<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 1O-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-17947
HAVERFIELD CORPORATION
----------------------
(Exact name of registrant as specified in its charter)
Ohio 34-1606726
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(State or other jurisdiction of
incorporation or organization) (IRS Employer Identification No.)
Terminal Tower, 50 Public Square, Suite 444, Cleveland, Ohio 44113-2203
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 348-2800
Former name, former address and former fiscal year,
if changed since last report: Not Applicable
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Shares, $0.01 par value 1,906,349
- --------------------------------------------------------------------------------
(Class) (Outstanding at October 31, 1996)
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HAVERFIELD CORPORATION
INDEX
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<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Consolidated Statements of Financial Condition
September 30, 1996, December 31, 1995 and September 30, 1995 3
Consolidated Statements of Income
Three Months Ended September 30, 1996 and 1995 4
Nine Months Ended September 30, 1996 and 1995 5
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1996 and 1995 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition and
Results of Operations 16
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings 25
Item 2 - Changes in Securities 25
Item 3 - Defaults Upon Senior Securities 25
Item 4 - Submission of Matters to a Vote of Security Holders 25
Item 5 - Other Information 25
Item 6 - Exhibits and Reports on Form 8-K 25
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
HAVERFIELD CORPORATION
Consolidated Statements of Financial Condition (unaudited)
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Sept. 30, 1996 December 31, 1995 Sept. 30, 1995
-------------- ----------------- --------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 4,165 $ 7,647 $ 5,318
Due from banks-interest bearing 100 100 200
Federal funds sold 15,182 4,396 5,654
Investment securities:
Available for sale, at fair value (amortized
cost of $29,318, $47,034 and $48,405, respectively) 28,665 47,184 48,500
Mortgage-backed securities:
Available for sale, at fair value (amortized
cost of $2,139, $2,672 and $2,813 respectively) 2,197 2,754 2,877
Loans (net of allowance for loan losses of $2,757,
$2,734 and $2,710, respectively) 290,620 283,560 281,897
Premises and equipment 4,096 3,953 4,049
Accrued interest and other assets 5,537 4,745 5,018
Cost in excess of fair value of net assets acquired 41 166 372
-------- -------- --------
TOTAL $350,603 $354,505 $353,885
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Passbook/statement accounts $ 40,815 $ 45,564 $ 47,520
Non-interest-bearing NOW accounts 7,097 11,072 11,700
Interest bearing NOW accounts 15,903 13,804 12,533
Money market fund accounts 60,873 53,876 47,258
Certificates of deposit 157,222 193,463 199,419
-------- -------- --------
Total deposits 281,910 317,779 318,430
Advances from Federal Home Loan Bank 31,000 -- --
Advances by borrowers for taxes and insurance 3,136 5,740 2,901
Accrued interest and other liabilities 6,964 2,928 4,981
-------- -------- --------
Total liabilities 323,010 326,447 326,312
-------- -------- --------
Preferred stock; 1,000,000 shares authorized;
none issued -- -- --
Common stock, par value $.01 per share; 5,000,000
shares authorized; issued: 1,915,892 shares,
1,894,475 shares and 1,893,359 shares, respectively 19 19 19
Capital in excess of par value 16,510 16,353 16,345
Retained earnings 11,575 11,669 11,224
Net unrealized appreciation (depreciation) in the
fair value of securities (net of deferred income
taxes of $(202), $79 and $54, respectively) (393) 153 104
Common shares in treasury, at cost (9,301 shares,
11,790 shares and 10,512 shares, respectively) (118) (136) (119)
-------- -------- --------
Total shareholders' equity 27,593 28,058 27,573
-------- -------- --------
TOTAL $350,603 $354,505 $353,885
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
HAVERFIELD CORPORATION
Consolidated Statements of Income (unaudited)
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(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1996 1995
---- ----
<S> <C> <C>
Interest income:
Loans $6,201 $5,872
Investments and other 559 943
Mortgage-backed securities 46 58
------ ------
Total interest income 6,806 6,873
------ ------
Interest expense:
Deposits 3,379 4,119
Advances from Federal Home Loan Bank 290 --
------ ------
Total interest expense 3,669 4,119
------ ------
Net interest income 3,137 2,754
Provision for loan losses 34 30
------ ------
Net interest income after provision for loan losses 3,103 2,724
------ ------
Noninterest income:
Service fees and other charges 347 272
Servicing income 112 132
Other income 75 44
------ ------
Total noninterest income 534 448
------ ------
Noninterest expense:
Employee compensation and benefits 966 851
Occupancy and equipment 476 477
Advertising 71 107
Insurance premiums 2,151 189
Amortization of intangibles 46 207
Data processing fees 89 85
Other expenses 748 549
------ ------
Total noninterest expense 4,547 2,465
------ ------
Income (loss) before income taxes (910) 707
Provision (benefit) for income taxes (309) 238
------ ------
Net income (loss) $ (601) $ 469
====== ======
Net income (loss) per common share $ (.31) $ .25
====== ======
Cash dividend paid per common share $ .135 $ .127
====== ======
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
HAVERFIELD CORPORATION
Consolidated Statements of Income (unaudited)
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(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1996 1995
---- ----
<S> <C> <C>
Interest income:
Loans $18,330 $17,300
Investments and other 1,891 2,008
Mortgage-backed securities 148 184
------- -------
Total interest income 20,369 19,492
------- -------
Interest expense:
Deposits 10,620 11,077
Advances from Federal Home Loan Bank 354 57
------- -------
Total interest expense 10,974 11,134
------- -------
Net interest income 9,395 8,358
Provision for loan losses 102 91
------- -------
Net interest income after provision for loan losses 9,293 8,267
------- -------
Noninterest income:
Service fees and other charges 952 901
Servicing income 347 410
Other income 218 87
------- -------
Total noninterest income 1,517 1,398
------- -------
Noninterest expense:
Employee compensation and benefits 2,949 2,894
Occupancy and equipment 1,443 1,430
Advertising 357 374
Insurance premiums 2,552 555
Amortization of intangibles 161 621
Data processing fees 263 266
Other expenses 2,058 1,569
------- -------
Total noninterest expense 9,783 7,709
------- -------
Income before income taxes 1,027 1,956
Provision for income taxes 350 660
------- -------
Net income $ 677 $ 1,296
======= =======
Net income per common share $ .36 $ .69
======= =======
Cash dividend paid per common share $ .405 $ .381
======= =======
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
HAVERFIELD CORPORATION
Consolidated Statements of Cash Flows (unaudited)
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(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1996 1995
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 677 $ 1,296
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 102 91
Amortization of intangibles 161 621
Depreciation 525 592
Amortization of deferred loan fees (189) (116)
Federal Home Loan Bank stock dividends (139) (124)
Net change in other assets and other liabilities 1,223 (2)
Net change in accrued interest receivable and accrued interest payable 1,644 927
Other 6 (173)
-------- --------
Net cash provided by operating activities 4,010 3,112
-------- --------
INVESTING ACTIVITIES:
Disbursements on loans originated (66,892) (56,781)
Proceeds from:
Loan repayments and maturities 68,520 55,511
Mortgage-backed security repayments and maturities 530 309
Investment security calls and maturities 23,000 3,500
Sale of real estate owned 659 --
Purchases of:
Loans (9,034) (855)
Investment securities (5,099) (40,045)
Premises and equipment (674) (304)
Decrease (increase) in federal funds sold (10,786) 1,246
Other 353 85
-------- --------
Net cash provided by (used in) investing activities 577 (37,334)
-------- --------
FINANCING ACTIVITIES:
Net increase in passbook, NOW and money market fund accounts 373 507
Net increase (decrease) in certificates of deposits (36,241) 38,655
Proceeds from Federal Home Loan Bank advances 31,000 --
Repayments of Federal Home Loan Bank advances -- (2,016)
Net decrease in mortgage escrow deposits (2,604) (3,143)
Proceeds from exercise of stock options 157 8
Payment of cash dividends (722) (719)
Resale (purchase) of treasury shares 18 (47)
-------- --------
Net cash provided by (used in) financing activities (8,069) 33,245
-------- --------
Net decrease in cash and due from banks (3,482) (977)
Cash and due from banks at beginning of period 7,647 6,295
-------- --------
Cash and due from banks at end of period $ 4,165 $ 5,318
======== ========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
HAVERFIELD CORPORATION
Notes to Consolidated Financial Statements
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1. The accounting policies of Haverfield Corporation ("Haverfield" or the
"Company") conform to generally accepted accounting principles and prevailing
practices within the banking and thrift industry. A summary of the more
significant policies follows:
NATURE OF OPERATIONS - Haverfield is a unitary savings and loan holding company
whose principal operating subsidiary is Home Bank, F.S.B. (the "Bank"). The
Company is principally engaged in the business of attracting deposits from the
general public and using such deposits, together with borrowings and other
funds, to make loans secured by real estate, various types of consumer loans and
commercial loans in its market area. The Company's principal market area
consists of suburban communities of Cleveland, and the Company's business is
conducted through its corporate office located in Cleveland, Ohio and ten branch
offices located in Beachwood, Brooklyn, Cleveland, Euclid, Lakewood, Mayfield
Village, Mentor, Rocky River, University Heights, and Westlake, Ohio. Loans and
deposits are primarily generated from the areas where its banking offices are
located. The Company's income is derived 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. In the
opinion of management, the accompanying unaudited financial statements include
all adjustments (consisting only of normal recurring accruals) which the Company
considers necessary for a fair presentation of (a) the results of operations for
the three-month and nine-month periods ended September 30, 1996 and 1995, (b)
the financial position at September 30, 1996, December 31, 1995 and September
30, 1995, and (c) cash flows for the nine-month periods ended September 30,
1996 and 1995. The results of operations for the period ended September 30,
1996 are not necessarily indicative of the results which may be expected for a
full year. Certain amounts previously reported in the prior years consolidated
financial statements have been reclassified to conform with the current
presentation.
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES - At the time of purchase,
securities are classified as either held for trading, available for sale or held
for investment, based upon management's intent. Securities held for trading are
carried at estimated market value with the adjustment, if any, reflected in the
statement of income. Securities classified as available for sale are also
carried at estimated market value; however, the adjustment, if any, is reflected
in shareholders' equity. Securities held for investment continue to be carried
at amortized cost. Gains or losses on the sale of securities, representing the
difference between net proceeds and carrying value, are recorded in noninterest
income on the trade date using the specific identification method.
LOANS - At the time of origination or purchase, loans are classified as held for
sale or held for investment, based upon management's intent. Critical to the
proper classification of, and accounting for, loans as investments is the intent
and ability to hold them to maturity. Loans held for sale are accounted for at
the lower of cost or market, with any unrealized loss included in income. Loans
held for investment are stated at the principal amount outstanding adjusted for
amortization of premiums and accretion of discounts using the interest method.
Interest is accrued as earned. Transfers of loans held for sale to the
investment portfolio are recorded at the lower of cost or market value on the
transfer date.
On January 1, 1995, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan,"
and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan Income
Recognition and Disclosures," which impose certain requirements on the
measurement of impaired loans. The Company has previously measured such loans in
accordance with the methods prescribed in SFAS No. 114. Conse-
7
<PAGE> 8
quently, no additional loss provisions were required by the adoption of these
statements. SFAS No. 114 also requires that impaired loans for which foreclosure
is probable should be accounted for as loans. The amounts of impaired loans, as
defined by SFAS No. 114, and impaired loans for which foreclosure is probable
are not significant and have not changed materially since December 31, 1995. The
initial adoption of SFAS No. 114 and SFAS No. 118 did not have a material effect
on the financial condition or results of operations of the Company.
The Company's policy for recognition of interest on impaired loans, including
how cash receipts are recorded, is essentially unchanged as a result of the
adoption of SFAS Nos. 114 and 118. A loan (including a loan impaired under SFAS
No. 114) is classified as nonaccrual when collectability is in doubt (this is
generally when the borrower is 90 days past due on contractual principal or
interest payments). A loan may be considered impaired, but remain on accrual
status, when the borrower demonstrates (by continuing to make payments) a
willingness to keep the loan current. When a loan is placed on nonaccrual
status, unpaid interest is reversed and an allowance is established by a charge
to interest income equal to all accrued interest. Income is subsequently
recognized only to the extent that cash payments are received. Loans are
returned to accrual status when, in management's judgment, the borrower has the
ability and intent to make periodic principal and interest payments (this
generally requires that the loan be brought current in accordance with its
original contractual terms).
A loan is considered to be impaired when, based on current information and
events, it is probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement. In general, the Bank
considers a loan on income-producing properties to be impaired when the debt
service ratio is less than 1.0. Loans on non-income producing properties are
considered impaired whenever fair value is less than book value. The Bank
performs a review of all loans over $500,000 to determine if the impairment
criteria have been met. If the impairment criteria have been met, a reserve is
calculated according to the provisions of the SFAS No. 114. For loans which are
individually not significant ($500,000 or less) and represent homogeneous
populations, the Bank evaluates impairment based on the level and extent of
delinquencies. Such loans include all mortgage loans secured by 1-4 family
residential property, all consumer loans, and certain multi-family real estate
loans, nonresidential real estate loans, business loans and leases. The Bank
charges principal off at the earlier of (1) when a total loss of principal has
been deemed to have occurred as a result of the book value exceeding the fair
value or net realizable value or (2) when collection efforts have ceased.
NONPERFORMING LOANS - Loans considered to be nonperforming include nonaccrual,
accruing loans delinquent 90 days or more, and restructured loans. Loans are
classified as nonaccrual when, in management's judgment, the borrower no longer
has the ability and intent to make periodic interest and principal payments.
Loans are classified as accruing loans delinquent 90 days or more when the loan
is 90 days or more past due, is fully secured, and, in management's judgment,
the borrower has the ability and intent to make periodic interest and principal
payments. Loans are classified as restructured when concessions are made to
borrowers with respect to the principal balance, interest rate or the term due
to the inability of the borrower to meet the obligation under the original
terms.
LOAN FEES - Loan origination fees received for loans held for investment, net of
certain direct origination costs, are deferred and amortized to interest income
over the contractual life of the loan using the level yield method. Loan
origination fees received for loans held for sale, net of certain direct
origination costs, are deferred and recognized as an adjustment of the basis on
sale of the loans. Fees received for loan commitments that are expected to be
drawn, based on the Bank's experience with similar commitments, are deferred and
amortized over the life of the loan using the level yield method. Fees for other
loan commitments are deferred and amortized over the loan commitment period on a
straight-line basis. Unamortized deferred loan fees related to loans paid off
are included in interest income in the period the loan is paid off. Amortization
of net deferred fees is discontinued for loans that are deemed to be
nonperforming.
ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is established at an
amount necessary to reduce the recorded balances of loans receivable to their
estimated net realizable value, and is increased by charges to income and
decreased by charge-offs (net of recoveries). The allowance for loan losses is
based on management's estimate of the value of the collateral, considering the
current and currently anticipated future operating or sales conditions, as well
as the Bank's past loan loss experience, known and inherent risks in the
portfolio, adverse situations which may affect the borrower's ability to repay,
and current economic conditions. Consequently, these estimates are particularly
susceptible to changes that could result in a material adjustment to results of
operations. Recovery of the carrying value of such loans is dependent on
economic, operating, and other conditions that are beyond the control of the
Company. In the opinion of management, the allowance for loan losses is recorded
in accordance with generally accepted accounting principles.
8
<PAGE> 9
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.
EARNINGS PER COMMON SHARE - Earnings per common share was computed using the
weighted average number of common shares outstanding for the period. The
weighted average shares used in the computation of earnings (loss) per common
share was 1,906,591 shares and 1,882,965 shares during the three-month periods
ended September 30, 1996 and 1995, respectively. The weighted average shares
used in the computation of earnings per common share was 1,899,323 shares and
1,884,143 shares during the nine-month periods ended September 30, 1996 and
1995, respectively.
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 $639,000 and $649,000 at September 30, 1996 and 1995,
respectively.
Income tax payments made for the nine months ended September 30, 1996 and 1995
were $1.1 million and $700,000, respectively. Interest paid on deposits and
other borrowings totaled $9,542,000 and $9,134,000 for the nine months ended
September 30, 1996 and 1995, respectively. There were no loans made to finance
the sale of foreclosed real estate during the nine months ended September
30, 1996 and 1995. There were no acquisitions of real estate property through
foreclosure during the nine months ended September 30, 1996 and 1995.
NEW ACCOUNTING STANDARDS - During March, 1995, the Financial Accounting
Standards Board ("FASB") issued SFAS No.121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." This statement
requires that long-lived assets and certain intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. SFAS No. 121 is effective
for 1996 with impairment losses resulting from its application being reported in
the period in which the recognition criteria are first applied and met.
During May, 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights." This statement requires that the right to service loans,
acquired either through the purchase or origination of the loan and retained
after the loans have been sold or securitized, shall be recognized as an asset
by allocating the total cost of the loans to mortgage servicing rights and loans
based on the relative fair values. The provisions of this statement shall be
applied prospectively beginning in 1996, to transactions in which mortgage loans
are sold or securitized with servicing rights retained and to impairment
evaluations of all amounts capitalized as mortgage servicing rights, including
those purchased before the adoption of this statement.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." This standard is effective for fiscal years begining 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
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fair value method under SFAS No. 123 are required to present pro forma net
income and earnings per share, in the notes to the annual financial statements,
as if the fair value based method had been adopted. Management has elected to
continue the use of the APB 25 method.
Management adopted these statements on January 1, 1996. The impact of adopting
these statements on the financial condition and results of operations of the
Company was not significant.
In June, 1996, the FASB issued SFAS No.125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This standard
is effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after December 31, 1996. This statement supersedes SFAS
No. 122. The impact of adopting this statement on the financial condition and
results of operations of the Company is not expected to be significant.
2. Amortized cost, estimated market values and weighted average
end-of-period yields of investment securities by contractual maturity are
summarized as follows:
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995 September 30, 1995
------------------ ----------------- ------------------
Amortized Market Amortized Market Amortized Market
Cost value Yield Cost value Yield Cost value Yield
---- ----- ----- ---- ----- ----- ---- ----- -----
(Dollars in thousands)
U.S. Government obligations:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Due in one year or less $ 1,000 $ 1,003 7.25% $ 2,000 $ 2,016 5.81% $ 3,391 $ 3,390 5.73%
Due after 1 year through 5 years 9,986 9,858 6.26% 23,977 24,055 6.81% 29,974 30,028 6.90%
Due after 5 years through 10 years 15,479 14,951 6.90% 18,443 18,499 6.97% 12,472 12,514 7.36%
------ ------ ------ ------ ------ ------
Total 26,465 25,812 6.67% 44,4420 44,570 6.83% 45,837 45,932 6.94%
------ ------ ------ ------ ------ ------
Marketable equity securities 100 100 6.42% -- -- -- -- -- --
Federal Home Loan Bank stock 2,753 2,753 7.00% 2,614 2,6144 7.00% 2,568 2,568 7.00%
------ ------ ------ ------ ------ ------
Total $29,318 $28,665 6.70% $47,034 $47,184 6.84% $48,405 $48,500 6.94%
====== ====== ====== ====== ====== ======
</TABLE>
All investment securities are classified as available for sale at September 30,
1996. Investment securities totaling $3.3 million at September 30, 1996 were
pledged as collateral for public funds on deposit with the Bank, treasury tax
and loan deposits and a revolving credit facility. The Federal Home Loan Bank
stock was pledged as collateral for the advances from the Federal Home Bank of
Cincinnati.
Gross unrealized gains and gross unrealized losses on investment securities are
summarized as follows:
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995 September 30, 1995
------------------ ----------------- ------------------
Gross Gross Gross Gross Gross Gross
Unrealized Unrealized Unrealized Unrealized Unrealized Unrealized
Gains Losses Gains Losses Gains Losses
----- ------ ----- ------ ----- ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government obligations $7 $660 $175 $25 $142 $47
Federal Home Loan Bank stock - - - - - -
-- ---- ---- --- ---- ---
Total $7 $660 $175 $25 $142 $47
== ==== ==== === ==== ===
</TABLE>
3. Loans may be exchanged for mortgage-backed securities guaranteed by
government agencies. Although long-term and fixed-rate in nature,
mortgage-backed securities are more liquid than real estate loans since a
large and active secondary market exists. At September 30, 1996, all
mortgage-backed securities are classified as available for sale.
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<PAGE> 11
Amortized cost, estimated market values, and weighted average end-of-period
yields by contractual maturity are summarized as follows:
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995 September 30, 1995
------------------ ----------------- ------------------
Amortized Market Amortized Market Amortized Market
Cost Value Yield Cost Value Yield Cost Value Yield
---- ----- ----- ---- ----- ----- ---- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Pass-through certificates:
Federal Home Loan Mortgage
Corporation:
Due after 5 years through 10 years $ 11 $ 11 7.50% $ 14 $ 14 7.50% $ 15 $ 15 7.50%
Due after 10 years 1,842 1,900 8.61% 2,085 2,168 8.62% 2,192 2,259 8.63%
----- ----- ----- ----- ----- -----
Total 1,853 1,911 8.60% 2,099 2,182 8.61% 2,207 2,274 8.62%
----- ----- ----- ----- ----- -----
Government National Mortgage
Association:
Due after 1 year through 5 years 186 186 9.07% 1 1 8.35% 1 1 8.50%
Due after 5 years through 10 years -- -- -- 250 249 9.20% 260 257 9.24%
----- ----- ----- ----- ----- -----
Total 186 186 9.07% 251 250 9.20% 261 258 9.24%
----- ----- ----- ----- ----- -----
Collateralized mortgage obligations:
Due in 1 year or less -- -- -- 201 201 5.47% -- -- --
Due after 1 year through 5 years -- -- -- -- -- -- 217 217 5.49%
Due after 10 years 100 100 6.13% 121 121 5.68% 128 128 5.81%
----- ----- ----- ----- ----- -----
Total 100 100 6.13% 322 322 5.55% 345 345 5.61%
----- ----- ----- ----- ----- -----
Total $2,139 $2,197 8.53% $2,672 $2,754 8.30% $2,813 $2,877 8.31%
===== ===== ===== ===== ===== =====
</TABLE>
At September 30, 1996, mortgage-backed securities totaling $834,000 were pledged
as collateral for public funds on deposit with the Bank.
Gross unrealized gains and gross unrealized losses on mortgage-backed
securities are summarized as follows:
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995 September 30, 1995
------------------ ----------------- ------------------
Gross Gross Gross Gross Gross Gross
Unrealized Unrealized Unrealized Unrealized Unrealized Unrealized
Gains Losses Gains Losses Gains Losses
----- ------ ----- ------ ----- ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Pass-through certificates:
Federal Home Loan Mortgage
Corporation $58 $ - $83 $ - $67 $ -
Government National Mortgage
Association - - - 1 - 3
Collateralized mortgage obligations - - - - - -
----- ------ ----- ------ ----- ------
Total $58 $ - $83 $ 1 $67 $3
===== ====== ===== ====== ===== ======
</TABLE>
4. The loan portfolio is comprised primarily of residential and, to a lesser
extent, commercial real estate loans granted to customers residing in
northeastern Ohio. Although the Bank has a diversified loan portfolio, its
debtors' ability to honor their contracts is to a degree dependent upon the
general economic conditions of the region.
11
<PAGE> 12
All loans are classified as held for investment at September 30, 1996,
December 31, 1995 and September 30, 1995. The composition of the loan portfolio
is as follows:
<TABLE>
<CAPTION>
Sept. 30, 1996 December 31, 1995 Sept. 30, 1995
-------------- --------------------------------
(In thousands)
<S> <C> <C> <C>
Real estate loans - mortgage $ 238,835 $ 238,181 $ 238,866
Real estate loans - construction 4,630 1,616 2,281
Land 3,757 4,461 4,591
Business loans 5,474 4,758 4,394
Consumer and other loans 44,123 40,055 37,932
--------- --------- ---------
296,819 289,071 288,064
LESS:
Undisbursed portion of loans in process (2,425) (1,711) (2,446)
Unearned income on consumer loans (8) (18) (24)
Amount due other financial institutions relating
to wrap around mortgage loans (138) (145) (148)
Deferred loan fees (871) (903) (839)
Allowance for loan losses (2,757) (2,734) (2,710)
--------- --------- ---------
$ 290,620 $ 283,560 $ 281,897
========= ========= =========
</TABLE>
At September 30, 1996, December 31, 1995 and September 30, 1995, loans serviced
for others amounted to $119.9 million, $139.5 million and $145.0 million,
respectively. Servicing loans for others generally consists of collecting
mortgage payments, maintaining escrow accounts, disbursing payments to investors
and foreclosure processing.
5. The following table summarizes nonaccrual, past due and repossessed
assets.
<TABLE>
<CAPTION>
Sept. 30, 1996 December 31, 1995 Sept. 30, 1995
-------------- ----------------- --------------
(Dollars in thousands)
<S> <C> <C> <C>
Nonaccrual loans $982 $1,303 $1,447
Loans past due 90 days and accruing 14 21 22
Repossessed assets -- 737 567
---- ------ ------
Total nonperforming assets $996 $2,061 $2,036
==== ====== ======
Percent of nonperforming loans to
total loans .34% .46% .51%
Percent of nonperforming assets to
total assets .28% .58% .58%
</TABLE>
The loans included above are secured by real estate or other collateral which
limits the Company's exposure to loss. At September 30, 1996, there were no
significant commitments outstanding to lend additional funds to borrowers with
nonperforming loans. For all periods presented, there have been no troubled debt
restructurings which involve forgiving a portion of interest or principal on any
loans or making loans at a rate materially less than market rates.
In addition to the loans disclosed in the table above, the Bank has a $1.1
million loan secured by a strip shopping center located in Northeast Ohio. The
shopping center has experienced higher-than-expected vacancies, and the cash
flow from the property has not been sufficient to meet the principal and
interest due on the loan. The borrower has maintained the loan current through
September 30, 1996. The borrower is working to cure the vacancies.
12
<PAGE> 13
6. In the normal course of business, various commitments and contingent
liabilities arise, including commitments to originate real estate loans and
commitments to extend credit. Commitments to borrowers for unused lines of
credit and to originate loans are summarized below:
<TABLE>
<CAPTION>
Sept. 30, 1996 December 31, 1995 Sept. 30, 1995
-------------- ----------------- --------------
(In thousands)
<S> <C> <C> <C>
Commitments to originate:
Fixed rate loans $ 2,787 $ 856 $ 1,349
Variable rate loans 6,609 2,765 1,695
Unused line of credit 66,934 57,134 56,304
</TABLE>
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since some of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Each customer's creditworthiness is
evaluated on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company upon the credit extension, is based on management's
credit evaluation of the counter-party. The Company generally extends credit
only on a secured basis. Collateral held usually includes residential and
commercial real estate.
7. The composition of premises and equipment is as follows:
<TABLE>
<CAPTION>
Sept. 30, 1996 December 31, 1995 Sept. 30, 1995
-------------- ----------------- --------------
(In thousands)
<S> <C> <C> <C>
Land and improvements $ 673 $ 669 $ 997
Buildings and improvements 1,709 1,658 2,403
Furniture and fixtures 5,091 5,023 5,001
Leasehold improvements 2,029 1,799 1,677
----- ----- -----
9,502 9,149 10,078
Accumulated depreciation and amortization 5,406 5,196 6,029
----- ----- -----
$4,096 $3,953 $4,049
===== ===== =====
</TABLE>
In December, 1995, the Bank completed the sale of its Madison office which
resulted in an after-tax gain of $204,000.
8. Accrued interest and other assets consists of the following:
<TABLE>
<CAPTION>
Sept. 30, 1996 December 31, 1995 Sept. 30, 1995
-------------- ----------------- --------------
(In thousands)
<S> <C> <C> <C>
Accrued interest $2,390 $2,602 $2,770
Real estate owned -- 737 567
Purchased mortgage servicing rights 103 -- --
Other assets 3,044 1,406 1,681
----- ----- -----
$5,537 $4,745 $5,018
===== ===== =====
</TABLE>
9. Accrued interest and other liabilities consists of the following:
<TABLE>
<CAPTION>
Sept. 30, 1996 December 31, 1995 Sept. 30, 1995
-------------- ----------------- --------------
(In thousands)
<S> <C> <C> <C>
Accrued interest payable $2,108 $ 676 $2,753
SAIF assessment 1,959 -- --
Collections on loans serviced 560 465 523
Other liabilities 2,337 1,787 1,705
----- ----- -----
$6,964 $2,928 $4,981
====== ====== ======
</TABLE>
13
<PAGE> 14
10. Advances from the Federal Home Loan Bank (the "FHLB") at September 30, 1996
consist of:
<TABLE>
<CAPTION>
Maturity Date Balance Rate
------------- ------- ----
(In thousands)
<S> <C> <C>
December 18, 1996 $ 1,000 5.60%
June 20, 1997 2,000 5.55%
July 2, 1997 4,000 5.75%
September 23, 1997 2,000 5.65%
June 23, 1998 1,500 6.45%
July 15, 1998 4,000 5.75%
July 17, 1998 4,000 5.75%
July 24, 1998 4,000 5.75%
August 21, 1998 2,000 5.75%
September 23, 1998 5,000 5.75%
September 23, 1998 1,500 6.55%
------
$31,000
======
</TABLE>
Advances from the FHLB are secured by qualifying real estate loans with a fair
market value equal to approximately 175% of the advances outstanding and stock
in the FHLB. These advances are subject to restrictions or penalties in the
event of prepayment.
The Company has a one-year revolving credit facility from a third-party lender
in the amount of $1 million. The interest rate associated with this credit
facility is based on the prime rate. The Company has not drawn on this credit
facility.
11. Under the current capital regulations, the Bank must have: (i) core capital
equal to 3% of adjusted total assets, (ii) tangible capital equal to 1.5%
of adjusted total assets, and (iii) total capital equal to 8.0% of risk-weighted
assets. Risk-weighted assets are comprised primarily of financial instruments,
mortgage-backed securities, loans and real estate owned. The risk-weighted
assets are assigned a risk weighting from 0-100% based on their relative risk.
The Bank was in compliance with these regulatory capital regulations on
September 30, 1996, December 31, 1995 and September 30, 1995.
The following is a summary of the Bank's capital levels at September 30, 1996:
<TABLE>
<CAPTION>
Core Capital Tangible Capital Risk-Based Capital
------------ ---------------- ------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total regulatory capital $23,497 6.72% $23,497 6.72% $26,186 10.85%
Regulatory capital required 10,496 3.00% 5,248 1.50% 19,313 8.00%
------- ----- ------- ----- ------- ------
Regulatory capital excess $13,001 3.72% $18,249 5.22% $ 6,873 2.85%
======= ===== ======= ===== ======= =====
</TABLE>
Management believes that, under current regulations, the minimum capital
requirements will continue to be met in the foreseeable future. However, events
beyond the control of management, such as increased general interest rates or a
downturn in the local economy of northeastern Ohio where the Bank has most of
its loans, could adversely affect future earnings and, consequently, the ability
to meet its future minimum capital requirements.
14
<PAGE> 15
The following table shows shareholders' equity per share and tangible
shareholders' equity per share.
<TABLE>
<CAPTION>
Sept. 30, 1996 December 31, 1995 Sept. 30, 1995
-------------- ----------------- --------------
<S> <C> <C> <C>
Shareholders' equity per share $14.47 $14.90 $14.64
Tangible shareholders' equity per share $14.45 $14.82 $14.45
</TABLE>
The Board of Directors declared a third quarter dividend of $.135 per share
which was paid on September 30, 1996.
15
<PAGE> 16
HAVERFIELD CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
On September 30, 1996, President Clinton signed into law an omnibus budget
reconciliation bill (the "Omnibus Bill") which includes provisions designed to
recapitalize the Savings Association Insurance Fund ("SAIF") and to mitigate the
premium disparity between the SAIF and the Bank Insurance Fund ("BIF"). The
Omnibus Bill requires the Federal Deposit Insurance Corporation (the "FDIC") to
impose a special assessment on SAIF-insured deposits held by institutions as of
March 31, 1995. The FDIC has announced that the special assessment rate will be
set at 65.7 basis points. Based upon insured deposits on March 31, 1995 and an
assessment rate of 0.657%, the Bank will pay an assessment of $2.0 million on
November 27, 1996 from the working capital of the Bank.
Excluding the nonrecurring SAIF assessment, earnings for the nine months ended
September 30, 1996 totaled $1,971,000 or $1.04 per common share compared to
$1,296,000 or $.69 per common share in the same period of 1995. The increase in
earnings is mainly attributable to a 12.4% increase in net interest income and a
8.5% increase in noninterest income. The Company's net interest margin increased
to 3.79% for the first nine months of 1996 compared to 3.38% for the same period
in 1995. Excluding the nonrecurring SAIF assessment, earnings for the nine
months ended September 30, 1996, produced a return on assets of .78% and a
return on common equity of 9.07%.
With the inclusion of the one-time SAIF charge, the Company reported net income
of $677,000 or $.36 per share for the nine months ended September 30, 1996,
compared to $1,296,000 for the nine months ended September 30, 1995. Return on
average assets for the nine months ended September 30, 1996 was .27% compared
with .51% in the same period of 1995. Return on average equity was 3.12% for the
first nine months of 1996, compared with 6.22% in the same period of 1995.
Excluding the nonrecurring SAIF assessment, earnings for the third quarter of
1996 totaled $693,000 or $.37 per common share compared to $469,000 or $.25 per
common share in the third quarter of 1995. The increase in earnings is mainly
attributable to a 13.9% increase in net interest income and a 19.2% increase in
noninterest income. The Company's net interest margin increased to 3.77% for the
third quarter of 1996 compared to 3.17% for the same period in 1995. Excluding
the nonrecurring SAIF assessment, earnings for the third quarter produced a
return on assets of .81% and a return on common equity of 9.43%. These ratios
compare very favorably to the 1995 ratios of .53% and 6.63%, respectively.
With the inclusion of the one-time SAIF charge, the Company reported a net loss
of $601,000 or $.31 per share for the third quarter of 1996, compared to net
income of $469,000 for the third quarter of 1995. Return on average assets for
the three months ended September 30, 1996 was (.71)%. Return on average equity
was (8.17)% for the three months ended September 30, 1996.
NET INTEREST INCOME
- -------------------
Net interest income is the principal source of earnings for the Company. It is
affected by a number of factors including the level, pricing and maturity of
interest-earning assets and interest-bearing liabilities, as well as interest
rate fluctuations and asset quality.
Net interest income for the nine months ended September 30, 1996 totaled $9.4
million, compared to $8.4 million for the first nine months of 1995. An analysis
of net interest income is presented in the following table. For each major
category of interest-earning assets and interest-bearing liabilities, the
average balance of funds employed during the period indicated is shown along
with the interest earned or paid on that balance for the period and the weighted
average annualized rate earned or paid for that category. Average balance
calculations are based on daily balances.
16
<PAGE> 17
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------------------------------------------
1996 1995
------------------------------ --------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $288,934 $ 18,330 8.46% $284,215 $17,300 8.11%
Investments and other 39,551 1,891 6.30 43,574 2,008 6.09
Mortgage-backed securities 2,503 148 7.88 3,052 184 8.06
-------- -------- ---- -------- ------- ----
Total interest-earning assets 330,988 20,369 8.20 330,841 19,492 7.84
Noninterest-earning assets 7,275 -------- ---- 7,903 ------- ----
-------- --------
Total assets $338,263 $338,744
======== ========
Interest-bearing liabilities:
Passbook/statement accounts $ 42,961 796 2.48 $ 51,616 952 2.47
NOW accounts 24,531 161 .88 24,615 185 1.00
Money market fund accounts 58,173 2,119 4.87 38,757 1,482 5.11
Certificates of deposit 169,750 7,543 5.94 189,509 8,458 5.97
-------- -------- ---- -------- ------- ----
Total deposits 295,415 10,620 4.80 304,497 11,077 4.86
FHLB advances 8,325 354 5.58 769 57 9.93
-------- -------- ---- -------- ------- ----
Total interest-bearing liabilities 303,740 10,974 4.83 305,266 11,134 4.88
Noninterest bearing liabilities 5,518 -------- ---- 5,621 ------- ----
-------- --------
Total liabilities 309,258 310,887
Shareholders' equity 29,005 27,857
-------- --------
Total liabilities and shareholders' equity $338,263 $338,744
======== ========
Net interest income/interest rate spread $ 9,395 3.37% $ 8,358 2.96%
======== ==== ======= ====
Net interest margin 3.79% 3.38%
==== ====
</TABLE>
The sensitivity of the Company's net interest income to general economic
conditions and the effect on net interest income due to changes in interest
rates and changes in amounts of interest-earning assets and interest-bearing
liabilities for the nine months ended September 30, 1996 versus September 30,
1995 is shown in the following table. Changes in interest due to both rate and
volume have been allocated to change due to volume and change due to rate in
proportion to the absolute amounts of the change in each.
<TABLE>
<CAPTION>
Nine Months Sept. 30, 1996 vs. Nine Months Sept. 30, 1995
---------------------------------------------------------
Change Due To
-------------
Total Change Volume Rate
------------ ------ ----
(In thousands)
<S> <C> <C> <C>
Interest income:
Loans $1,030 $290 $740
Investments and other (117) (191) 74
Mortgage-backed securities (36) (32) (4)
------ ---- -----
Total 877 67 810
------ ---- -----
Interest expense:
Deposits (457) (327) (130)
FHLB advances 297 331 (34)
------ ---- -----
Total (160) 4 (164)
------ ---- -----
Increase in net interest income $1,037 $ 63 $974
====== ==== =====
</TABLE>
17
<PAGE> 18
Net interest income for the three months ended September 30, 1996 was $3.1
million, compared to $2.8 million for the third quarter of 1995. An analysis of
net interest income is presented in the following table. For each major category
of interest-earning assets and interest-bearing liabilities, the average balance
of funds employed during the period indicated is shown along with the interest
earned or paid on that balance for the period and the weighted average
annualized rate earned or paid for that category. Average balance calculations
are based on daily balances.
<TABLE>
<CAPTION>
Three Months Ended September 30,
-------------------------------------------------------------
1996 1995
------------------------------ ----------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(Dollars in thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans $293,099 $ 6,201 8.45% $283,207 $5,872 8.26%
Investments and other 35,877 559 6.11 58,390 943 6.42
Mortgage-backed securities 2,306 46 8.03 2,964 58 7.89
-------- -------- ---- -------- ------ ----
Total interest-earning assets 331,282 6,806 8.20 344,562 6,873 7.90
-------- ---- ------ ----
Noninterest-earning assets 7,283 8,118
-------- --------
Total assets $338,565 $352,680
======== ========
Interest-bearing liabilities:
Passbook/statement accounts $ 41,144 256 2.48 $ 48,639 302 2.46
NOW accounts 23,988 50 0.83 24,168 62 1.02
Money market fund accounts 59,961 734 4.87 45,064 592 5.22
Certificates of deposit 159,688 2,339 5.83 201,959 3,163 6.21
-------- -------- ---- -------- ------ ----
Total deposits 284,781 3,379 4.72 319,830 4,119 5.11
FHLB advances 20,120 290 5.63 -- -- --
-------- -------- ---- ------- ------ ----
Total interest-bearing liabilities 304,901 3,669 4.79 319,830 4,119 5.11
-------- ---- ------ ----
Noninterest bearing liabilities 4,436 4,783
-------- --------
Total liabilities 309,337 324,613
Shareholders' equity 29,228 28,067
-------- --------
Total liabilities and shareholders' equity $338,565 $352,680
======== ========
Net interest income/interest rate spread $ 3,137 3.41% $2,754 2.79%
======== ==== ====== ====
Net interest margin 3.77% 3.17%
==== ====
</TABLE>
The sensitivity of the Company's net interest income to general economic
conditions and the effect on net interest income due to changes in interest
rates and changes in amounts of interest-earning assets and interest-bearing
liabilities for the three months ended September 30, 1996 versus September 30,
1995 is shown in the following table. Changes in interest due to both rate and
volume have been allocated to change due to volume and change due to rate in
proportion to the absolute amounts of the change in each.
<TABLE>
<CAPTION>
Three Months Sept. 30, 1996 vs. Three Months Sept. 30, 1995
-----------------------------------------------------------
Change Due To
-------------
Total Change Volume Rate
------------ ------ ----
(In thousands)
<S> <C> <C> <C>
Interest income:
Loans $329 $209 $120
Investments and other (384) (352) (32)
Mortgage-backed securities (12) (13) 1
---- ---- ----
Total (67) (156) 89
---- ---- ----
Interest expense:
Deposits (740) (431) (309)
FHLB advances 290 290 --
---- ---- ----
Total (450) (141) (309)
---- ---- ----
Increase (decrease) in net interest income $383 $(15) $398
==== ==== ====
</TABLE>
18
<PAGE> 19
ALLOWANCE FOR LOAN LOSSES
- -------------------------
The amount of the allowance for loan losses is based on management's analysis
of risks inherent in the various segments of the loan portfolio, management's
assessment of known or potential problem credits which have come to management's
attention during the ongoing analysis of credit quality, historical loss
experience, current economic conditions and other factors. Loan loss estimates
are reviewed periodically, and adjustments, if any, are reported in earnings in
the period in which they become known. In addition, the Company maintains a
portion of the allowance to cover potential losses inherent in the portfolio
which have not been specifically identified. Activity in the loan loss allowance
for the nine months ended September 30, 1996 and 1995 is presented below.
<TABLE>
<CAPTION>
Nine Months Ended Sept. 30,
---------------------------
1996 1995
---- ----
(Dollars in thousands)
<S> <C> <C>
Balance, January 1 $ 2,734 $ 2,665
Provision charged to expense 102 91
Loans charged off (87) (50)
Recoveries 8 4
--------- ---------
Balance, September 30 $ 2,757 $ 2,710
========= =========
Average loans $ 288,934 $ 284,215
Loans at end-of-period $ 296,819 $ 288,064
Allowance/average loans .95% .95%
Allowance/end-of-period loans .93% .94%
Allowance/nonperforming loans 276.81% 184.48%
Allowance/nonperforming assets 276.81% 133.10%
</TABLE>
Although management believes that it uses the best information available in
determining the adequacy of the allowance for loan losses, future adjustments to
reserves may be necessary, and net income could be significantly affected, if
circumstances and/or economic conditions differ substantially from the
assumptions used in making the initial determinations. Management believes that
the allowance for loan losses is adequate at September 30, 1996.
Nonperforming assets at September 30, 1996, December 31, 1995 and September 30,
1995 are presented in Note 5 of the consolidated financial statements.
ASSET/LIABILITY MANAGEMENT
- --------------------------
The function of asset/liability management is to monitor the maturities and
repricing schedules of the components of the balance sheet, and to initiate
actions to minimize the Company's vulnerability to changing interest rates while
maximizing current and expected net interest yield. Asset/liability management
seeks to ensure that assets and liabilities respond to interest rate changes in
a similar time frame.
19
<PAGE> 20
The following tables sets forth at September 30, 1996 the amounts of
interest-earning assets and interest-bearing liabilities scheduled to mature or
reprice within a specified period. No prepayment assumptions or deposit decay
rates have been incorporated. The table shows the excess or shortfall of
interest-earning assets less interest-bearing liabilities. This excess or
shortfall is called the "gap".
<TABLE>
<CAPTION>
Scheduled Maturity or Repricing
-----------------------------------------
1 Year 1 Year More than
or Less to 3 Years 3 Years Total
------- ---------- ------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest-earning assets:
Real estate loans:
Conventional:
Fixed-rate $ 3,932 $ 8,645 $ 59,278 $ 71,855
Adjustable-rate 104,816 56,629 5,535 166,980
Construction 3,131 1,499 -- 4,630
Land Loans 3,757 -- -- 3,757
Consumer loans 43,379 499 245 44,123
Business loans 5,459 15 -- 5,474
Loans in process, allowance
for loan losses and
net deferred loan fees -- -- (6,199) (6,199)
-------- ------- --------- ---------
Total loans(1) 164,474 67,287 58,859 290,620
Mortgage-backed securities 205 210 1,782 2,197
Other interest-earning assets 20,719 1,499 25,894 48,112
-------- ------- --------- ---------
Total interest-earning assets $185,398 $68,996 $ 86,535 $ 340,929
======== ======= ========= =========
Interest-bearing liabilities:
Deposits:
Passbook and NOW accounts (2) $ -- $ -- $ 56,718 $ 56,718
Money market fund accounts 60,873 -- -- 60,873
Certificates of deposit 99,801 39,797 17,624 157,222
-------- ------- --------- ---------
Total deposits 160,674 39,797 74,342 274,813
FHLB advances 28,000 3,000 -- 31,000
-------- ------- --------- ---------
Total interest bearing liabilities $188,674 $42,797 $ 74,342 $ 305,813
======== ======= ========= =========
GAP $ (3,276) $26,199 $ 12,193 $ 35,116
Cumulative GAP $ (3,276) $22,923 $ 35,116
Cumulative GAP as a percentage of
total assets (.93)% 6.54% 10.02%
<FN>
- ---------------------
(1) Contractual maturities of loans do not reflect the actual term of the loan
portfolio. The average life of real estate loans is substantially less than
their contractual terms because of loan prepayments and due-on-sale
clauses.
(2) Management believes that a significant amount of passbook and NOW accounts
are core deposits.
</TABLE>
The Company will continue to actively manage the interest rate sensitivity
position to maintain a reasonable balance between earnings and exposure to
interest rate fluctuations.
NONINTEREST INCOME
- ------------------
Noninterest income increased to $1.5 million for the nine months ended
September 30, 1996, compared to $1.4 million for the same period in 1995. The
greatest change in noninterest income was a $131,000 increase in other income,
which was attributable mainly to an increase in the income earned by the Bank's
financial services subsidiary, Home Financial, Inc. Servicing income decreased
from $410,000 for the nine months ended September 30, 1995 to $347,000 for the
same period in 1996 as a result of the decreased amount of loans serviced for
others. Loans serviced for others amounted to $145.0 million at September 30,
1995 compared to $119.9 million at September 30, 1996.
20
<PAGE> 21
Noninterest income for the three months ended September 30, 1996 totaled
$534,000, compared to $448,000 for the same period in 1995. This increase was
attributable mainly to an increase in service fees and other charges, as well as
the increase in fee income earned by the Bank's financial services subsidiary,
Home Financial, Inc.
NONINTEREST EXPENSE
- -------------------
Noninterest expense increased to $9.8 million for the nine months ended
September 30, 1996, compared to $7.7 million for the same period in 1995. The
greatest change was in insurance premiums, which includes a one-time pretax
SAIF recapitalization charge of $2.0 million. Other expenses increased
$489,000, led by a $545,000 loss provision recorded in connection with an
indemnification claim, partially offset by a $322,000 recovery of a credit loss
provision. Both of these items are discussed below. Consulting fees increased
$162,000 as a result of a recently completed revenue enhancement study.
The composition of other expenses is as follows:
<TABLE>
<CAPTION>
Nine months ended Sept. 30,
---------------------------
1996 1995
---- ----
(In thousands)
<S> <C> <C>
Business and management development $ 86 $ 142
Examination/audit expense 142 174
OTS assessment 65 61
Postage 117 113
Supplies 90 87
Telephone 108 101
Franchise/sales tax 290 274
Director fees 72 68
Consulting fees 208 46
Legal fees 95 73
Provision for HUD indemnification claim 545 --
Liability for credit loss-standby letter of credit (322) --
Provision for real estate owned losses 80 44
Miscellaneous expenses 482 386
------ ------
$2,058 $1,569
====== ======
</TABLE>
The Bank was a 19.6% participant in a standby letter of credit totaling $10.2
million. This standby letter of credit was issued to guarantee the payment of
principal and interest on multi-family housing revenue bonds, issued to finance
a 240-unit apartment complex in Stone Mountain, Georgia. The Bank had
outstanding commitments under this standby letter of credit of $2.1 million at
December 31, 1995 and a $322,000 liability for credit loss for this standby
letter of credit. On July 15, 1996, this standby letter of credit was called and
the entire $2.1 million plus interest was advanced. The property was sold in
August, 1996, and the Bank received $1.7 million in cash and a second mortgage
position for $416,000. Since there was no longer any commitment outstanding
under the letter of credit and the Bank did not suffer any loss on the
transaction, the $322,000 liability for credit loss was recognized as a
recovery.
During the first quarter of 1996, the Housing and Urban Development ("HUD")
Mortgagee Review Board proposed that the Bank indemnify HUD for HUD/FHA
insurance claims and associated costs paid against insured properties affected
by the indictment and guilty plea of a former loan originator of the Bank on
charges of fraud relating to loan activities from 1991. A settlement of these
claims has been reached under which the Bank paid $545,000 to HUD in July, 1996.
The Bank has submitted a proof of loss to its insurer. The insurer has not yet
determined whether there is coverage. Management believes that this claim by HUD
is covered by insurance maintained by the Bank; however, no assurances can be
given as to the outcome of this request for indemnification. The Bank has
recorded a loss provision in the amount of $545,000 in connection with this
matter.
Noninterest expense for the three months ended September 30, 1996 totaled $4.5
million, compared to $2.5 million for the same period in 1995. Other expenses
increased $199,000.
21
<PAGE> 22
The composition of other expenses is as follows:
<TABLE>
<CAPTION>
Three months ended Sept. 30,
----------------------------
1996 1995
---- ----
(In thousands)
<S> <C> <C>
Business and management development $ 30 $ 44
Examination/audit expense 47 59
OTS assessment 21 21
Postage 35 38
Supplies 34 41
Telephone 37 35
Franchise/sales tax 97 94
Director fees 24 23
Consulting fees 191 22
Legal fees 43 37
Liability for credit loss - standby letter of credit (322) --
Provision for HUD indemnification claim 345 --
Miscellaneous expenses 166 135
---- ----
$748 $549
==== ====
</TABLE>
REGULATORY ISSUES
- -----------------
The Bank is subject to extensive regulation, supervision and examination by the
Office of Thrift Supervision (the "OTS"), as its chartering authority and
primary federal regulator, and by the FDIC, which insures its deposits up to
applicable limits. Such regulation and supervision establishes a comprehensive
framework of activities in which an institution can engage and is intended
primarily for the protection of the insurance fund and depositors. On September
30, 1996, President Clinton signed into law the Omnibus Bill which includes
provisions designed to recapitalize the SAIF and to mitigate the BIF/SAIF
premium disparity. The Omnibus Bill requires the FDIC to impose a special
assessment on SAIF-insured deposits held by institutions as of March 31, 1995.
The FDIC has announced that the special assessment rate will be set at 65.7
basis points. Based upon insured deposits on March 31, 1995 and an assessment
rate of 0.657%, the Bank will pay an assessment of $2.0 million on November 27,
1996 from the working capital of the Bank. When the SAIF reaches its required
reserve ratio following the one-time assessment, the FDIC has indicated that it
will reduce the annual assessment rates for SAIF-insured institutions to bring
them in line with BIF assessment rates.
In addition, the Omnibus Bill requires the merger of the BIF and SAIF into a
single insurance fund no later than January 1, 1999. In connection with the
merger of the funds, it is possible that SAIF-insured institutions will be
required to convert their charters into state bank charters or national bank
charters. If such proposal became law, the Corporation would become a bank
holding company and be subject to regulation by the Federal Reserve Board, which
imposes capital requirements on bank holding companies. The Corporation is not
currently subject to capital requirements.
In connection with an examination of the Bank, the Bank entered into a written
agreement with the OTS dated June 4, 1993 (the "Supervisory Agreement")
providing for measures to address the regulatory compliance concerns of the OTS
regarding the Bank's policies and procedures with respect to certain matters.
The Supervisory Agreement was terminated effective September 3, 1996.
The regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities. Any
change in such regulation, whether by the OTS, the FDIC or the Congress could
have a material impact on the Bank and its operations. Management cannot predict
what, if any, future legislation may be enacted or regulations adopted or what
impact any such actions may have on the Company or the Bank. However, management
is not aware of any current recommendations by the regulatory authorities which,
if implemented, would have a material effect on the Bank or the Company.
22
<PAGE> 23
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 scheduled loan
payments and maturing investment and mortgage-backed securities are relatively
predictable sources of funds, deposit flows and loan prepayments are greatly
influenced by the general level of interest rates, economic conditions and
competition. The Bank utilizes particular sources of funds based on comparative
costs and availability. The Bank generally manages the pricing of its deposits
to maintain a steady deposit balance, but has from time to time decided not to
pay rates on deposits as high as its competition and, when necessary, to
supplement deposits with longer term and/or less expensive alternative sources
of funds such as borrowings from the FHLB. Management also considers the Bank's
interest-sensitivity profile when deciding on alternative sources of funds.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments. If
the Company requires funds beyond its ability to generate them internally,
borrowing agreements exist with the Federal Home Loan Bank of Cincinnati (the
"FHLB"), which provide an additional source of funds. Under these borrowing
agreements, the maximum level of advances available is generally limited to 25%
of the Bank's total assets; however, the FHLB may approve advances in excess of
this limit based upon the Bank meeting all of its regulatory capital
requirements. At September 30, 1996, the Company had $31.0 million in
outstanding borrowings from the FHLB.
Currently, the Company anticipates that it will have sufficient funds to meet
its existing loan commitments. At September 30, 1996, the commitments to
borrowers for unused lines of credit and to originate loans totaled $76.3
million.
As a member of the FHLB, the Bank is required to maintain specific levels of
"liquid" investments. Regulations currently in effect require liquid assets of
not less than 5% of net withdrawable accounts plus short-term borrowings to
assure that demands for repayment of debt and withdrawals are met. This
requirement may be changed from time to time to reflect current economic
conditions. The Bank was in compliance with these regulations at September 30,
1996 and anticipates remaining in compliance. It is the intention of the
Company's cash management efforts to keep liquidity levels within regulatory
guidelines, but at minimal levels in order to maximize interest income from
investing in loans versus lower yielding short-term investment securities.
FEDERAL TAXATION
- ----------------
The following discussion of tax matters is intended only as a summary and does
not purport to be a comprehensive description of the tax rules applicable to the
Corporation or the Bank.
Savings associations such as the Bank are generally taxed in the same manner as
other corporations. For taxable years beginning prior to January 1, 1996,
savings associations such as the Bank which met certain definitional tests
primarily relating to their assets and the nature of their supervision and
business operations ("qualifying thrifts") were permitted to establish a reserve
for bad debts and to make annual additions thereto, which additions may, within
specified formula limits, have been deducted in arriving at their taxable
income. The Bank's deduction with respect to "qualifying real property loans,"
which are generally loans secured by certain interests in real property, may
have been computed using an amount based on the Bank's actual loss experience,
or a percentage equal to 8% of the Bank's taxable income, computed with certain
modifications and reduced by the amount of any permitted additions to the
reserve for nonqualifying loans (the "percentage of taxable income method"). The
Bank's deduction with respect to nonqualifying loans was computed under the
experience method, which essentially allows a deduction based on the Bank's
actual loss experience over a period of several years. Each year the Bank
selected the most favorable way to calculate the deduction attributable to an
addition to the tax bad debt reserve.
Recently enacted legislation repealed the existing reserve method of accounting
for bad debt reserves for tax years beginning after December 31, 1995. As a
result, savings associations will no longer be able to calculate their deduction
for bad debts using the percentage of taxable income method. Instead, savings
associations will be required to compute their deduction based on specific
charge offs during the taxable year or, if the savings association or its
controlled group had assets of not more that $500 million, based on actual loss
experience over a period of years. This legislation also requires a savings
association (or its controlled group) with assets of more than $500 million to
recapture into income over a six-year period their post-1987 additions to their
bad debt tax reserves for qualifying real property loans and
23
<PAGE> 24
nonqualifying loans, thereby generating additional tax liability. A savings
association (or its controlled group) with assets of not more than $500 million
are required to recapture their bad debt tax reserve to the extent it exceeds
the greater of (i) the applicable bad debt tax reserve as of the close of the
last taxable year beginning before January 1, 1988, or (ii) what the savings
association's applicable bad debt tax reserve would have been at the close of
its last taxable year beginning before January 1, 1996 under the experience
method. At December 31, 1995, the Bank's post-1987 reserves totaled
approximately $1.2 million. The recapture may be suspended for up to two years
if, during those years, the savings association satisfies a residential loan
requirement.
FORWARD -LOOKING STATEMENTS
- ---------------------------
The Company is hereby filing certain cautionary statements for the purposes
of establishing a readily available document which may be referenced pursuant to
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995 (the "Reform Act"). The Company wishes to ensure that any forward-looking
statements are accompanied by meaningful cautionary statements in order to
maximize to the fullest extent possible the protections of the safe harbor
established in the Reform Act. Accordingly, any such statements are qualified in
their entirety by reference to, and are accompanied by, the following important
factors, among others, that could cause the Company's actual results to differ
materially from those projected in forward-looking statements of the Company
made by or on behalf of the Company in oral or written communications and in
documents filed with the Securities and Exchange Commission.
Various discussions in this Quarterly Report filed with the Securities and
Exchange Commission include certain forward-looking statements based on
management's current expectations. Those factors which could cause future
results to vary from these expectations include, and are not limited to, the
following: general market rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Treasury and the Federal Reserve, changes in the quality or composition of the
Company's loan and investment portfolios, demand for loan products, deposit
flows, competition, demand for financial services in the Company's markets,
increased expenses, failure to obtain new customers or retain existing
customers, inability to carry out marketing and sales plans, loss or retirement
of key executives, and changes in accounting principles, policies or guidelines.
Further, any forward-looking statement speaks only as of the date on which such
statement is made, and the Company undertakes no obligation to update any
forward-looking statement or statements to reflect events or circumstances after
the date on which such statement is made or to reflect the occurrence of
unanticipated events. New factors emerge from time to time and it is not
possible for management to predict all of such factors, nor can management
assess the impact of each such factor on the business or the extent to which any
fctor, or combination of factors, may cause actual results to differ materially
from those contained in any forward-looking statements. Therefore,
forward-looking statements should not be relied upon as a prediction of actual
future results.
24
<PAGE> 25
PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- ---------------------------------------------------------------
Not Applicable
ITEM 2. CHANGES IN SECURITIES
- ---------------------------------------------------------------
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- ---------------------------------------------------------------
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ---------------------------------------------------------------
Not Applicable
ITEM 5. OTHER INFORMATION
- ---------------------------------------------------------------
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ---------------------------------------------------------------
(a) Exhibits
27 Financial Data Schedule (EDGAR only)
(b) Reports on Form 8-K
None
25
<PAGE> 26
HAVERFIELD CORPORATION
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HAVERFIELD CORPORATION
/s/ William A. Valerian
-----------------------------------------
Dated: November 1, 1996 William A. Valerian
President and Chief Executive Officer
/s/ Richard C. Ebner
-----------------------------------------
Dated: November 1, 1996 Richard C. Ebner
Executive Vice President, Chief Operating Officer,
Chief Financial Officer and Treasurer
26
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF HAVERFIELD CORPORATION INCLUDED IN THE FORM
10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934, FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1996
<CASH> 4,165
<INT-BEARING-DEPOSITS> 100
<FED-FUNDS-SOLD> 15,182
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 30,862
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 293,377
<ALLOWANCE> 2,757
<TOTAL-ASSETS> 350,603
<DEPOSITS> 281,910
<SHORT-TERM> 0
<LIABILITIES-OTHER> 10,100
<LONG-TERM> 31,000
<COMMON> 19
0
0
<OTHER-SE> 27,574
[TOTAL-LIABILITY-AND-EQUITY] 350,603
<INTEREST-LOAN> 18,330
<INTEREST-INVEST> 1,891
<INTEREST-OTHER> 148
<INTEREST-TOTAL> 20,369
<INTEREST-DEPOSIT> 10,620
<INTEREST-EXPENSE> 10,974
<INTEREST-INCOME-NET> 9,395
<LOAN-LOSSES> 102
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 9,783
<INCOME-PRETAX> 1,027
<INCOME-PRE-EXTRAORDINARY> 677
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 677
<EPS-PRIMARY> .36
<EPS-DILUTED> .36
<YIELD-ACTUAL> 3.79
<LOANS-NON> 982
<LOANS-PAST> 14
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,052
<ALLOWANCE-OPEN> 2,734
<CHARGE-OFFS> 87
<RECOVERIES> 8
<ALLOWANCE-CLOSE> 2,757
<ALLOWANCE-DOMESTIC> 2,359
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 398
</TABLE>
