approved by the shareholders at their 1995
annual meeting. The maximum number of shares reserved for purchase pursuant to
the exercise of options granted under the 1995 Stock Option Plan is 165,000
shares, subject to modification or adjustment to reflect changes in
Haverfield's capitalization as, for example, in the case of a merger,
reorganization or stock split. Authorized but unissued shares or shares
previously issued and reacquired by the Company may be used to satisfy an
exercise of an option under the Management Option Plan, resulting in an
increase in the number of shares outstanding, which will have a dilutive effect
on the holdings of existing shareholders.
The Management Option Plan is administered by the Compensation Committee of the
Board, all of whom are non-employee members of the Board, and all of whom are
"disinterested directors", as such term is defined under Rule 16b-3 of the
Exchange Act. The Compensation Committee is given absolute discretion under the
Management Option Plan to select the persons to whom rights will be granted and
to determine the number of rights to be granted to each. Grants of options
under the Management Option Plan are designed to be either incentive stock
options under Section 422A of the Internal Revenue Code of 1986, as amended
(the "Code"), or non-statutory stock options.
Under the 1995 Stock Option Plan, non-statutory stock options may be granted at
a purchase price which shall not be less than 65% of the fair market value of
Haverfield Common Stock on the date of grant. Incentive stock options may be
granted at a purchase price which shall not be less than 100% of the fair
market price on the date of grant, provided that grantee does not possess more
than 10% of the total combined voting power of the Company (as determined
pursuant to Section 424(d) of the Code). If the grantee does possess more than
10% of the total combined voting power of all classes of Haverfield Common
Stock, the purchase price per share of Haverfield Common Stock deliverable upon
the exercise of each incentive stock Option shall not be less than 110% of the
fair market value of Haverfield Common Stock on the date of grant.
The terms of both non-statutory stock options and incentives stock options
shall be determined by the Compensation Committee; however, no grant will be
exercisable, in whole or in part, more than 10 years from the date of grant. If
at the time an incentive stock option is granted to an employee who is deemed
to beneficially own more than 10% of the total combined voting power of the
Company as defined under Section 424(d) of the Code, then the term of such grant
shall not exceed 5 years from the date of grant. However, in the event of a
change in control of the Company, all non-statutory and incentive stock options
shall become immediately exercisable. Unless otherwise determined by the
Compensation Committee at the time of grant, termination of a participant's
employment for any reason other than disability, change of control, or death,
will result in both non-statutory and incentive stock to expire upon
termination. Unless otherwise determined by the Compensation Committee at the
time of grant, in the event of death or disability of any participant, all
non-statutory options held by the participant, whether or not exercisable at
the time, shall be exercisable by the participant or his legal representative
or beneficiary for one year or such longer period as determined by the
Compensation Committee following the date of such event, provided that in no
event shall the period extend beyond the expiration of the non-statutory stock
option term. In the event of a participant's death or disability,
11
<PAGE> 16
all incentive stock options held by the participant, whether or not exercisable
at such time, shall be exercisable by the participant or the participant's
legal representative or beneficiary for one year following the date of the
participant's death or cessation of employment due to disability. Upon
termination of the participant's employment due to a change in control, all
incentive stock options held by such participant, whether or not exercisable at
such time, shall be exercisable for a period of one year following the date of
such participant's cessation of employment but in no event, shall the
exercisable period extend beyond the expiration of the incentive stock option
term.
The following table presents individual grants of options that were made under
the 1995 Stock Option Plan during fiscal 1995 to each of the named executives
in the Summary Compensation Table. This table is intended to allow shareholders
to ascertain the relationship between the number and size of option grants made
during fiscal 1995, the exercise price and the market price on the date of
grant, and the expiration date of the grants.
OPTION GRANTS IN THE LAST FISCAL YEAR (1)
<TABLE>
<CAPTION>
Individual Grants Potential
--------------------------------------------------------- Realizable
Value at
Percent Assumed
of Total Annual Rates
Options of Stock Price
Number Granted to Exercise Appreciation
Date of Employees or Base for Option Term
of Options In Price Expiration ----------------
Name Grant Granted(2) Fiscal Year Per Share Date 5% 10%
- ---- -------- ---------- ---------- --------- ---------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
William A. Valerian 12/21/95 10,000 52.63% $13.875 12/21/05 $ 87,289 $221,132
Richard C. Ebner 12/21/95 5,000 26.32% $13.875 12/21/05 $ 43,630 $110,566
Nick J. Nero, Jr. 12/21/95 1,000 5.26% $13.875 12/21/05 $ 8,726 $ 22,113
- -----------------------
<FN>
1. The 1995 Stock Option Plan is administered by the Compensation Committee of
the Board which has the authority to determine the individuals to whom and
the terms at which option grants shall be made, certain terms of the
options, and the number of shares to be subject to each option. The
exercise or base price per share is the fair market value of Haverfield
Common Stock on the date of the grant, and the term of the option is 10
years.
2. All grants in 1995 were incentive stock options.
</TABLE>
The following tabulation shows, as to all persons named in the Summary
Compensation Table, the following information with respect to the exercise of
stock options during fiscal 1995 by each of the named executive officers and
the fiscal year-end value of unexercised options.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
Number of
Shares Number of Value of Unexercised
Acquired Value Unexercised Options at In-the-Money Options at
Name on Exercise Realized December 31, 1995(1) December 31, 1995(2)
- ---- ----------- -------- ---------------------- -----------------------
<S> <C> <C> <C> <C>
William A. Valerian None None 45,862 $181,000
Richard C. Ebner None None 28,344 $115,485
Nick J. Nero, Jr. None None 3,699 $ 9,753
- -----------------
<FN>
1. All unexercised options were incentive stock options that were exercisable.
2. Based on December 31, 1995 closing stock price of $13.50 per share minus
the exercise or base price.
</TABLE>
12
<PAGE> 17
CERTAIN TRANSACTIONS
- -------------------------------------------------------------------------------
The Bank offers to its directors, officers and employees first mortgage loans
for the financing of their primary residences, a line of credit ("LOC") secured
by the borrower's primary residence and both secured and unsecured MasterCard
loans. Directors, officers and employees execute a note at the rate then being
offered by the Bank to the general public. The actual payment rate for
adjustable loans, however, is adjusted annually based on a designated index for
so long as the director, officer or employee continues employment or service
with the Bank and, in the case of directors and executive officers, does not
modify the existing note. Loans outstanding made since August 9, 1989 to
directors and executive officers no longer have any preferential terms and bear
the same rate of interest as comparable transactions with nonaffiliated
persons. It is the belief of management that these loans neither involve
more than normal risk of collectibility nor present other unfavorable features.
All loans to directors and executive officers were current as of December 31,
1995.
The table below sets forth certain information with respect to directors and
executive officers whose loans from the Bank exceeded an aggregate of $60,000
during the year ended December 31, 1995.
<TABLE>
<CAPTION>
Highest Principal
Balance During Principal
Nature of Year Payment Note The Year Ended Balance as of
Name Indebtedness(1) Made Rate(2) Rate(3) December 31, 1995 December 31,1995
- ---- --------------- ---- ------- ------- ----------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Richard C. Ebner Mortgage 1985 7.04% 7.75% $ 53,897 $ 47,453
Equity LOC 1985 6.61 8.61 70,163 70,163
MasterCard 1985 6.61 8.61 1,785 221
Michael T. Gaul Mortgage 1992 7.25 7.25 279,841 266,387
Mortgage 1993 8.38 8.38 52,475 51,974
Equity LOC 1993 11.00 11.00 56,321 --
Equity LOC 1995 8.00 8.00 58,562 6,718
Mark R. Magnotto Mortgage 1987 7.04 8.25 160,872 157,273
Mortgage 1995 7.00 7.00 175,000 175,000
Mortgage 1995 6.63 6.63 228,000 227,393
Equity LOC 1993 10.25 10.25 92,653 92,589
Equity LOC 1995 9.00 9.00 76,638 --
Equity LOC 1995 8.75 8.75 150,000 27,752
MasterCard 1987 12.99 12.99 625 548
Unsecured 1991 17.96 17.96 82 --
Nick J. Nero, Jr. Mortgage 1995 7.00 7.00 145,000 144,399
MasterCard 1983 13.56 13.56 4,148 3,948
Jacques C. Pomeroy Mortgage 1993 8.25 8.25 298,998 296,142
MasterCard 1993 12.99 12.99 10,724 10,424
Peter E. Shimrak Mortgage 1986 6.67 8.50 200,299 196,032
Equity LOC 1987 6.67 8.67 100,000 87,760
Savings 1986 4.91 6.91 16,000 16,000
Savings 1986 6.00 8.00 54,535 54,535
MasterCard 1987 6.67 8.67 5,399 5,032
John D. Simacek Mortgage 1984 5.96 8.50 52,700 50,530
Equity LOC 1986 9.00 9.00 10,000 9,326
MasterCard 1986 9.00 9.00 2,943 658
Edward R. Turza Mortgage 1991 6.50 6.50 61,873 --
Mortgage 1995 8.00 8.00 95,000 93,325
Equity LOC 1992 11.25 11.25 6,397 --
Equity LOC 1987 9.75 9.75 26,317 14,028
Equity LOC 1995 10.00 10.00 103 --
MasterCard 1987 9.75 9.75 4,967 --
MasterCard 1991 8.00 8.00 961 772
Savings 1986 3.48 5.48 3,400 3,400
</TABLE>
13
<PAGE> 18
<TABLE>
<CAPTION>
Highest Principal
Balance During Principal
Nature of Year Payment Note The Year Ended Balance as of
Name Indebtedness(1) Made Rate(2) Rate(3) December 31, 1995 December 31,1995
- ---- --------------- ---- ------- ------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
William A. Valerian Mortgage 1991 6.50 6.50 205,000 203,112
Equity LOC 1985 6.61 8.61 129,102 88,639
MasterCard 1985 6.61 8.61 5,736 5,736
Unsecured 1987 17.96 17.96 689 620
- -------------------
<FN>
1. All mortgage loans are secured by first liens on primary residences. Both
the equity LOC and MasterCard loans are secured.
2. Payment rate on adjustable first mortgage loans, equity LOC and MasterCard
loans adjust annually based on a designated index.
3. The note rate represents that rate which would be offered to the general
public.
</TABLE>
During the year ended December 31, 1995, certain family members of some of the
directors and executive officers listed above had loans outstanding from the
Bank. These loans aggregated less than $8,000 and were made in the ordinary
course of business on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions
with other persons and did not involve more than the normal risk of
collectibility or present other unfavorable features.
CONSULTING AGREEMENT
- -------------------------------------------------------------------------------
Peter E. Shimrak, Chairman of the Board, and the Bank entered into a Consulting
Agreement (the "Consulting Agreement") effective August 1, 1995, which, in
addition to the $1,250 per month which Mr. Shimrak receives as Chairman of the
Board, provides that he shall receive an hourly charge for his consulting
services in the amount of $50 per hour. The maximum hours to be actually billed
to the Bank on a monthly basis may not exceed twenty (20) hours. In addition,
Mr. Shimrak is also entitled to receive certain commission based compensation
for business activities conducted on behalf of the Bank. The term of the
Consulting Agreement is one year. During 1995, Mr. Shimrak was paid $6,826
under the Consulting Agreement.
1997 SHAREHOLDERS' PROPOSALS
Any shareholder proposal intended for inclusion in the proxy statement and form
of proxy related to Haverfield's annual meeting of shareholders expected to be
held on or about April 23, 1997 must be received by the Company by November 20,
1996 pursuant to the proxy solicitation regulations of the SEC. Any such
proposals shall be subject to the requirements of the proxy rules adopted under
the Exchange Act. It is urged that any such proposals be sent by certified
mail, return receipt requested.
By Order of the Board of Directors,
/s/ Nancy M. Czupik
Nancy M. Czupik
Corporate Counsel and Secretary
Cleveland, Ohio
March 18,1996
14
<PAGE> 19
APPENDIX A
Haverfield Corporation and Subsidiaries
Index to Financial Information
<TABLE>
<CAPTION>
Page
- -------------------------------------------------------
<S> <C>
Market and Dividend Information A-1
Form 10-K Copies Available A-1
Consolidated Financial Highlights A-2
Management's Discussion and Analysis A-3
Report of Management A-18
Report of Independent Auditors A-19
Consolidated Statements of Financial Condition A-20
Consolidated Statements of Income A-21
Consolidated Statements of Cash Flows A-22
Consolidated Statements of Shareholders' Equity A-23
Notes to Consolidated Financial Statements A-24
</TABLE>
MARKET AND DIVIDEND INFORMATION
Haverfield Common Stock trades on the Nasdaq National Market tier of The Nasdaq
Stock Market under the symbol HVFD. At December 31, 1995, the number of
shareholders of record was 434. A summary of the trading ranges and cash
dividends paid on Haverfield Common Stock during each quarter of 1995 and 1994
is presented below. The amounts shown for the first two quarters of 1995 and
all four quarters of 1994 have been restated to reflect a 10% stock dividend
distributed on October 1, 1995.
<TABLE>
<CAPTION>
1995 1994
----------------------------------------------- -------------------------------------------------
Sales Price Cash Dividends Sales Price Cash Dividends
High Low Paid High Low Paid
<S> <C> <C> <C> <C> <C> <C>
First Quarter $14.32 $12.95 $.127 $19.09 $14.77 $.127
Second Quarter $13.64 $11.82 $.127 $16.82 $15.00 $.127
Third Quarter $14.75 $12.27 $.127 $16.82 $14.77 $.127
Fourth Quarter $14.75 $13.50 $.135 $16.14 $13.18 $.127
</TABLE>
Information describing the Haverfield Corporation Dividend Investment Service
can be obtained from: Richard C. Ebner, Treasurer, Haverfield Corporation,
Terminal Tower, 50 Public Square, Suite 444, Cleveland, Ohio 44113-2203.
FORM 10-K COPIES AVAILABLE
UPON RECEIPT OF A WRITIEN REQUEST TO RICHARD C. EBNER, TREASURER, HAVERFIELD
CORPORATION, TERMINAL TOWER, 50 PUBLIC SQUARE, SUITE 444, CLEVELAND, OHIO
44113-2203, HAVERFIELD WILL FURNISH TO ANY SHAREHOLDER WITHOUT CHARGE A COPY
OF THE ANNUAL REPORT ON FORM 10-K, WITHOUT EXHIBITS UNLESS SPECIFICALLY RE-
QUESTED, FOR THE YEAR ENDED DECEMBER 31, 1995.
A-1
<PAGE> 20
<TABLE>
CONSOLIDATED FINANCIAL HIGHLIGHTS
(Dollars in thousands, except per share data)
=====================================================================================================
<CAPTION>
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
AT DECEMBER 31:
Total assets $ 354,505 $ 316,768 $ 310,410 $ 317,640 $ 287,555
Net loans 283,560 279,680 248,005 236,319 213,654
Mortgage-backed securities 2,754 3,101 5,961 13,138 18,399
Cash and investments 59,327 24,997 33,783 50,099 33,616
Deposits 317,779 279,269 268,012 284,163 251,638
Borrowed money -- 2,000 6,348 2,000 5,700
Shareholders' equity 28,058 26,868 22,510 18,761 17,292
Amount of loans serviced for others 139,498 161,968 177,763 183,592 187,221
Number of offices 10 11 10 10 9
YEAR ENDED DECEMBER 31:
Interest income $ 26,505 $ 21,784 $ 22,964 $ 25,156 $ 27,883
Interest expense 15,195 11,057 11,150 13,988 18,253
Provision for loan losses 123 97 897 750 1,351
Noninterest income 2,204 2,160 3,735 2,799 2,610
Noninterest expense 10,376 10,421 11,321 9,928 8,411
Provision for income taxes 1,020 669 1,138 1,318 878
Extraordinary item, net of tax -- -- -- (67) --
Net income 1,995 1,700 2,193 1,904 1,600
PER SHARE DATA(1):
Net income:
Primary $ 1.06 $ 1.03 $ 1.45 $ 1.35 $ 1.13
Fully-diluted 1.06 .96 1.33 1.35 1.13
Shareholders' equity 14.90 14.25 14.15 13.23 12.18
Tangible shareholders' equity 14.82 13.73 13.11 11.43 10.76
Cash dividends declared and paid .52 .51 .48 .44 .40
Dividend payout ratio 49.06% 49.56% 33.30% 32.02% 35.07%
SELECTED RATIOS:
Return on average assets .58% .55% .73% .65% .55%
Return on average equity 7.13% 6.96% 10.32% 10.25% 9.14%
Average equity to average assets 8.17% 7.83% 7.09% 6.30% 6.03%
Weighted-average yield on interest-
earning assets 7.92% 7.18% 7.91% 8.77% 9.93%
Weighted-average cost of interest-
bearing liabilities 4.93% 3.92% 4.10% 5.17% 6.84%
Interest rate spread 2.99% 3.26% 3.81% 3.60% 3.09%
Net interest margin 3.38% 3.54% 4.07% 3.90% 3.43%
Shareholders' equity to total assets 7.91% 8.48% 7.25% 5.91% 6.01%
- ---------------------
<FN>
(1) Prior year amounts have been restated to reflect a 10% stock dividend
distributed on October 1, 1995.
</TABLE>
A-2
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis is intended to assist readers in
understanding the results of operations and changes in financial position for
the past three years. It should be read in conjunction with the audited
financial statements, accompanying footnotes and supplemental financial data
presented elsewhere in this Appendix A to the Proxy Statement.
On August 23, 1995, the Board of Directors of Haverfield Corporation
("Haverfield" or 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. Per share data has been computed giving
retroactive effect to the stock dividend.
GENERAL OVERVIEW
- -------------------------------------------------------------------------------
The Company is a unitary savings and loan holding company owning all the
outstanding common stock of Home Bank, F.S.B. Effective February 23, 1995, the
Company changed the name of its banking subsidiary from Home Federal Savings
Bank, Northern Ohio to Home Bank, F.S.B. ("Banking subsidiary" or the "Bank").
The financial statements and statistical data presented herein are the
financial statements and data for the Company on a consolidated basis.
The operations of the Company and its Banking subsidiary are significantly
influenced by general economic conditions, monetary and fiscal policies of the
federal government, and policies of regulatory authorities, including the
Federal Reserve Board, the Securities and Exchange Commission, the Office of
Thrift Supervision (the "OTS"), the Federal Deposit Insurance Corporation (the
"FDIC") and the Office of the Comptroller of Currency (the "OCC"). Deposit
flows and cost of funds are influenced by interest rates on competing
investments and general market rates of interest. Lending activities are
affected by the demand for mortgage financing and for consumer and other types
of loans, which in turn are affected by the interest rates at which such
financing may be offered and other factors affecting the supply of housing and
the availability of funds.
The Company's net income in 1995 increased 17.4% over 1994. The Company's net
income for the year ended December 31, 1995 was $1,995,000 or $1.06 per share,
compared with $1,700,000 or $1.03 per share for the year ended December 31,
1994. The increase in 1995 compared to 1994 was due to the improvement in net
interest income, which increased from $10,727,000 in 1994 to $11,310,000 in
1995 primarily due to the effects of increases in volume, partially offset by
lower net interest margin.
The Company's net income for the year ended December 31, 1994 was $1,700,000 or
$1.03 per share, compared with $2,193,000 or $1.45 per share for the year ended
December 31, 1993. The decrease in 1994 compared to 1993 was due to the decline
in net interest income of $1.1 million primarily due to the effects of a general
increase in interest rates during 1994, and a decrease of $1.6 million in
noninterest income, primarily in gains on sales of loans, offset by a decrease
of $800,000 in the provision for loan losses, based on management's assessment
of the adequacy of the allowance for loan losses, and a 7.9% decrease in
noninterest expense.
NET INTEREST INCOME
- -------------------------------------------------------------------------------
Net interest income, the primary component of the Company's earnings, is
influenced by the distribution and volume of the assets and liabilities, and
the difference ("spread") between the yields earned and the rates paid on those
assets and liabilities.
For 1995, net interest income totaled $11.3 million compared to $10.7 million
in 1994. The general level of interest rates increased during 1995, causing
interest-bearing liabilities, particularly deposits, to reprice more quickly
than interest-earning assets, resulting in a decrease of 27 basis points in the
interest rate spread. The decline in the interest rate spread was offset by
increased volume of the assets and liabilities which contributed $887,000 to
the increase in net interest income.
For 1994, net interest income was $10.7 million, compared to $11.8 million in
1993. The decrease in 1994 resulted from a substantial decrease in the yield on
interest-earning assets, which declined 73 basis points, while the cost of
interest-bearing liabilities decreased only 18 basis points. The significant
declines in the yields on loans (the primary
A-3
<PAGE> 22
interest-earning asset) in 1994 were a consequence of the declining interest
rate environment prevalent throughout much of 1993. During 1993, a large number
of loans (with higher interest rates) were repaid and refinanced (at lower
rates) either with the Bank or elsewhere. In addition, new loan originations
were also at substantially lower rates. In 1994, new loan originations declined
significantly as interest rates began to rise in the first quarter. Mainly as a
result of the decline in the yield on loans, the interest rate spread declined
55 basis points in 1994.
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 rate earned or paid for that category. Average
balances are determined on a daily basis.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------------------------
1995 1994 1993
--------------------------------- ---------------------------- ------------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- ------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (1) $284,385 $ 23,313 8.20% $273,927 $20,472 7.47% $255,661 $ 21,488 8.40%
Mortgage-backed
securities 2,991 240 8.02 4,031 301 7.47 9,071 653 7.20
Investment securities
and other 47,301 2,952 6.24 25,395 1,011 3.98 25,759 823 3.19
-------- -------- ---- -------- ------- ---- -------- -------- ----
Total interest-earning assets 334,677 26,505 7.92 303,353 21,784 7.18 290,491 22,964 7.91
-------- ---- ------- ---- -------- ----
Noninterest-earning assets 7,870 8,577 9,141
-------- -------- --------
Total assets $342,547 $311,930 $299,632
======== ======== ========
Interest-bearing liabilities:
Deposits
Passbook/statement
accounts $ 50,308 1,241 2.47% $ 61,460 1,524 2.48% $ 62,285 1,745 2.80%
NOW accounts 24,699 245 .99 26,481 285 1.08 26,731 333 1.24
Money market fund
accounts 41,762 2,138 5.12 38,697 1,404 3.63 40,267 1,312 3.27
Certificates of deposit 191,049 11,514 6.03 149,693 7,401 4.94 137,923 7,358 5.34
-------- -------- ---- -------- ------- ---- -------- -------- ----
Total deposits 307,818 15,138 4.92 276,331 10,614 3.84 267,206 10,748 4.02
FHLB advances 575 57 9.91 2,148 213 9.92 2,000 206 10.30
Long-term borrowings -- -- -- 3,323 230 6.92 2,837 196 6.91
-------- -------- ---- -------- ------- ---- -------- -------- ----
Total interest-bearing
liabilities 308,393 15,195 4.93 281,802 11,057 3.92 272,043 11,150 4.10
-------- ---- ------- ---- -------- ----
Noninterest-bearing
liabilities 6,174 5,700 6,331
-------- -------- --------
Total liabilities 314,567 287,502 278,374
Shareholders' equity 27,980 24,428 21,258
-------- -------- --------
Total liabilities and
shareholders' equity $342,547 $311,930 $299,632
======== ======== ========
Net interest income/interest
rate spread $ 11,310 2.99% $10,727 3.26% $ 11,814 3.81%
======== ==== ======= ==== ======== ====
Net interest margin 3.38% 3.54% 4.07%
==== ==== ====
<FN>
- --------------------
(1) The average balance of loans includes the principal balance of nonaccrual
loans. Interest income includes amortization of deferred loan fees of
$167,000, $188,000 and $320,000 in 1995, 1994, and 1993, respectively.
</TABLE>
A-4
<PAGE> 23
The effect on net interest income due to changes in interest rates and changes
in the amounts of interest-earning assets and interest-bearing liabilities 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> Change Due To
Total -----------------
Change Volume Rate
------ ------ ----
(In thousands)
<S> <C> <C> <C>
1995 CHANGE FROM 1994
Interest income:
Loans $ 2,841 $ 720 $ 2,121
Mortgage-backed securities (61) (82) 21
Investment securities and other 1,941 1,171 770
------- ------- -------
Total 4,721 1,809 2,912
------- ------- -------
Interest expense:
Deposits 4,524 1,308 3,216
FHLB advances (156) (156) --
Long-term borrowings (230) (230) --
------- ------- -------
Total 4,138 922 3,216
------- ------- -------
Change in net interest income $ 583 $ 887 $ (304)
======= ======= =======
1994 CHANGE FROM 1993
Interest income:
Loans $(1,016) $ 1,469 $(2,485)
Mortgage-backed securities (352) (375) 23
Investment securities and other 188 (12) 200
------- ------- -------
Total (1,180) 1,082 (2,262)
------- ------- -------
Interest expense:
Deposits (134) 360 (494)
FHLB advances 7 15 (8)
Long-term borrowings 34 34 --
------- ------- -------
Total (93) 409 (502)
------- ------- -------
Change in net interest income $(1,087) $ 673 $(1,760)
======= ======= =======
</TABLE>
ASSET/LIABILITY MANAGEMENT
- --------------------------------------------------------------------------------
As with most financial institutions, the Company's interest income and cost of
funds are significantly affected by general economic conditions and by policies
of regulatory authorities. 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
less-than-one-year period is monitored closely because it is in this time
frame that the greatest exposure to sudden rate movements occurs. The
Company's objective with regard to asset/liability management is to attempt to
minimize the impact of interest rate risk in the ensuing one-year time frame.
The Board of Directors establishes policies and objectives with regard to
asset/liability management while senior management oversees the implementation
of such policies. The Pricing Committee of the Bank meets weekly to review and
establish rates on loan and deposit products, as well as to establish
strategies to monitor the flow of funds and coordinate the sources, uses and
pricing of those funds. The Company does not use derivative financial
instruments in its asset/liability strategy.
Interest rate sensitivity arises from differences between the dollar amounts of
assets and liabilities which mature or reprice within a time period. These
differences, or "gaps", provide an indication of the extent to which net
interest income is affected by interest rate movements in future periods. Net
interest income is also affected by changes in the slope of the yield curve and
by the price sensitivity of assets and liabilities which may have different
effects on profit volatility - factors which cannot be quantified from gap data
alone. For example, a decline in short-term market rates may not result in
corresponding declines in the rates paid on consumer deposits. Interest rate
sensitivity gap data does not provide an absolute measure of net interest
income vulnerability; however, it is useful for identifying trends of changing
interest rate sensitivity over time within an institution, and for providing
comparisons between institutions.
A-5
<PAGE> 24
Although the interest rate sensitivity gap is subject to a number of
assumptions and is only one of a number of measurements, management believes
the measure is an important indication of the Company's exposure to interest
rate risk and the related volatility of net interest income in a changing
interest rate environment. However, even a perfect interest rate sensitivity gap
of 0% (i.e., where the repricing of interest-earning assets and
interest-bearing liabilities is perfectly matched) does not assure a stable net
interest margin in a period of changing interest rates. Depending on which
indices are affected and when the interest-earning assets and interest-bearing
liabilities reprice, the change in interest rates may have a favorable or
unfavorable impact on net interest income.
The following table sets forth at December 31, 1995 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
----------------------------------------------------------------------
6 Months 6 Months 1 Year 3 Years More
or to to to than
Less 1 Year 3 Years 5 Years 5 Years Total
--------- -------- ------- --------- ------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Real estate loans:
Conventional:
Fixed-rate $ 841 $ 2,549 $ 7,510 $ 8,454 $ 41,676 $ 61,030
Adjustable-rate 39,208 94,865 39,516 3,562 -- 177,151
Construction 1,120 496 -- -- -- 1,616
Land loans 2,498 1,963 -- -- -- 4,461
Consumer loans 28,854 10,179 566 69 387 40,055
Business loans 3,136 1,603 -- 19 -- 4,758
Loans in process,
allowance for loan losses
and net deferred loan fees -- -- -- -- (5,511) (5,511)
--------- --------- --------- --------- --------- ---------
Total loans (1) 75,657 111,655 47,592 12,104 36,552 283,560
Mortgage-backed
securities 352 91 243 243 1,825 2,754
Investment securities and other 7,466 1,017 4,529 36,055 2,613 51,680
--------- --------- --------- --------- --------- ---------
Total interest-earning assets $ 83,475 $ 112,763 $52,364 $48,402 $40,990 $ 337,994
========= ========= ========= ========= ========= =========
INTEREST-BEARING LIABILITIES:
Deposits:
Passbook and NOW
accounts(2) $ -- $ -- $ -- $ -- $ 59,368 $ 59,368
Money market fund
accounts 53,876 -- -- -- -- 53,876
Certificates of deposit 49,915 62,949 59,883 14,497 6,219 193,463
--------- --------- --------- --------- --------- ---------
Total deposits 103,791 62,949 59,883 14,497 65,587 306,707
--------- --------- --------- --------- --------- ---------
Total interest-bearing
liabilities $ 103,791 $ 62,949 $ 59,883 $ 14,497 $ 65,587 $ 306,707
========= ========= ========= ========= ========= =========
GAP $ (20,316) $ 49,814 $ (7,519) $ 33,905 $ (24,597) $ 31,287
Cumulative GAP $ (20,316) $ 29,498 $ 21,979 $ 55,884 $ 31,287
- ----------------------------------
<FN>
(1) Contractual maturities of loans do not reflect the actual term of the
Company's loan portfolio. The average life of mortgage 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>
A-6
<PAGE> 25
The Company is positively mismatched on a one-year basis at December 31, 1995,
because more assets than liabilities are expected to mature or reprice in the
next twelve months. A positive mismatch implies that an increase in interest
rate levels may have a positive impact on the Company's results of operations,
while a decrease in interest rate levels may have the opposite effect. The
Company will continue to actively manage its interest rate sensitivity position
to maintain a reasonable balance between earnings and exposure to interest rate
fluctuations.
The Bank's interest rate sensitivity is also monitored by management through
selected interest rate risk measures produced by the OTS. Using data from the
Bank's quarterly Thrift Financial Report, the Bank receives a report from the
OTS which measures the Bank's interest rate risk by modeling the change in Net
Portfolio Value ("NPV") over a variety of interest rate scenarios. NPV is the
present value of expected cash flows from assets, liabilities and off-balance
sheet contracts. A NPV ratio, in any interest rate scenerio, is defined as the
NPV in that rate scenario divided by the market value of assets in the same
scenario. Under OTS regulations, an institution's "normal" level of interest
rate risk in the event of an assumed change in interest rates is a decrease in
the institution's NPV in an amount not exceeding 2% of the present value of its
assets. Thrift institutions with greater than "normal" interest rate exposure
must take a deduction from their total capital available to meet their
risk-based capital requirement. The amount of that deduction from total capital
is one-half of the difference between (a) the institution's actual calculated
exposure to a 200 basis point interest rate increase or decrease (whichever
results in the greater pro forma decrease in NPV) and (b) its "normal" level
of exposure, which is 2% of the present value of its assets. For the present
time, the OTS has deferred implementation of the interest rate risk component.
As of December 31, 1995, the Bank's exposure to a 200 basis point interest
rate increase (which would result in the greater pro forma decrease in NPV) was
1.60% of the present value of its assets. On this basis, the Bank believes that
its interest rate risk was consistent with the amount treated as "normal" under
the OTS regulations.
The table below shows the increase and decrease of NPV under different interest
rate scenarios at December 31, 1995:
<TABLE>
<CAPTION>
Net Portfolio Value
- -----------------------------------------------------------------------------------------------------------------------
Estimated NPV Change in NPV
Change in as a Percentage as a Percentage
Interest Rates Present Value of Present Value of Present
(basis points) Estimated NPV Estimates of Assets Estimates of Assets Amount of Change Value of Assets
- -------------- ------------- ------------------- ------------------- ---------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
+400 $19,577 $343,119 5.71% $(15,216) (4.14)%
+300 24,410 350,080 6.97% (10,383) (2.83)%
+200 28,897 356,765 8.10% (5,896) (1.60)%
+100 32,530 362,678 8.97% (2,263) (.62)%
-- 34,793 367,318 9.47%
-100 36,414 371,425 9.80% 1,621 .44%
-200 38,322 375,944 10.19% 3,529 .96%
-300 40,966 381,307 10.74% 6,173 1.68%
-400 44,521 387,670 11.48% 9,728 2.65%
</TABLE>
PROVISION FOR LOAN LOSSES
- ------------------------------------------------------------------------------
The provision for loan losses represents a charge against current earnings in
order to maintain the allowance for loan losses at a level believed adequate by
management to absorb potential losses in the loan portfolio. Management's
determination of the adequacy of the allowance is based upon an ongoing review
and analysis of the risk characteristics of the loan portfolio, historical
charge-offs and recoveries, current economic conditions, volume, growth and
composition of the loan portfolio, and other relevant factors. In 1995, based
on management's assessment of the adequacy of the allowance, the provision for
loan losses was $123,000, compared to $97,000 in 1994 and $897,000 in 1993. A
significant portion of the provision in 1995, 1994 and 1993 was for the purpose
of maintaining, or for the year 1993, increasing the general loan loss reserve,
which covers potential losses inherent in the portfolio which have not been
specifically identified.
See "Credit Risk Management" for a discussion of the adequacy of the Company's
allowance for loan losses.
A-7
<PAGE> 26
NONINTEREST INCOME
- --------------------------------------------------------------------------------
In 1995, noninterest income totaled $2.2 million, compared to $2.2 million in
1994 and $3.7 million in 1993. Included in the notinterest income category are
the following items: (i) servicing income, (ii) service fees and other charges,
(iii) gains on the sale of loans, mortgage-backed securities and investment
securities, and (iv) other income.
Servicing income was $536,000 in 1995, compared to $634,000 in 1994 and
$705,000 in 1993. This decline is attributable to the decrease in the average
balance of loans serviced for others from $181.9 million in 1993 to $171.4
million in 1994 and to $151.2 million in 1995, due to the large number of
fixed-rate loans being refinanced in recent years into adjustable-rate loans
which are held in the Company's portfolio, and to lower volumes of loan
originations. Although the Company may resume its involvement in the secondary
market, on April 1, 1994, the Company changed its policy with regard to current
originations of fixed-rate loans to hold them for portfolio investment;
previously, such loans had been designated as held for sale. As such, the
volume of loans sold declined to $23.7 million in 1994 from $79.7 million in
1993. No loans were sold during 1995. Gain on sale of loans was $80,000 in
1994, compared to $1,395,000 in 1993. Substantially all of the residential
mortgage loans, whether fixed-rate or adjustable-rate, are originated under
terms, conditions, and documentation which enable them to be sold in the
secondary market. Under its loan sale agreements, the Company continues to
collect payments on loans as they become due, to inspect the security property
when appropriate, to make certain insurance and tax payments on behalf of
borrowers, and to otherwise service the loans. The Company pays the purchaser
under its participation and sales agreements an agreed yield on the loans or
participation interest in loans sold. Amounts not paid to the purchaser are
retained and recognized as servicing income. Servicing income includes
servicing fees from investors and certain charges collected from borrowers,
such as late payment fees. Although the rights to service loans can be sold in
the secondary market to generate additional revenue, the Company did not sell
loan servicing rights during 1995, 1994 or 1993.
In 1995, service fees and other charges increased to $1.2 million, compared to
$971,000 in 1994 and $995,000 in 1993. This increase resulted from a revision
of the service charges earned on certain deposit accounts and certain automated
teller machine transactions, which became effective in November, 1994. Other
income for 1995 includes a pre-tax gain of $309,000 realized during the fourth
quarter in connection with the sale of the Bank's Madison Avenue office. This
gain was largely offset by a reduction in fee income earned by the Bank's
financial services subsidiary, Home Financial, Inc.
NONINTEREST EXPENSE
- --------------------------------------------------------------------------------
Noninterest expense totaled $10.4 million in 1995, compared to $10.4 million in
1994 and $11.3 million in 1993. The decreases from 1993 were mainly
attributable to cost containment activities. Other expenses increased to $2.1
million for 1995 from $1.9 million in 1994 and $2.4 million in 1993. The
composition of other expenses is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1995 1994 1993
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Business and management development $ 163 $ 113 $ 178
Examination/audit expense 224 245 241
OTS assessment 82 79 81
Postage 148 133 158
Supplies 114 159 150
Telephone 134 154 123
Franchise/sales tax 365 355 259
Director fees 92 90 104
Consulting fees 52 53 103
Legal fees 145 85 223
Liability for credit loss - off-balance sheet items -- -- 322
Loss (gain) on sale of real estate owned (2) (150) (88)
Provision for real estate owned losses 51 1 13
Miscellaneous expenses 531 586 541
------- ------- -------
$ 2,099 $ 1,903 $ 2,408
======= ======= =======
</TABLE>
The 1995 and 1994 decreases in other expenses from the 1993 level also reflect
cost containment activities.
A-8
<PAGE> 27
INCOME TAXES
- ------------------------------------------------------------------------------
The Company has provided $1,020,000 for federal income taxes in 1995, $669,000
in 1994 and $1,138,000 in 1993. Changes from year to year are primarily due to
changes in the level of pre-tax income. The 1994 provision reflects the receipt
of a favorable "no change" letter from the Internal Revenue Service regarding
the 1991 tax year, which allowed the Company to reduce its tax liabilities for
certain estimated contingent items. Refer to Note 14 in the consolidated
financial statements for additional analysis of the tax position of the Company.
REVIEW OF MAJOR ASSET PORTFOLIOS
- -------------------------------------------------------------------------------
The Company's total assets increased $37.7 million from $316.8 million at
December 31, 1994 to $354.5 million at December 31, 1995. The largest increase
was in investment securities ($35.6 million), as funds raised were invested in
U.S. government securities due to the decreased loan demand. Loans increased
$3.9 million. These increases were partially offset by a decrease of $2.5
million in federal funds sold. The following table shows each individual asset
category as a percent of total assets.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------
1995 1994
-------------------- ------------------
Percent of Percent of
Balance Assets Balance Assets
------- ------ ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Due from banks-interest bearing $ 100 -- $ 200 --
Federal funds sold 4,396 1.2% 6,900 2.2%
Investment securities 47,184 13.3 11,602 3.7
Mortgage-backed securities 2,754 .8 3,101 1.0
Loans-net 283,560 80.0 279,680 88.3
-------- -------- -------- --------
Total earning assets 337,994 95.3 301,483 95.2
Cash 7,647 2.2 6,295 2.0
Premises and equipment 3,953 1.1 4,337 1.4
Cost in excess of fair value of net assets acquired 166 -- 993 .3
Accrued interest and other assets 4,745 1.4 3,660 1.1
-------- -------- -------- --------
$354,505 100.0% $316,768 100.0%
======== ======== ======== ========
</TABLE>
The largest asset portfolio is loans. The following table reflects the
composition of the loan portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Real estate loans:
Conventional:
One-to-four units $ 194,894 $ 204,807 $ 174,250 $ 156,275 $ 125,371
Over four units 12,551 10,354 12,516 12,528 13,616
Construction:
Residential 1,616 3,490 3,859 2,993 878
Commercial -- -- 650 650 3,100
Commercial real estate 30,736 30,876 33,478 39,047 41,425
Land 4,461 3,359 1,611 801 35
Consumer loans 40,055 31,431 27,554 30,129 36,012
Business loans 4,758 1 673 999 -- --
---------- ---------- ---------- ---------- ----------
289,071 285,990 254,917 242,423 220,437
---------- ---------- ---------- ---------- ----------
Less:
Undisbursed portion of loans in process (1,711) (2,640) (3,594) (3,019) (2,956)
Unearned income on consumer loans (18) (40) (69) (115) (180)
Amount due other financial institutions
relating to wrap-around mortgage loans (145) (175) (297) (472) (553)
Net deferred loan fees (903) (790) (340) (777) (1,255)
Allowance for loan losses (2,734) (2,665) (2,612) (1,721) (1,839)
---------- ---------- ---------- ---------- ----------
( 5,511) (6,310) (6,912) (6,104) (6,783)
---------- ---------- ---------- ---------- ----------
Total loans held for investment $ 283,560 $ 279,680 $ 248,005 $ 236,319 $ 213,654
========== ========== ========== ========== ==========
Loans held for sale $ -- $ -- $ 13,386 $ 7,750 $ 13,056
========== ========== ========== ========== ==========
</TABLE>
A-9
<PAGE> 28
The following table shows the change in the Company's net loan portfolio,
including loans held for sale, for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
Loans originated:
Real estate loans:
Loans for purchase of existing property $63,262 $ 101,399 $ 173,931 $ 154,791 $ 72,560
Construction 1,211 5,916 6,845 5,429 3,080
Loans refinanced 7,587 12,372 19,163 18,942 10,241
--------- --------- --------- --------- ---------
Total real estate loans originated 72,060 119,687 199,939 179,162 85,881
Business loans originated 3,724 679 1,000 -- --
Other originations (1) 3,523 3,266 3,443 3,507 3,813
--------- --------- --------- --------- ---------
Total loans originated 79,307 123,632 204,382 182,669 89,694
Loans purchased (2) 855 364 854 1,026 8,277
Loans sold -- (23,717) (79,600) (73,671) (35,293)
Loan principal payments (76,229) (81,528) (107,144) (91,777) (73,805)
Other increases (decreases) (53) (462) (1,170) (888) (1,766)
--------- --------- --------- --------- ---------
Change in net loan portfolio including
loans held for sale $ 3,880 $ 18,289 $ 17,322 $ 17,359 $ (12,893)
========= ========= ========= ========= =========
- ------------------------
(1) Other loans consist of MasterCard, property improvement, student, and
savings account loans.
(2) Includes $7.769 million of loans purchased from the Resolution Trust
Corporation in 1991.
</TABLE>
Credit Risk Management
- --------------------------------------------------------------------------------
The Company has consistently maintained a conservative posture with respect to
credit risk. The Company has no investment securities which are less than
investment grade, no foreign loans, nor significant loan concentrations to any
one borrower. The Company's credit policies emphasize evaluation of a
borrower's financial condition before a loan is approved and close monitoring
of loan repayment after credit is extended. Most loan delinquencies that occur
are remedied within 90 days as a result of actions taken by the Company's
collection staff. If a mortgage loan delinquency exceeds 90 days, measures are
instituted to enforce collection, including the commencement of a foreclosure
action. Loss experience as a result of foreclosure with respect to residential
loans originated by the Company has historically been very low. On January 1,
1995, the Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 114, "Accounting by Creditors for Impairment of 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. Accordingly, the adoption of SFAS No. 114
and No. 118 did not have a material effect on the financial condition or results
of operations of the Company, and prior period amounts did not not require
restatement. See Note 1 and Note 6 to the Consolidated Financial Statements for
additional information on impaired loans and the Company's policies related to
such loans. The adoption of SFAS Nos. 114 and 118 did not affect the
comparability of the information which follows.
A-10
<PAGE> 29
The table below sets forth the amounts and categories of risk elements in the
loan portfolio. For all years presented, there has been no troubled debt
restructuring which involved forgiving a portion of interest or principal on
any loans or making loans at rates materially less than market rates.
Repossessed assets include assets acquired in settlement of loans. See Note 1
to the Consolidated Financial Statements for a discussion of the Company's
policy for classifying loans as nonperforming.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
Residential real estate $1,002 $1,091 $ 591 $1,093 $1,257
Commercial real estate 99 170 -- 582 252
Business -- -- -- -- --
Consumer 202 54 280 273 160
------ ------ ------ ------ ------
Total 1,303 1,315 871 1,948 1,669
------ ------ ------ ------ ------
Accruing loans delinquent more than 90 days:
Residential real estate -- -- -- -- --
Commercial real estate -- -- -- -- --
Business -- -- -- -- --
Consumer 21 44 11 13 45
------ ------ ------ ------ ------
Total 21 44 11 13 45
------ ------ ------ ------ ------
Total nonperforming loans 1,324 1,359 882 1,961 1,714
------ ------ ------ ------ ------
Repossessed assets:
Residential real estate 197 695 567 208 179
Commercial real estate 540 -- 103 922 653
Business -- -- -- -- --
Consumer -- -- -- -- --
------ ------ ------ ------ ------
Total 737 695 670 1,130 832
------ ------ ------ ------ ------
Total nonperforming assets $2,061 $2,054 $1,552 $3,091 $2,546
====== ====== ====== ====== ======
Nonperforming loans as a percent of
total loans .46% .48% .35% .81% .78%
=== === === === ===
Nonperforming assets as a percent of
total assets .58% .65% .50% .97% .89%
=== === === === ===
</TABLE>
The loans included above are secured by real estate or other collateral which
limits the Company's exposure to loss. At December 31, 1995, there were no
commitments to lend additional funds to borrowers with nonperforming loans.
As of December 31, 1995, there were no concentrations of loans in any types of
industries which exceeded 10% of the total loans that are not included as a
loan category in the table above.
In addition to the loans disclosed in the table above, the Company's Banking
subsidiary 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 throughout 1995. 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.
A-11
<PAGE> 30
The ratio of nonperforming loans to total loans decreased significantly from
December 31, 1992 to December 31, 1993. This improvement resulted mainly from
the increased effectiveness of the Company's collections efforts. Repossessed
assets also decreased significantly during 1993, as a commercial property with
a carrying value of $573,000 was disposed of. The improvement in the ratio of
nonperforming assets to total assets from December 31, 1992 to December 31,
1993 reflects both the increased effectiveness of the Company's collections
efforts and the successful disposal of its largest foreclosed property.
A summary of the potential income from nonperforming loans based on their
original terms, the actual interest income recorded and the interest foregone
is set forth below:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Income potential based on original terms $131 $130 $ 99 $191 $203
Income recorded -- -- -- 1 2
---- ---- ---- ---- ----
Interest foregone $131 $130 $ 99 $190 $201
==== ==== ==== ==== ====
</TABLE>
Activity in the loan loss allowance over the past five years is presented
below.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------
1995 1994 1993 1992 1991
----- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 2,665 $ 2,612 $ 1,721 $ 1,839 $ 495
Provision for loan losses 123 97 897 750 1,351
Charge-offs:
Residential real estate (8) (4) -- (27) (39)
Commercial real estate -- -- -- (824) --
Business -- -- -- -- --
Consumer (52) (40) (18) (26) (5)
--------- --------- --------- --------- ---------
Total charge-offs (60) (44) (18) (877) (44)
--------- --------- --------- --------- ---------
Recoveries:
Residential real estate -- -- 12 9 37
Commercial real estate -- -- -- -- --
Business -- -- -- -- --
Consumer 6 -- -- -- --
--------- --------- --------- --------- ---------
Total recoveries 6 -- 12 9 37
--------- --------- --------- --------- ---------
Net (charge-offs) recoveries (54) (44) (6) (868) (7)
--------- --------- --------- --------- ---------
Balance at end of year $ 2,734 $ 2,665 $ 2,612 $ 1,721 $ 1,839
========= ========= ========= ========= =========
Average loans $ 284,385 $ 273,927 $ 255,661 $ 228,417 $ 230,641
Loans at end of period 289,071 285,990 254,918 242,423 220,437
Net charge-offs/average loans
outstanding .02% .02% -- .38% --
Allowance/average loans .96% .97% 1.02% .75% .80%
Allowance/end-of-period loans .95% .93% 1.02% .71% .83%
Net charge-offs/allowance 1.98% 1.65% .23% 50.44% .38%
Net charge-offs/provision for
loan losses 43.90% 45.36% .67% 115.73% .52%
Allowance/nonperforming loans 206.50% 196.10% 296.15% 87.76% 107.29%
Allowance/nonperforming assets 132.65% 129.75% 168.30% 55.68% 72.23%
</TABLE>
A-12
<PAGE> 31
Net charge-offs (recoveries) as a percentage of average loans by portfolio type
are shown in the following table:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Residential real estate .004% .002% (.007)% .012% .001%
Commercial real estate -- -- -- 1.918% --
Business -- -- -- -- --
Consumer .114% .126% .054% .080% .014%
Total net charge-offs
to average loans .019% .016% .002% .380% .003%
</TABLE>
An allocation of the ending allowance for loan losses by major loan type
follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C>
Residential real estate $1,251 $1,293 $ 935 $ 510 $ 297
Commercial real estate 665 643 684 1,009 1,458
Business 87 -- -- -- --
Consumer 179 143 114 184 71
Unallocated 552 586 879 18 13
------ ------ ------ ------ ------
$2,734 $2,665 $2,612 $1,721 $1,839
====== ====== ====== ====== ======
</TABLE>
The above allocation is made for analytical purposes. General reserves are
available to absorb losses from any segment of the portfolio.
The amount of the allowance for loan losses is based on management's analysis
of risks inherent in the various segments of the loan portfolio, management's
assessment of known or potential problem credits which have come to
management's attention during the ongoing analysis of credit quality,
historical loss experience, current economic conditions and other factors. If
actual circumstances and losses differ substantially from management's
assumptions and estimates, such allowance for loan losses may not be sufficient
to absorb all future losses, and net earnings could be significantly and
adversely affected. Loan loss estimates are reviewed periodically, and
adjustments, if any, are reported in earnings in the period in which they
become known. In addition, the Company maintains a portion of the allowance to
cover potential losses inherent in the portfolio which have not been
specifically identified.
Although management believes that it uses the best information available to make
such determinations and that the allowance for loan losses is adequate at
December 31, 1995, 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. Any downturn in the Ohio real estate market could result in the
Company experiencing increased levels of nonperforming assets and charge-offs,
significant provisions for loan losses and significant reductions in income.
Additionally, various regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for loan
losses. Such agencies may require the recognition of additions to the allowance
based on their judgments of information available to them at the time of their
examination.
A-13
<PAGE> 32
Deposits
- -------------------------------------------------------------------------------
The Company's deposits increased $38.5 million from $279.3 million at December
31, 1994 to $317.8 million at December 31, 1995. The Company had no brokered
deposits at December 31, 1995, 1994 and 1993. The following table sets forth
the distribution of deposits at the dates indicated.
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994 December 31, 1993
----------------- ------------------ -----------------
% of % of % of
Balance Deposits Balance Deposits Balance Deposits
------- -------- ------- -------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing NOW accounts $ 11,072 3.5% $ 11,286 4.0% $ 5,912 2.2%
NOW accounts 13,804 4.3 14,344 5.1 18,753 7.0
Passbook/statement accounts 45,564 14.3 56,533 20.2 62,863 23.4
Money market fund accounts 53,876 17.0 36,342 13.1 39,879 14.9
-------- ----- -------- ----- -------- -----
Total non-certificate accounts 124,316 39.1 118,505 42.4 127,407 47.5
-------- ----- -------- ----- -------- -----
Certificate accounts:
Time deposits ($100,000 and over) 7,825 2.5 7,792 2.8 5,853 2.2
7-31 day accounts 27 -- 47 -- 118 --
32-91 day accounts 1,312 .4 920 .3 1,389 .5
92-182 day accounts 14,178 4.5 14,348 5.2 18,662 7.0
Greater than 6 months through 1
year accounts 54,131 17.0 33,294 11.9 29,697 11.1
Greater than 1 year to 2 1/2 year
accounts 42,974 13.5 53,229 19.1 43,953 16.4
2 1/2 year and over accounts 73,016 23.0 51,134 18.3 40,933 15.3
-------- ----- -------- ----- -------- -----
Total certificate accounts 193,463 60.9 160,764 57.6 140,605 52.5
-------- ----- -------- ----- -------- -----
Total deposits $317,779 100.0% $279,269 100.0% $268,012 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
The following table provides the maturity distribution of time deposits in
amounts of $100,000 or more at December 31, 1995, 1994 and 1993.
<TABLE>
<CAPTION>
December 31,
--------------------------
1995 1994 1993
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Time remaining to maturity:
Three months or less $2,771 $3,015 $2,336
Three through six months 1,000 901 1,599
Six through twelve months 1,100 723 1,418
Over twelve months 2,954 3,153 500
------ ------ ------
Total $7,825 $7,792 $5,853
====== ====== ======
</TABLE>
Capital and Dividends
- -------------------------------------------------------------------------------
Federal regulations prescribe three separate regulatory capital requirements
for savings associations: (i) a risk-based capital requirement, (ii) a leverage
limit (core capital requirement), and (iii) a tangible capital requirement.
Under the risk-based requirement, assets are risk-weighted from 0% to 100% with
cash and other non-risk assets requiring no risk weighting, certain
mortgage-backed securities 20%, qualifying (home) mortgage loans 50% and
commercial loans, other non-residential loans and real estate owned 100%. The
risk-based regulation requires that risk-based capital be maintained in an
amount equal to at least 8% of risk-weighted assets. The leverage limit requires
that core capital, which is generally defined as shareholders' equity minus
non-qualifying intangible assets, be maintained in an amount not less than 3%
of adjusted total assets. Under the tangible capital requirement, tangible
capital, defined as core capital minus all intangible assets (other than a
limited amount of purchased mortgage servicing rights), must be maintained in
an amount equal to at least 1.5% of adjusted total assets. The Company's
Banking subsidiary was in compliance with these regulatory capital regulations
on December 31, 1995 and 1994. See note 13 to the Consolidated Financial
Statements.
A-14
<PAGE> 33
At December 31, 1995, shareholders' equity totaled $28.1 million, an increase of
4.4% over year-end 1994 and 24.6% over year-end 1993. The primary sources of
these increases were the retention of earnings and the conversion of the
convertible subordinated debt in 1994.
Dividends have been increased each year since 1985, and amounted to $.52 per
share in 1995 for a dividend payout ratio of 49.06%. This increase reflects the
Company's policy of seeking to ensure a dividend return to its shareholders
that is reflective of the Company's capital position and earnings growth.
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.
As presented in the Consolidated Statements of Cash Flows, operating
activities, including net income, generally provide cash; however, in 1993
operating activities were a use of cash as the result of the excess of
disbursements on loans originated for resale over proceeds from sale of loans
originated for resale.
The primary investing activity during each period was lending. New loan
originations were funded by significant principal repayments and maturities on
loans and mortgage-backed securities, which totaled $76.7 million in 1995,
$84.1 million in 1994 and $114.6 million in 1993.
In financing activities, cash was used during 1995, 1994 and 1993 primarily
to fund maturities of and withdrawals from certificate of deposit accounts.
Such uses exceeded increases in demand deposit accounts and proceeds from the
sale of certificates of deposit, the main sources of funds from financing
activities, in 1993. In 1995 and 1994, however, proceeds from sales of
certificates of deposit exceeded such uses, as certificates of deposit returned
to favor with investors in conjunction with the rising interest rate
environment. During 1995, funds were also used to repay borrowings. During
1993, funds were also provided by the issuance of long-term debt and common
shares.
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 Company's Banking subsidiary'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 December 31,1995, the Company did not have
any outstanding borrowings from the FHLB.
Currently, the Company anticipates that it will have sufficient funds to meet
its existing loan commitments. At December 31, 1995, the commitments to
borrowers for unused lines of credit and to originate loans totaled $60.8
million. Certificates of deposit which were scheduled to mature in one year or
less at December 31, 1995, totaled $112.8 million.
As a member of the FHLB, the Company's Banking subsidiary 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 Company's Banking subsidiary was in
compliance with these regulations at December 31, 1995 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.
A-15
<PAGE> 34
IMPACT OF INFLATION AND CHANGING PRICES
- --------------------------------------------------------------------------------
The consolidated financial statements and related data contained herein have
been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars. Changes in the relative purchasing power of money
over time due to inflation are not recognized in the financial statements.
Unlike most industrial companies, substantially all the assets and liabilities
of a financial institution are monetary in nature. As a result, interest rate
fluctuations generally have a more significant and direct impact on a financial
institution's performance than do the effects of inflation. To the extent
inflation affects interest rates, real estate values and other costs, the
Company's lending activities are impacted. Changes in inflation may cause
changes in interest rates. Significant increases in interest rates make it more
difficult for potential borrowers to qualify for business and mortgage loans.
As a result, the volume and related income on loan originations may be reduced.
Significant decreases in interest rates may result in higher loan prepayment
activity, although such conditions may enable potential borrowers to qualify
for a relatively high mortgage loan balance.
RECENT REGULATORY DEVELOPMENTS
- --------------------------------------------------------------------------------
The deposits of saving associations such as the Bank are presently insured by
the Savings Association Insurance Fund (the "SAIF"), which together with the
Bank Insurance Fund (the "BIF"), are the two insurance funds administered by
the FDIC. Financial institutions which are members of the BIF are subject to
insurance premiums which range from 0% to .27% (with a minimum $2,000 annual
assessment) of insured deposits, as compared to the current range of .23% to
.31% of insured deposits for members of SAIF; thus, well capitalized and
healthy BIF members pay significantly lower premiums than comparable
SAIF-insured institutions. This disparity is due to the BIF having reached its
statutory reserve ratio of 1.25% of insured deposits, while the SAIF is not
anticipated to reach its statutory reserve ratio until 2002, absent a
substantial increase in premium rates or the imposition of special assessments
or other significant developments, such as the merger of the SAIF and the BIF.
As a result of this disparity, SAIF members have been placed at a significant
competitive disadvantage to BIF members due to higher costs for deposit
insurance. A recapitalization plan under consideration by the Treasury
Department, the FDIC, the OTS and the Congress reportedly provides for a
one-time assessment of .80% to .90% to be imposed on all SAIF-insured deposits
held as of March 31, 1995, in order to recapitalize the SAIF and eliminate the
premium disparity. Such an assessment, should it occur, may or may not be a
deductible expense for income tax purposes. No assurance can be given, however,
as to whether the recapitalization plan will be implemented or as to the nature
or extent of any competitive disadvantage which may be experienced by SAIF
member institutions. In addition, it is not known at the present time whether
a merger of the SAIF and the BIF, should it occur, would result in income tax
consequences for SAIF member institutions, particularly in regard to the
potential recapture of the institutions' bad debt reserves.
FOURTH QUARTER RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The Company's net income for the three months ended December 31, 1995, was
$699,000, compared with $373,000 for the three months ended December 31, 1994.
The 87.4% increase in 1995 compared to 1994 was due to an increase in net
interest income to $2,952,000 for the three months ended December 31, 1995,
compared to $2,663,000 for the three months ended December 31, 1994, resulting
from an improvement in the spread between the ratio of interest-earning assets
to total assets and the ratio of interest-bearing liabilities to total
liabilities. In addition, noninterest income for the fourth quarter of 1995
increased $336,000 over the fourth quarter of 1994, due mainly to the gain on
the sale of the Bank's Madison Avenue office in December 1995. Noninterest
expense increased $123,000 or 4.8% compared to the same period in 1994. The
largest change from 1994 was in salary and benefits, which increased $85,000.
A-16
<PAGE> 35
QUARTERLY FINANCIAL DATA (UNAUDITED)
- ------------------------------------------------------------------------------
The following is a summary of selected quarterly financial data for the periods
indicated.
<TABLE>
<CAPTION>
1995
----------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income $5,953 $6,666 $6,873 $7,013
Net interest income 2,787 2,817 2,754 2,952
Provision for loan losses 31 30 30 32
Noninterest income 478 472 448 806
Noninterest expense 2,667 2,577 2,465 2,667
Net income 374 453 469 699
Net income per share (1):
Primary $ .20 $ .24 $ .25 $ .37
Fully-diluted $ .20 $ .24 $ .25 $ .37
</TABLE>
<TABLE>
<CAPTION>
1994
----------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income $5,298 $5,420 $5,422 $5,644
Net interest income 2,664 2,816 2,584 2,663
Provision for loan losses 6 30 30 31
Noninterest income 699 493 498 470
Noninterest expense 2,617 2,615 2,643 2,546
Net income 592 450 285 373
Net income per share (2):
Primary $ .37 $ .28 $ .17 $ .21
Fully-diluted $ .33 $ .25 $ .17 $ .21
- ---------------------
<FN>
(1) Per share amounts for the first two quarters have been restated to reflect
a 10% stock dividend declared on August 23, 1995 and distributed on
October 1, 1995.
(2) Per share amounts have been restated to reflect a 10% stock dividend
declared on August 23, 1995 and distributed on October 1, 1995.
</TABLE>
A-17
<PAGE> 36
REPORT OF MANAGEMENT
The management of Haverfield Corporation is responsible for the preparation,
content and integrity of the financial statements and related information
contained in Appendix A to the Proxy Statement. The financial statements have
been prepared in accordance with generally accepted accounting principles and,
as such, include amounts based on informed judgments and estimates made by
management.
The management of Haverfield Corporation is also responsible for maintaining a
system of internal controls designed to provide reasonable assurance as to the
protection of assets and integrity of financial statements. This system of
controls includes written policies and procedures including a code of conduct
to foster a strong ethical climate, proper delegation of authority and
organizational division of responsibility and the careful selection and
training of qualified personnel. In addition, an effective internal audit
function periodically tests the system of internal controls. Management
believes that the system of internal controls provides reasonable assurance
that financial transactions are recorded properly to permit the preparation of
reliable financial statements. The system contains monitoring mechanisms, and
actions are taken to correct deficiencies identified.
There are inherent limitations in the effectiveness of any system of internal
control, including the possibility of human error and the circumvention or
overriding of controls. Accordingly, even an effective internal control system
can provide only reasonable assurance with respect to financial statement
preparation. Further, because of changes in conditions, the effectiveness of an
internal control system may vary over time.
The accounting policies and system of internal controls, including the
recommendation of the independent auditors, are under the general oversight of
the Board of Directors, acting through the Audit Committee. The Auditor of
Haverfield Corporation, who reports directly to the Audit Committee, conducts
an extensive program of audits and risk asset reviews that tests the system of
internal controls. The Audit Committee meets periodically with management, the
independent auditors, and the internal auditors to ensure that they are carrying
out their responsibilities. The Audit Committee is also responsible for
performing an oversight role by reviewing and monitoring the financial,
accounting and auditing procedures of Haverfield Corporation in addition to
reviewing the financial reports. The independent auditors and the internal
auditors have full and free access to the Audit Committee, with or without the
presence of management, to discuss the adequacy of the internal control
structure for financial reporting and any other matters which they believe
should be brought to the attention of the Audit Committee.
William A. Valerian Richard C. Ebner
President and Chief Executive Officer Executive Vice President,
Chief Operating Officer,
Chief Financial Officer and Treasurer
A-18
<PAGE> 37
REPORT OF INDEPENDENT AUDITORS
The Shareholders and Board of Directors
Haverfield Corporation
We have audited the accompanying consolidated statements of financial condition
of Haverfield Corporation and subsidiaries as of December 31, 1995 and 1994,
and the related consolidated statements of income, shareholders' equity and
cash flows for each of the three years in the period ended December 31,1995.
These financial statements are the responsibility of Haverfield's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Haverfield Corporation and
subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective
December 31, 1993, Haverfield Corporation changed its method of accounting for
certain investments in debt and equity securities to conform with Statement of
Financial Accounting Standards No. 115.
/s/ Deloitte & Touche LLP
Cleveland, Ohio
January 23, 1996
A-19
<PAGE> 38
HAVERFIELD CORPORATION
Consolidated Statements of Financial Condition
(Dollars in thousands, except per share data)
================================================================================
<TABLE>
<CAPTION>
December 31,
----------------------
1995 1994
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 7,647 $ 6,295
Due from banks - interest bearing 100 200
Federal funds sold 4,396 6,900
Investment securities:
Available for sale, at fair value (Amortized cost of $47,034
in 1995 and $11,677 in 1994) 47,184 11,602
Mortgage-backed securities:
Available for sale, at fair value (Amortized cost of $2,672
in 1995 and $3,124 in 1994) 2,754 3,101
Loans (net of allowance for loan losses of $2,734 in 1995
and $2,665 in 1994) 283,560 279,680
Premises and equipment 3,953 4,337
Accrued interest and other assets 4,745 3,660
Cost in excess of fair value of net assets acquired 166 993
--------- ---------
Total $ 354,505 $ 316,768
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Passbook/statement accounts $ 45,564 $ 56,533
Noninterest-bearing NOW accounts 11,072 11,286
Interest-bearing NOW accounts 13,804 14,344
Money market fund accounts 53,876 36,342
Certificates of deposit 193,463 160,764
--------- ---------
Total deposits 317,779 279,269
Advances from Federal Home Loan Bank -- 2,000
Advances by borrowers for taxes and insurance 5,740 6,044
Accrued interest and other liabilities 2,928 2,587
--------- ---------
Total liabilities 326,447 289,900
--------- ---------
Shareholders' Equity:
Preferred stock; 1,000,000 shares authorized; none issued -- --
Common stock, par value $.01 per share; 5,000,000 shares
authorized; issued: 1,894,475 shares in 1995 and 1,720,135 shares in 1994 19 17
Capital in excess of par value 16,353 13,823
Retained earnings 11,669 13,165
Net unrealized appreciation (depreciation) in the fair value of securities
(net of deferred income taxes of $79 in 1995 and $(33) in 1994) 153 (64)
Common shares in treasury, at cost (11,790 shares in 1995 and
6,154 shares in 1994) (136) (73)
--------- ---------
Total shareholders' equity 28,058 26,868
--------- ---------
Total $ 354,505 $ 316,768
========= =========
</TABLE>
See notes to consolidated financial statements.
A-20
<PAGE> 39
HAVERFIELD CORPORATION
Consolidated Statements of Income
(Dollars in thousands, except per share data)
================================================================================
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME
Loans $23,313 $20,472 $21,488
Mortgage-backed securities 240 301 653
Investment securities and other 2,952 1,011 823
------- ------- -------
Total interest income 26,505 21,784 22,964
------- ------- -------
INTEREST EXPENSE
Deposits 15,138 10,614 10,748
Advances from Federal Home Loan Bank 57 213 206
Long-term borrowings -- 230 196
------- ------- -------
Total interest expense 15,195 11,057 11,150
------- ------- -------
Net interest income 11,310 10,727 11,814
Provision for loan losses 123 97 897
------- ------- -------
Net interest income after provision for loan losses 11,187 10,630 10,917
------- ------- -------
NONINTEREST INCOME
Servicing income 536 634 705
Service fees and other charges 1,184 971 995
Gain on sale of loans -- 80 1,395
Other income 484 475 640
------- ------- -------
Total noninterest income 2,204 2,160 3,735
------- ------- -------
NONINTEREST EXPENSE
Employee compensation and benefits 3,965 4,280 4,671
Occupancy and equipment 1,896 1,992 1,999
Advertising 477 374 425
Insurance premiums 761 718 733
Amortization of intangibles 827 808 750
Data processing fees 351 346 335
Other expenses 2,099 1,903 2,408
------- ------- -------
Total noninterest expense 10,376 10,421 11,321
------- ------- -------
Income before income taxes 3,015 2,369 3,331
Provision for income taxes 1,020 669 1,138
------- ------- -------
Net income $1,995 $1,700 $2,193
======= ======= =======
EARNINGS PER COMMON SHARE
Primary $1.06 $1.03 $1.45
======= ======= =======
Fully diluted $1.06 $ .96 $1.33
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
A-21
<PAGE> 40
<TABLE>
HAVERFIELD CORPORATION
Consolidated Statements of Cash flows
(Dollars in thousands)
=================================================================================================
<CAPTION>
Year Ended December 31,
-----------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,995 $ 1,700 $ 2,193
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Provision for loan losses 123 97 897
Net gain on sale of loans -- (80) (1,395)
Net gain on sale of premises and equipment (309) (3) (9)
Amortization of intangibles 827 808 750
Depreciation 782 803 758
Amortization of deferred loan fees (167) (188) (320)
Federal Home Loan Bank stock dividends (169) (129) (94)
Net change in other assets and other liabilities 321 (4,566) 1,189
Net change in accrued interest receivable and accrued
interest payable (981) (405) (403)
Proceeds from sale of loans originated for resale -- 23,797 80,995
Disbursements on loans originated for resale -- (12,784) (85,864)
Other (232) (574) (84)
-------- -------- --------
Net cash provided by (used in) operating activities 2,190 8,476 (1,387)
-------- -------- --------
INVESTING ACTIVITIES:
Disbursements on loans originated (79,307) (110,460) (117,851)
Proceeds from:
Loan repayments and maturities 76,229 81,528 107,144
Mortgage-backed security repayments and maturities 450 2,580 7,413
Investment security maturities 19,400 4,405 3,150
Sale of premises and equipment 464 3 9
Sale of real estate owned 2 456 173
Purchases of:
Loans (855) (364) (854)
Investment securities (54,514) (7,375) (5,435)
Premises and equipment (570) (1,066) (995)
Decrease in due from banks - interest bearing 100 1,100 809
Decrease in federal funds sold 2,504 12,300 17,800
Net cash and cash equivalents received in connection with
the acquisition of certain assets and liabilities of other
financial institutions -- 3,832 --
Other 83 165 452
-------- -------- --------
Net cash provided by (used in) investing activities (36,014) (12,896) 11,815
-------- -------- --------
FINANCING ACTIVITIES:
Net increase (decrease) in passbook/statement, NOW,
and money market fund accounts 5,811 (12,180) 923
Net increase (decrease) in certificates of deposit 32,698 19,329 (17,074)
Net increase (decrease) in mortgage escrow deposits (295) 62 392
Proceeds from issuance of common shares -- -- 1,558
Proceeds from issuance of long-term debt -- -- 4,355
Proceeds from exercise of stock options 16 23 16
Repayments of borrowings (2,016) (387)
Payment of cash dividends (975) (858) (730)
Purchase of treasury shares (63) (7) (4)
-------- -------- --------
Net cash provided by (used in) financing activities 35,176 5,982 (10,564)
-------- -------- --------
Net increase (decrease) in cash and due from banks 1,352 1,562 (136)
Cash and due from banks at beginning of year 6,295 4,733 4,869
-------- -------- --------
Cash and due from banks at end of year $ 7,647 $ 6,295 $ 4,733
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
A-22
<PAGE> 41
<TABLE>
HAVERFIELD CORPORATION
Consolidated Statements of Shareholders' Equity
(Dollars in thousands, except per share data)
===================================================================================================================================
<CAPTION>
Net
Capital Unrealized Borrowings
in Appreciation of
Excess (Depreciation) Employee Common
of in the Fair Stock Shares Total
Common Par Retained Value of Ownership in Shareholders'
Stock Value Earnings Securities Plan Treasury Equity
-------- -------- -------- ----------- --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1993 $12 $6,565 $12,585 $ -- $(368) $(33) $18,761
Net income 2,193 2,193
Sale of 125,000 shares of common
stock 1 1,557 1,558
Issuance of 130,219 shares as a
10% stock dividend 1 1,724 (1,725) --
Issuance of 2,000 common shares
upon exercise of stock options 16 16
Issuance of 17,059 common shares
upon conversion of convertible
subordinated debentures 235 235
Net unrealized appreciation in the fair
value of securities 219 219
Dividends paid - $.48 per share (730) (730)
Purchase of 250 treasury shares (4) (4)
Repayments of borrowings of ESOP 262 262
--- ------ ------ --- ---- ---- ------
BALANCE, DECEMBER 31,1993 14 10,097 12,323 219 (106) (37) 22,510
Net income 1,700 1,700
Issuance of 2,200 common shares upon
exercise of stock options 23 23
Issuance of 268,157 common shares
upon redemption of convertible
subordinated debt 3 3,703 3,706
Net unrealized depreciation in the
fair value of securities (283) (283)
Dividends paid - $.51 per share (858) (858)
Purchase of 2,029 treasury shares (36) (36)
Repayments of borrowings of ESOP 106 106
--- ------ ------ --- ---- ---- ------
BALANCE, DECEMBER 31, 1994 17 13,823 13,165 (64) -- (73) 26,868
Net income 1,995 1,995
Issuance of 172,030 shares as a
10% stock dividend 2 2,514 (2,516) --
Issuance of 2,310 common shares upon
exercise of stock options 16 16
Net unrealized appreciation in the
fair value of securities 217 217
Dividends paid - $.52 per share (975) (975)
Purchase of 5,021 treasury shares (63) (63)
--- ------ ------ --- ---- ---- ------
BALANCE, DECEMBER 31, 1995 $19 $16,353 $11,669 $153 $ - $(136) $28,058
=== ====== ====== === ==== ==== ======
</TABLE>
See notes to consolidated financial statements.
A-23
<PAGE> 42
HAVERFIELD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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. ("Banking subsidiary"
or the "Bank"). Effective February 23, 1995, the Bank changed its corporate
name from "Home Federal Savings Bank, Northern Ohio" to Home Bank, F.S.B. 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 predominately 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. 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 - The Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," as of December 31, 1993.
Accordingly, securities are classified as either held for trading, available
for sale or held for investment. 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 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. Consequently, no additional loss provisions were required
A-24
<PAGE> 43
HAVERFIELD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
================================================================================
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
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, and prior
period amounts have not been restated.
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
A-25
<PAGE> 44
HAVERFIELD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
================================================================================
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.
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 - Primary 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 primary earnings per
common share was 1,883,795 shares, 1,662,019 shares, and 1,515,489 shares
during the years ended December 31, 1995, 1994 and 1993, respectively.
Fully diluted earnings per common share was computed giving appropriate
consideration to the dilutive effect of stock options and shares issuable upon
conversion of the 6.50% Convertible Subordinated Debentures. In computing fully
diluted earnings per common share, net income has been adjusted to eliminate
interest expense associated with the debentures, net of estimated income taxes.
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 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 $658,000 and $727,000 at December 31, 1995 and 1994,
respectively.
Income tax payments of $1,000,000, $1,050,000 and $1,081,000 were made in 1995,
1994 and 1993, respectively. Interest paid on deposits and other borrowings
totaled $15,270,000, $11,211,000 and $11,723,000 in 1995, 1994 and 1993,
respectively. There were no mortgage loans exchanged for mortgage-backed
securities in 1995, 1994 or 1993. Transfers from loans to real estate owned for
1995, 1994 and 1993 were $168,000, $750,000 and $590,000, respectively. There
were no loans made to finance the sale of real estate owned during 1995. Loans
made to finance the sale of real estate owned for 1994 and 1993 totaled
$388,000 and $667,000, respectively.
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
A-26
<PAGE> 45
HAVERFIELD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
================================================================================
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 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 financial
statements, as if the fair value based method had been adopted.
Management intends to adopt these statements when they become effective. The
impact of adopting these statements on the financial condition and results of
operations of the Company is not expected to be significant.
2. INVESTMENT SECURITIES
Amortized cost, estimated market values and weighted average end-of-period
yields of investment securities by contractual maturity are summarized as
follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------
1995 1994
------------------------------ -----------------------------
Amortized Market Amortized Market
Cost Value Yield Cost Value Yield
---------- -------- ----- --------- ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government obligations:
Due in 1 year or less $ 2,000 $ 2,016 5.81% $ 4,341 $ 4,314 6.00%
Due after 1 year through 5 years 23,977 24,055 6.81% 4,980 4,932 6.45%
Due after 5 years through 10 years 18,443 18,499 6.97% -- -- --
------- ------- ------- -------
Total 44,420 44,570 6.83% 9,321 9,246 6.24%
------- ------- ------- -------
Federal Home Loan Bank stock 2,614 2,614 7.00% 2,356 2,356 6.38%
------- ------- ------- -------
Total $47,034 $47,184 6.84% $11,677 $11,602 6.27%
======= ======= ======= =======
</TABLE>
All investment securities are classified as available for sale at December 31,
1995 and 1994. There were no sales of investment securities in 1995, 1994 or
1993. There were no obligations or investments of any one issuer, other than
the federal government or an agency of the federal government, with an
aggregate carrying value in excess of 10% of the Company's shareholders' equity
at December 31, 1995. The Federal Home Loan Bank stock does not have
a contractual maturity. The Company's Banking subsidiary, as a member of the
Federal Home Loan Bank system, is required to maintain an investment in capital
stock of the Federal Home Loan Bank in an amount equal to the greater of 1% of
its
A-27
<PAGE> 46
HAVERFIELD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
================================================================================
outstanding home loans or 5% of advances from the Federal Home Loan Bank. No
ready market exists for this stock, and it has no quoted market value. For
presentation purposes, such stock is assumed to have a market value which is
equal to cost.
At December 31, 1995, investment securities totaling $5.0 million were pledged
as collateral for deposits and a standby letter of credit commitment.
Gross unrealized gains and losses are summarized as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------
1995 1994
----------------------- --------------------------
Gross Gross Gross Gross
Unrealized Unrealized Unrealized Unrealized
Gains Losses Gains Losses
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
U.S. Government obligations $175 $ 25 $ 2 $ 77
Federal Home Loan Bank stock -- -- -- --
---- ---- ---- ----
Total $175 $ 25 $ 2 $ 77
==== ==== ==== ====
</TABLE>
3. MORTGAGE-BACKED SECURITIES
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. At December 31, 1995, and 1994, all mortgage-backed
securities are classified as available for sale. There were no sales of
mortgage-backed securities in 1995, 1994 or 1993.
Collateralized mortgage obligations represent variable rate bonds
collateralized by Federal Home Loan Mortgage Corporation mortgages,
pass-through certificates and other bonds, principally adjustable rate,
securitized by single-family residential mortgage loans. At December 31, 1995,
and 1994, all collateralized mortgage obligations are classified as available
for sale.
A-28
<PAGE> 47
HAVERFIELD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
================================================================================
Amortized cost, estimated market values and weighted average end-of-period
yields of mortgage-backed securities by contractual maturity are summarized as
follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------
1995 1994
------------------------------ -----------------------------
Amortized Market Amortized Market
Cost Value Yield Cost Value Yield
---------- -------- ----- --------- ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Pass-through certificates:
Federal Home Loan Mortgage Corporation:
Due after 5 years through 10 years $ 14 $ 14 7.50% $ 18 $ 17 7.50%
Due after 10 years 2,085 2,168 8.62% 2,410 2,392 8.64%
------ ------ ------ ------
Total 2,099 2,182 8.61% 2,428 2,409 8.63%
------ ------ ------ ------
Government National Mortgage Association:
Due after 1 year through 5 years 1 1 8.35% 1 1 9.14%
Due after 5 years through 10 years 250 249 9.20% 294 296 9.35%
------ ------ ------ ------
Total 251 250 9.20% 295 297 9.35%
------ ------ ------ ------
Collateralized mortgage obligations:
Due in 1 year or less 201 201 5.47% -- -- --
Due after 1 year through 5 years -- -- -- 255 251 4.02%
Due after 5 years through 10 years -- -- -- -- --
Due after 10 years 121 121 5.68% 146 144 4.63%
------ ------ ------ ------
Total 322 322 5.55% 401 395 4.24%
------ ------ ------ ------
Total $2,672 $2,754 8.30% $3,124 $3,101 8.14%
====== ====== ====== ======
</TABLE>
Gross unrealized gains and losses are summarized as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------
1995 1994
----------------------- --------------------------
Gross Gross Gross Gross
Unrealized Unrealized Unrealized Unrealized
Gains Losses Gains Losses
---------- ---------- ---------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Pass-through certificates:
Federal Home Loan Mortgage Corporation $83 $- $- $19
Government National Mortgage Association -- 1 2 --
Collateralized mortgage obligations -- -- -- 6
--- --- --- ---
Total $83 $ 1 $ 2 $25
=== === === ===
</TABLE>
At December 31, 1995, mortgage-backed securities totaling $980,000 were pledged
as collateral for public funds on deposit with the Company's Banking
subsidiary.
A-29
<PAGE> 48
HAVERFIELD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
================================================================================
4. LOANS
The composition of the loan portfolio is as follows:
<TABLE>
<CAPTION>
December 31,
----------------------
1995 1994
---- ----
(In thousands)
<S> <C> <C>
Real estate - mortgage $ 238,181 $ 246,037
Real estate - construction 1,616 3,490
Land 4,461 3,359
Business loans 4,758 1,673
Consumer and other loans 40,055 31,431
--------- ---------
289,071 285,990
LESS:
Undisbursed portion of loans in process (1,711) (2,640)
Unearned income on consumer loans (18) (40)
Amount due other financial institutions relating to
wrap-around mortgage loans (145) (175)
Net deferred loan fees (903) (790)
Allowance for loan losses (2,734) (2,665)
--------- ---------
$ 283,560 $ 279,680
========= =========
</TABLE>
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 Company has a diversified loan portfolio, its
debtors' ability to honor their contracts is substantially dependent upon the
general economic conditions of the region. Real estate loans to one borrower
cannot exceed 15% of unimpaired capital and surplus. This 15% limitation
results in a dollar limitation of approximately $3.9 million at December 31,
1995. The Company's Banking subsidiary is in compliance with this regulation.
At December 31, 1995 and 1994, no real estate loans were held for sale. Due to
its rate sensitivity position, the Company on April 1, 1994 began to extend the
maturity of its assets by designating its current originations of long-term
fixed-rate loans as held for portfolio investment rather than held for sale. As
such, on April 1, 1994, loans with a carrying value of $3.7 million were
transferred from the held-for-sale classification to the long-term investment
classification, at their current market value of $3.7 million.
Commercial real estate loans totaled $30.7 million and $30.9 million at
December 31, 1995 and 1994, respectively. These loans are considered by
management to be of somewhat greater risk of uncollectibility due to the
dependency on income production or future development of the real estate. All
real estate collateralizing the commercial real estate loans is located in
Ohio. The following table presents information as to the number and type of
commercial real estate loans in the loan portfolio.
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
-------------------------- ----------------------------
Number Principal Number Principal
Security Type of Loans Balance of Loans Balance
- ------------- -------- --------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Combination retail/residential 122 $17,522 133 $21,541
Stores and/or shopping centers 8 3,319 6 1,632
Office 9 5,980 9 4,464
Warehouse 3 1,907 2 1,087
Church 3 666 3 702
Other 6 1,342 8 1,450
--- ------ --- -------
151 $30,736 161 $30,876
=== ====== === =======
</TABLE>
A-30
<PAGE> 49
HAVERFIELD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
================================================================================
The Company's Banking subsidiary's aggregate commercial real estate loans may
not exceed 400% of its capital as determined under the regulatory capital
standards. At December 31, 1995, the Company estimates that it would be
permitted under this limitation to add an additional $60.0 million of
commercial real estate loans to its existing portfolio.
Both adjustable and fixed interest rate loans are originated. The
adjustable-rate loans have interest rate adjustment limitations and are
generally indexed to the weekly U.S. Treasury constant maturity index. The
composition of these loans was as follows:
<TABLE>
<CAPTION>
Fixed Rate Adjustable Rate
- ------------------------------------ ----------------------------------
Book Value Term to Rate Book Value
Term to Maturity at December 31, Adjustment at December 31,
- ---------------- --------------- ---------- -----------------
1995 1994 1995 1994
---- ---- ---- ----
(In thousands) (In thousands)
<S> <C> <C> <C> <C> <C>
1 mo. - 1 yr. $ 43 $ 4,520 1 mo. - 1 yr. $181,976 $200,700
1 yr. - 2 yr. 55 504 1 yr. - 2 yr. 14,366 10,302
2 yr. - 3 yr. 177 1,503 2 yr. - 3 yr. 23,621 14,249
3 yr. - 5 yr. 1,171 627 3 yr. - 5 yr. 6,845 4,043
5 yr.- 10 yr. 24,619 25,052
10 yr. - 20 yr. 12,461 11,395
Over 20 years 23,737 13,095
-------- -------- -------- --------
$ 62,263 $ 56,696 $226,808 $229,294
======== ======== ======== ========
</TABLE>
Commitments to purchase or sell loans are summarized below:
<TABLE>
<CAPTION>
December 31,
---------------
1995 1994
---------------
(In thousands)
<S> <C> <C>
Commitments to sell loans $- $-
Commitments to purchase loans 357 64
</TABLE>
Substantially all commitments disclosed in the table above are for fixed rate
loans.
In the ordinary course of business, the Company's Banking subsidiary has
granted loans to directors and executive officers, and to their associates.
These loans are made on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions
with unrelated persons except that certain persons receive a reduction in the
interest rate for loans granted prior to August 9, 1989. The Company's Banking
subsidiary also grants mortgage loans to non-executive officers and employees
at rates based on a designated index. Of the 1995 and 1994 loans outstanding,
none were nonperforming.
A summary of the aggregate activity related to loans to directors and executive
officers is shown below:
<TABLE>
<S> <C>
Balance at January 1, 1995 $1,841,000
Additions 1,238,000
Repayments 647,000
----------
Balance at December 31, 1995 $2,432,000
==========
</TABLE>
A-31
<PAGE> 50
HAVERFIELD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
================================================================================
5. LOANS SERVICED FOR OTHERS
At December 31, 1995, 1994 and 1993, loans serviced for others amounted to
$139.5 million, $162.0 million and $177.8 million, respectively. The majority
of these loans are serviced for the Federal National Mortgage Association.
Servicing loans for others generally consists of collecting mortgage payments,
maintaining escrow accounts, disbursing payments to investors and foreclosure
processing. In connection with loans serviced for others, borrowers' escrow
balances of $2,215,000, $2,428,000 and $2,639,000 were held at December 31,
1995, 1994 and 1993, respectively.
6. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1995 1994 1993
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Beginning balance $ 2,665 $ 2,612 $ 1,721
Provision for loan losses 123 97 897
Loans charged off:
Mortgage loans (8) (4) --
Consumer loans (52) (40) (18)
Recoveries:
Mortgage loans -- -- 12
Consumer loans 6 -- --
------- ------- -------
Ending balance $ 2,734 $ 2,665 $ 2,612
======= ======= =======
</TABLE>
Impaired loans totaled $3,107,000 and $5,856,000 at December 31, 1995 and 1994,
respectively. The 1995 amount included loans of $2,099,000 with no related
allowances and $1,088,000 of loans excluding related allowances of $(80,000).
The comparable 1994 amounts were $4,856,000, $1,096,000 and $(96,000),
respectively. The average recorded investment in impaired loans during 1995,
1994, and 1993 was $4,481,000, $4,641,000, and $4,200,000, respectively, while
interest income recognized on impaired loans during those periods was
approximately $435,000, $394,000 and $390,000, respectively.
7. PREMISES AND EQUIPMENT
The composition of premises and equipment is as follows:
<TABLE>
<CAPTION>
December 31,
---------------
1995 1994
------ ------
(In thousands)
<S> <C> <C>
Land and improvements $ 669 $ 997
Buildings and improvements 1,658 2,401
Furniture and fixtures 5,023 4,867
Leasehold improvements 1,799 1,557
------ ------
9,149 9,822
Accumulated depreciation and amortization 5,196 5,485
------ ------
$3,953 $4,337
</TABLE> ====== ======
In May, 1995, the Company's Banking subsidiary entered into a sale agreement on
its Madison office. The sale of the office was consumated in December, 1995,
and resulted in an after-tax gain of $204,000.
A-32
<PAGE> 51
HAVERFIELD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
================================================================================
At December 31, 1995, the Company's Banking subsidiary was obligated under a
number of noncancelable leases for land and buildings. Minimum future rental
commitments under these lease agreements at December 31, 1995 are as follows:
$637,000 in 1996, $623,000 in 1997, $550,000 in 1998, $505,000 in 1999,
$500,000 in 2000 and $4.4 million for years after 2000. Most of the operating
leases permit renewal of the leases at rentals specified by the lease
agreements. Rental expense under all leases aggregated $617,000 in 1995,
$569,000 in 1994 and $576,000 in 1993.
8. ACCRUED INTEREST AND OTHER
Accrued interest receivable and other assets consists of the following:
<TABLE>
<CAPTION>
December 31,
---------------
1995 1994
---- ----
(In thousands)
<S> <C> <C>
Accrued interest receivable $2,602 $1,697
Real estate owned 737 695
Other assets 1,406 1,268
------ ------
$4,745 $3,660
====== ======
</TABLE>
The balance of the allowance for losses on real estate owned was $109,000 and
$59,000 at December 31, 1995 and 1994, respectively. The provision for loss on
real estate owned was $51,000, $1,000 and $13,000 for 1995, 1994 and 1993,
respectively.
Accrued interest payable and other liabilities consists of the following:
<TABLE>
<CAPTION>
December 31,
---------------
1995 1994
---- ----
(In thousands)
<S> <C> <C>
Accrued interest payable $ 676 $ 752
Collections on loans serviced 465 350
Other liabilities 1,787 1,485
------ ------
$2,928 $2,587
====== ======
</TABLE>
9. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
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 to originate loans and for unused lines
of credit are summarized below:
<TABLE>
<CAPTION>
December 31,
---------------
1995 1994
---- ----
(In thousands)
<S> <C> <C>
Commitments to originate:
Fixed rate loans $ 856 $ 159
Variable rate loans 2,765 1,619
Unused lines of credit 57,134 46,006
</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. The Company evaluates each
customer's creditworthiness on a
A-33
<PAGE> 52
HAVERFIELD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
================================================================================
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 commitment amount represents the amount of
credit risk, however, the Company generally extends credit on a secured basis.
Collateral held usually includes residential and commercial real estate.
The Company's Banking subsidiary is a 19.6% participant in a standby letter of
credit totaling $10.2 million which expires in 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 Company's Banking subsidiary had
outstanding commitments under this standby letter of credit of $2.1 million at
December 31, 1995 and 1994. The Company's Banking subsidiary has established a
$322,000 liability for credit loss for this standby letter of credit. At
December 31, 1995, no funds have been advanced under this letter of credit.
10. DEPOSITS
The following table as of December 31, 1995 presents, by various rate
categories, the amounts of certificates of deposit maturing during the periods
indicated:
<TABLE>
<CAPTION>
Accounts Maturing in the Twelve Months Ended December 31,
--------------------------------------------------------------------
2001 &
1996 1997 1998 1999 2000 Later Total
---- ---- ---- ---- ---- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
1.001 to 2.000% $ -- $ -- $ -- $ -- $ -- $ 2,551 $ 2,551
2.001 to 3.000% 532 -- -- -- -- 100 632
3.001 to 4.000% 399 5 -- -- -- -- 404
4.001 to 5.000% 13,363 5,147 340 637 48 134 19,669
5.001 to 6.000% 49,471 9,806 1,663 999 472 380 62,791
6.001 to 7.000% 42,573 19,277 3,055 1,732 1,002 426 68,065
7.001 to 8.000% 3,074 1,795 17,694 2,937 5,459 2,705 33,664
8.001 to 9.000% 324 137 552 519 321 -- 1,853
9.001 to 10.000% 2,991 3 379 364 -- -- 3,737
10.001 to 11.000% 37 29 -- -- -- -- 66
11.001 and over -- -- -- -- 8 23 31
-------- -------- -------- -------- -------- -------- --------
$112,764 $ 36,199 $ 23,683 $ 7,188 $ 7,310 $ 6,319 $193,463
======== ======== ======== ======== ======== ======== ========
</TABLE>
Deposits are obtained primarily from persons who are residents of Ohio,
particularly the Cleveland area. The Company does not advertise for deposits
outside of Ohio, and management believes that an insignificant amount of the
deposits are from non-residents of Ohio at December 31, 1995.
11. ADVANCES FROM FEDERAL HOME LOAN BANK
No advances were outstanding from the Federal Home Loan Bank of Cincinnati at
December 31,1995. At December 31, 1994, a $2 million advance with an interest
rate of 10.30% and a maturity date of June 26, 1995 was outstanding. This
advance was repaid, including a prepayment penalty of $16,000 on April 4,1995.
12. LONG-TERM BORROWINGS
On May 19, 1993, the Company issued $4.6 million of 6.5% Convertible
Subordinated Debentures due April 1, 2003. On November 15, 1994, the Company
paid $402,000 to redeem all outstanding and unconverted debentures.
A-34
<PAGE> 53
HAVERFIELD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
================================================================================
In November, 1995, the Company obtained a one year secured revolving credit
facility from a third-party lender in the amount of $1.0 million. The interest
rate associated with this credit facility is based on the prime rate. The
Company has not drawn on this credit facility.
13. RETAINED EARNINGS, REGULATORY CAPITAL AND REGULATORY MATTERS
Under the current regulatory capital regulations, the Company's Banking
subsidiary must have: (i) core capital equal to 3% 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 of both on- and off-balance sheet items, and are assigned a risk
weighting from 0-100% based on their relative risk. The Company's Banking
subsidiary was in compliance with these regulatory capital regulations on
December 31, 1995 and 1994.
The following is a summary of the Company's Banking subsidiary regulatory
capital levels at December 31, 1995:
<TABLE>
<CAPTION>
Core Capital Tangible Capital Risk-Based Capital
------------ ---------------- ------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total regulatory capital $23,496 6.66% $23,496 6.66% $26,122 11.39%
Regulatory capital required 10,591 3.00 5,296 1.50 18,345 8.00
------- ---- ------- ---- ------- -----
Regulatory capital excess $12,905 3.66% $18,200 5.16% $ 7,777 3.39%
======= ==== ======= ==== ======= =====
</TABLE>
Management believes that, under the current regulations, the minimum capital
requirements will continue to be met in the foreseeable future. However, events
beyond the control of management, such as a downturn in the local economy of
northeastern Ohio where the Company has most of its loans, could adversely
affect future earnings and, consequently, the Company's ability to meet its
future minimum capital requirements.
In connection with an examination of the Company's Banking subsidiary, the Bank
entered into a written agreement with the OTS (the "Supervisory Agreement") in
1993, providing for measures to address the regulatory compliance concerns of
the OTS regarding the Bank's policies and procedures with respect to certain
matters which include the following: institution of a regulatory compliance
management program; revision of loan underwriting standards, application
register and monitoring information as pertains to nondiscrimination
regulations; improvement of loan and advertising disclosures as pertains to
regulatory requirements; improvements of currency transaction report completion
procedures as respects Bank Secrecy Act compliance; correction of loan index
adjustment procedures; correction of deficiencies in advertising as respects
Fair Housing Act compliance; and improvement of Community Reinvestment Act
ascertainment procedures. 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.
Retained earnings at December 31,1995 includes approximately $3.4 million of
income that has not been subject to tax because of deductions for bad debts
allowed for federal income tax purposes. Deferred taxes have not been provided
on such bad debt deductions since the Company does not intend to use the
accumulated bad debt deductions for purposes other than to absorb loan losses.
If, in the future, this portion of retained earnings is used for any purpose
other than to absorb bad debt losses, federal income taxes may be imposed on
such amounts at the then current corporate income tax rate.
A-35
<PAGE> 54
HAVERFIELD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
================================================================================
14. FEDERAL INCOME TAXES
The provision for income taxes consists of the following components:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1995 1994 1993
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Current income taxes $ 1,089 $ 861 $ 1,478
Deferred income taxes (69) (192) (340)
------- ------- -------
$ 1,020 $ 669 $ 1,138
======= ======= =======
</TABLE>
A reconciliation from the statutory income tax rate to the effective
consolidated income tax rate is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1994 1993
---- ---- -----
<S> <C> <C> <C>
Federal income tax rate 35.0% 35.0% 35.0%
Increase (decrease) resulting from:
Benefit of graduated rates (1.0) (1.0) (1.0)
IRS examination -- (6.1) --
Other (.2) .3 .2
---- ---- ----
Effective consolidated income tax rate 33.8% 28.2% 34.2%
==== ==== ====
</TABLE>
The lower effective income tax rate in 1994 resulted from receipt of a
favorable "no change" letter from the Internal Revenue Service regarding the
1991 tax year, which allowed the Company to reduce its tax liabilities for
certain estimated contingent items. Significant components of the deferred
tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------
1995 1994 1993
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Deferred tax assets:
Book loss reserves $(1,076) $(1,036) $(1,021)
Deferred loan fees (307) (268) (99)
Reserve for uncollected interest (76) (58) (45)
Excess servicing fees (81) (144) (224)
Mark-to-market accounting -- (33) --
Other (67) (20) (11)
------- ------- -------
Total deferred tax assets (1,607) (1,559) (1,400)
------- ------- -------
Deferred tax liabilities:
FHLB stock dividend 339 282 237
Tax bad debt reserves 429 338 226
Mark-to-market accounting 79 -- 113
Difference between book and tax
depreciation 27 19 62
Purchase accounting 19 182 344
Other -- -- 18
------- ------- -------
Total deferred tax liabilities 893 821 1,000
------- ------- -------
Net deferred tax liability (asset) $ (714) $ (738) $ (400)
======= ======= =======
</TABLE>
A-36
<PAGE> 55
HAVERFIELD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
===============================================================================
15. MANAGEMENT OPTION PLAN AND EMPLOYEE STOCK OWNERSHIP PLAN
The Management Option Plan is administered by the Compensation Committee of the
Board of Directors, which is given absolute discretion under the Management
Option Plan to select certain officers to whom rights will be granted, and to
determine the number of rights to be granted to each. Two kinds of rights are
contained in the Management Option Plan and are available for grant: incentive
stock options and nonqualified compensatory stock options. No compensatory
stock options have been granted. A summary of incentive stock option
transactions is as follows:
<TABLE>
<CAPTION>
Stock Options Option Price
------------- ------------
<S> <C> <C>
January 1, 1993 61,952 $ 6.612-11.157
Granted 8,250 14.545-15.227
Exercised (2,420) 6.612
Lapsed or cancelled (605) 11.157
------- --------------
December 31, 1993 67,177 6.612-15.227
Granted 5,797 14.318
Exercised (2,420) 7.851-11.157
Lapsed or cancelled (1,100) 15.227
------- --------------
December 31, 1994 69,454 $ 6.612-14.545
Granted 19,000 13.875
Exercised 2,420 6.612
------- --------------
December 31, 1995 86,034 $ 6.612-14.545
======= ==============
</TABLE>
The 1985 Stock Option Plan terminated on July 23, 1995; however, 67,034 stock
options remain outstanding. The 1995 Stock Option Plan has 165,000 shares of
authorized but unissued common stock reserved for future issuance pursuant to
the exercise of stock options, subject to modification or adjustment to reflect
changes in the capitalization of the Company as, for example, in the case of a
merger, reorganization, or stock split. The exercise price of options granted
may not be less than the fair market value of the common stock at the date of
grant.
Contributions to the employee stock ownership plan ("ESOP") by the Company are
made at the discretion of the Company. For the years ended December 31, 1995,
1994 and 1993, contributions in the amount of $17,655, $91,177, and $175,512,
respectively, were expensed as costs of the ESOP.
At December 31, 1995, the ESOP held approximately 8.10% of the total
outstanding shares of the Company. In 1991, the Board of Directors of the
Company approved a loan from the Company to the ESOP. The proceeds of the loan
were utilized by the ESOP to purchase existing shares of the Company common
stock. In June 1991, the ESOP borrowed $300,000 from McDonald & Company
Securities, Inc., a market maker in the Company's stock, and used the proceeds
to reduce the borrowings from the Company. Both loans were completely repaid
during 1994.
16. FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair value estimates are made at a discrete point in time based on relevant
market information and information about the financial instruments. Because no
market exists for a significant portion of the Company's financial instruments,
fair value estimates are based on judgments regarding future expected loss
experience, current economic conditions, and risk characteristics of various
financial instruments. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly affect
the estimates.
A-37
<PAGE> 56
HAVERFIELD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
===============================================================================
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
Cash and short-term investments, accrued interest receivable, advances by
borrowers for taxes and insurance, and other liabilities - The carrying amounts
reported in the consolidated statement of financial condition are a reasonable
estimate of fair value.
Investment securities and mortgage-backed securities - Fair values for
securities are based on quoted market prices or dealer quotes. If quoted market
prices are not available, fair value is estimated using quoted market prices
for securities with similar coupons, maturities and credit ratings.
Loans held for investment - The fair value is based on the estimated future
cash flows, discounted at current market rates for similar loans.
Time deposits - The fair value is estimated using current market rates for
certificate of deposits of similar remaining maturities.
Other deposits - The fair values disclosed for deposit liabilities with no
stated maturity, including passbook/statement accounts, NOW accounts and money
market fund accounts, are the amounts payable on demand at year-end, which is
their carrying amounts.
Advances from Federal Home Loan Bank - The fair value is estimated by
discounting the future cash flows at the rate currently available on borrowings
with similar characteristics.
Off-balance sheet financial instruments - The fair value of the off-balance
sheet financial instruments, including commitments to originate loans and the
standby letter of credit, is considered to be equivalent to the value of the
current fees charged to enter into the commitments. At December 31, 1995 and
1994, those fees were approximately $33,000, and $18,000, respectively.
The following table presents the estimated fair values of the Company's
financial instruments:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1995 1994
-------------------- -------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term investments $ 12,143 $ 12,143 $ 13,395 $ 13,395
Investment securities 47,184 47,184 11,602 11,602
Mortgage-backed securities 2,754 2,754 3,101 3,101
Loans held for investment 283,560 284,782 279,680 275,429
Accrued interest receivable 2,602 2,602 1,697 1,697
Financial liabilities:
Time deposits 193,463 194,737 160,764 160,577
Other deposits 124,316 124,316 118,505 118,505
Advances from Federal Home Loan Bank -- -- 2,000 2,028
Advances by borrowers for taxes and insurance 5,740 5,740 6,044 6,044
Other liabilities 1,141 1,141 1,102 1,102
</TABLE>
A-38
<PAGE> 57
HAVERFIELD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
==============================================================================
17. HAVERFIELD CORPORATION (PARENT COMPANY ONLY)
<TABLE>
STATEMENTS OF FINANCIAL CONDITION
<CAPTION>
December 31,
--------------------
1995 1994
-------- --------
(Dollars in thousands, except per share data)
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 3,197 $ 3,464
Investment securities, at fair value (Amortized cost
of $1,493 in 1995 and $1,000 in 1994) 1,514 991
Investment in Home Bank, F.S.B 23,802 22,737
Other assets 15 3
-------- --------
$ 28,528 $ 27,195
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Other liabilities $ 470 $ 327
Preferred stock; 1,000,000 shares authorized; none issued -- --
Common stock, par value $.01 per share; 5,000,000 shares authorized;
issued: 1,894,475 shares in 1995 and 1,720,135 shares in 1994 19 17
Capital in excess of par value 16,353 13,823
Retained earnings 11,669 13,165
Net unrealized appreciation (depreciation) in the fair value of securities 153 (64)
Common shares in treasury, at cost (11,790 shares in 1995
and 6,154 shares in 1994) (136) (73)
-------- --------
$ 28,528 $ 27,195
======== ========
</TABLE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1995 1994 1993
---- ---- ----
(In thousands)
<S> <C> <C> <C>
INCOME:
Dividends from subsidiary $1,400 $1,550 $1,250
Interest on ESOP loan -- -- 6
Interest on investment securities 56 42 63
Interest on deposit with subsidiary -- -- 2
------ ------ ------
Total income 1,456 1,592 1,321
------ ------ ------
EXPENSE:
Interest on long-term borrowings -- 230 196
Employee compensation and benefits 18 91 176
Advertising 53 46 42
Other expenses 257 328 328
------ ------ ------
Total expense 328 695 742
------ ------ ------
Income before income taxes 1,128 897 579
Provision for income taxes -- -- --
------ ------ ------
Income before equity in undistributed net income
of subsidiary 1,128 897 579
Equity in undistributed net income of subsidiary 867 803 1,614
------ ------ ------
Net income $1,995 $1,700 $2,193
====== ====== ======
</TABLE>
A-39
<PAGE> 58
HAVERFIELD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
===============================================================================
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1995 1994 1993
-------- -------- ------
(In thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,995 $ 1,700 $ 2,193
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed net earnings of subsidiary (867) (803) (1,614)
Net change in other assets and other liabilities 133 32 141
Other operating flows (14) (63) 5
------ ------ ------
Net cash provided by operating activities 1,247 866 725
------ ------ ------
INVESTING ACTIVITIES:
Purchases of investment securities (1,492) -- (4,841)
Maturities of investment securities 1,000 -- 3,850
Investment in subsidiary -- -- (1,475)
Proceeds from ESOP loan repayments -- 30 127
------ ------ ------
Net cash provided by (used in) investing activities (492) 30 (2,339)
------ ------ ------
FINANCING ACTIVITIES:
Proceeds from issuance of common shares -- -- 1,558
Proceeds from issuance of long-term debt -- -- 4,355
Proceeds from exercise of stock options 16 23 16
Repayments of borrowings -- (387) --
Payment of cash dividends (975) (858) (730)
Purchase of treasury shares (63) (7) (4)
------ ------ ------
Net cash provided by (used in) financing activities (1,022) (1,229) 5,195
------ ------ ------
Increase (decrease) in cash and cash equivalents (267) (333) 3,581
Cash and cash equivalents at beginning of year 3,464 3,797 216
------ ------ ------
Cash and cash equivalents at end of year $3,197 $3,464 $3,797
====== ====== ======
</TABLE>
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<PAGE> 59
REVOCABLE PROXY
HAVERFIELD CORPORATION-TERMINAL TOWER, 50 PUBLIC SQUARE, SUITE 444
CLEVELAND, OHIO 44113-2203
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned, being a shareholder of Haverfield Corporation, hereby
authorizes the members of the Board of Directors of Haverfield Corporation or
any successors in their respective positions, as Proxies, with full power of
substitution to represent the undersigned at the Annual Meeting to be held
April 24, 1996, and at any adjournment of said meeting, and thereat to vote, as
designated below, all the shares of common stock of Haverfield Corporation held
of record by the undersigned on February 29, 1996, on the following:
1. Proposal to ratify the appointment of Deloitte & Touche LLP as independent
auditors for the fiscal year ending December 31, 1996.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
-------------------------------------------------------
2. In accordance with their judgement, the Proxies are authorized to vote upon
any other matter that may come before the meeting.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER.
IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSAL 1.
The undersigned hereby acknowledges receipt of a Notice of the 1996 Annual
Meeting of Shareholders of Haverfield Corporation and a Proxy Statement for the
1996 Annual Meeting prior to the signing of this proxy.
Dated:______________________, 1996
______________________________________
Signature of Shareholder
______________________________________
Signature of Shareholder
Please date and sign proxy exactly as
you name appears herein and return in
the enclosed envelope which requires no
postage. Only one signature is required
in case of a joint account. When
signing in a representative capacity,
please give title.
