<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Fiscal Year Ended: December 31, 1996 Commission File No.: 0-17947
HAVERFIELD CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-1606726
- ------------------------------- --------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
Terminal Tower
50 Public Square, Suite 444, Cleveland, Ohio 44113-2203
- -------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 348-2800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($.0l par value)
-----------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was $32,047,712 as of February 28, 1997. In calculating the market
value of securities held by non-affiliates, Registrant has treated as securities
held by affiliates voting stock owned of record by its directors and executive
officers whose aggregate value totaled $7,032,443.
On February 28, 1997, the Registrant had outstanding 1,906,349 shares of common
stock, par value of $.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement of the Registrant relating to the
annual meeting of shareholders to be held on April 23, 1997, and Appendix A
thereto, have been incorporated by reference into Parts II, III, and IV hereof.
<PAGE> 2
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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.
GENERAL OVERVIEW
- -----------------------------------------------------------------------------
Haverfield Corporation ("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. 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 for the year ended December 31, 1996 was $1,507,000 or
$.79 per share, compared with $1,995,000 or $1.06 per share for the year ended
December 31, 1995. The decrease in 1996 compared to 1995 was mainly due to the
one time, after tax charge associated with the recapitalization of the Savings
Association Insurance Fund ("SAIF"), which totaled $1.3 million or $.68 per
share. Excluding the nonrecurring SAIF assessment, earnings for the twelve
months ended December 31, 1996 totaled $2,802,000 or $1.47 per share. The
increase in earnings, excluding the SAIF assessment, is mainly attributable to
an 11.0% increase in net interest income and a 3.6% decrease in noninterest
expense. The Company's net interest margin increased to 3.76% compared to 3.38%
for the same period in 1995. Excluding the nonrecurring SAIF assessment, 1996
earnings produced a return on average assets of .82% and a return on average
equity of 9.68%.
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.
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, or spread, between the yields earned and the rates paid on
those assets and liabilities.
For 1996, net interest income was $12.6 million, compared to $11.3 million in
1995. The increase in 1996 resulted from an increase in the yield on
interest-earning assets of 27 basis points, while the cost of interest-bearing
liabilities decreased 10 basis points.
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.
A-3
<PAGE> 3
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,
-------------------------------------------------------------------------------------
1996 1995 1994
---------------------------- -------------------------- ---------------------------
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) $290,294 $24,529 8.45% $284,385 $23,313 8.20% $273,927 $20,472 7.47%
Investment securities
and other 40,637 2,572 6.33 47,301 2,952 6.24 25,395 1,011 3.98
Mortgage-backed
securities 2,414 191 7.91 2,991 240 8.02 4,031 301 7.47
-------- ------ ---- -------- ------ ---- -------- ------ ----
Total interest-earning assets 333,345 27.292 8.19 334,677 26.505 7.92 303,353 21.784 7.18
------ ---- ------ ---- ------ ----
Noninterest-earning assets 7,736 7,870 8,577
-------- -------- --------
Total assets $340,581 $342,547 $311,930
======== ======== ========
Interest-bearing liabilities:
Deposits
Passbook/statement
accounts $ 42,227 1,042 2.47 $ 50,308 1,241 2.47% $ 61,460 1,524 2.48%
NOW accounts 24,684 212 .86 24,699 245 .99 26,481 285 1.08
Money market fund
accounts 58,741 2,873 4.89 41,762 2,138 5.12 38,697 1,404 3.63
Certificates of deposit 165,832 9,805 5.91 191,049 11,514 6.03 149,693 7,401 4.94
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total deposits 291,484 13,932 4.78 307,818 15,138 4.92 276,331 10,614 3.84
FHLB advances 13,986 810 5.79 575 57 9.91 2,148 213 9.92
Long-term borrowings - - - - - - 3,323 230 6.92
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-bearing
liabilities 305,470 14,742 4.83 308,393 15,195 4.93 281,802 11,057 3.92
------- ---- ------- ---- ------- ----
Noninterest-bearing
liabilities 6,178 6,174 5,700
-------- -------- --------
Total liabilities 311,648 314,567 287,502
Shareholders' equity 28,933 27,980 24,428
-------- -------- --------
Total liabilities and
shareholders' equity $340,581 $342,547 $311,930
======== ======== ========
Net interest income/interest
rate spread $12,550 3.36% $11,310 2.99% $10,727 3.26%
======= ==== ======= ==== ======= ====
Net interest margin 3.76% 3.38% 3.54%
==== ==== ====
- ---------------------------
<FN>
(1) The average balance of loans includes the principal balance of nonaccrual
loans. Interest income includes amortization of deferred loan fees of
$249,000, $167,000 and $188,000 in 1996, 1995, and 1994, respectively.
</TABLE>
A-4
<PAGE> 4
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>
1996 CHANGE FROM 1995
Interest income:
Loans $ 1,216 $ 160 $ 1,056
Investment securities and other (380) (421) 41
Mortgage-backed securities (49) (46) (3)
------- ------- -------
Total 787 (307) l,094
------- ------- -------
Interest expense:
Deposits (1,206) (789) (417)
FHLB advances 753 787 (34)
------- ------- -------
Total (453) (2) (451)
------- ------- -------
Change in net interest income $ 1,240 $ (305) $ 1,545
======= ======= =======
1995 CHANGE FROM 1994
Interest income:
Loans $ 2,841 $ 720 $ 2,121
Investment securities and other 1,941 1,171 770
Mortgage-backed securities (61) (82) 21
------- ------- -------
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)
======= ======= =======
</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. Although the interest rate sensitivity gap is subject to a
number of assumptions and is only one of a number of
A-5
<PAGE> 5
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, 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.
<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 $ 976 $ 2,979 $ 8,666 $ 9,479 $ 49,670 $ 71,770
Adjustable-rate 26,328 77,588 56,479 7,137 - 167,532
Construction 2,772 - 1,500 - - 4,272
Land loans 2,372 530 780 - - 3,682
Consumer loans 34,852 9,355 522 195 104 45,028
Business loans 5,170 1,471 14 65 - 6,720
Loans in process,
allowance for loan losses
and net deferred loan fees - - - - (5212) (5,212)
--------- -------- -------- -------- -------- --------
Total loans (1) 72,470 91,923 67,961 16,876 44,562 293,792
Investment securities and other 4,902 - 1,498 10,429 20,083 36,912
Mortgage-backed
securities 25 75 201 201 1,508 2,010
--------- -------- -------- -------- -------- --------
Total interest-earning assets $ 77,397 $ 91,998 $ 69,660 $ 27,506 $ 66,153 $332,714
========= ======== ======== ======== ======== ========
INTEREST-BEARING LIABILITIES:
Deposits:
Passbook and NOW
accounts(2) $ - $ - $ - $ - $ 56,493 $ 56,493
Money market fund
accounts 62,263 - - - - 62,263
Certificates of deposit 38,981 56,895 40,484 10,408 6,434 153,202
--------- -------- -------- -------- -------- --------
Total deposits 101,244 56,895 40,484 10,408 62,927 271,958
FHLB advances 27,000 - 3,000 - - 30,000
--------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities $ 128,244 $ 56,895 $ 43,484 $ 10,408 $ 62,927 $301,958
========= ======== ======== ======== ======== ========
GAP $ (50,847) $ 35,103 $ 26,176 $ 17,098 $ 3,226 $ 30,756
Cumulative GAP $ (50,847) $(15,744) $ 10,432 $ 27,530 $ 30,756
- -------------------
<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> 6
The Company is negatively mismatched on a one-year basis at December 31, 1996,
because more liabilities than assets are expected to mature or reprice in the
next twelve months. A negative mismatch implies that a decrease in interest rate
levels may have a positive impact on the Company's results of operations, while
an increase 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.
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 1996, based on
management's assessment of the adequacy of the allowance, the provision for loan
losses was $309,000, compared to $123,000 in 1995 and $97,000 in 1994 primarily
due to increased charge-offs and increased nonperforming loans. A significant
portion of the provision in 1995 and 1994 was for the purpose of maintaining 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.
NONINTEREST INCOME
- --------------------------------------------------------------------------------
In 1996, noninterest income totaled $2.0 million, compared to $2.2 million in
1995 and $2.2 million in 1994. Included in the noninterest income category are
the following items: (i) service fees and other charges, (ii) servicing income,
(iii) gain on the sale of loans, and (iv) other income.
In 1996, service fees and other charges increased to $1.3 million, compared to
$1.2 million in 1995 and $971,000 in 1994. This increase resulted from a
revision of the service charges earned on certain deposit accounts and certain
automated teller machine transactions. 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.
Servicing income was $454,000 in 1996, compared to $536,000 in 1995 and $634,000
in 1994. This decline is attributable to the decrease in the average balance of
loans serviced for others from $171.4 million in 1994 to $151.2 million in 1995
and to $130.4 million in 1996, due to loan repayments and no additional loan
sales in 1996 or 1995. 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, no loans were sold during 1996 and 1995. The volume of loans sold was
$23.7 million in 1994. 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. Servicing income is
partially offset by amortization expense representing the estimated diminution
in value over time of the Company's purchased mortgage servicing rights.
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 1996, 1995 or 1994.
A-7
<PAGE> 7
NONINTEREST EXPENSE
- --------------------------------------------------------------------------------
Noninterest expense totaled $12.0 million in 1996, compared to $10.4 million in
1995 and $10.4 million in 1994. The increase in 1996 is mainly attributable to
the one time nonrecurring charge associated with the recapitalization of the
SAIF which totaled $2.0 million. Excluding the nonrecurring SAIF assessment,
noninterest expense for 1996 would have totaled $10.0 million, a 3.6% reduction
from 1995. Other expenses increased to $2.3 million in 1996 from $2.1 million in
1995 and $1.9 million in 1994. The composition of other expenses is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Business and management development $ 114 $ 163 $ 113
Examination/audit expense 190 224 245
OTS assessment 86 82 79
Postage 149 148 133
Supplies 126 114 159
Telephone 148 134 154
Franchise/sales tax 388 365 355
Director fees 98 92 90
Consulting fees 213 52 53
Legal fees 177 145 85
Provision for HUD indemnification claim 100 - -
Recovery of credit loss - standby letter of credit (322) - -
Loss (gain) on sale of real estate owned 25 (2) (150)
Provision for real estate owned losses 80 51 1
Miscellaneous expenses 771 531 586
------ ------ ------
$2,343 $2,099 $1,903
====== ====== ======
</TABLE>
Other expenses increased $244,000 due to a $100,000 loss provision recorded in
connection with an indemnification claim, an increase of $161,000 in consulting
fees as a result of a recently completed revenue enhancement study, costs
incurred in connection with the establishment of a new retail banking facility,
and general increases in the prices of goods and services, partially offset by a
$322,000 recovery of a credit loss provision.
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 was reached under which the Bank paid $545,000 to HUD in July, 1996. The
Bank submitted a proof of loss to its insurer who, less the policy deductible,
reimbursed the Bank in the fourth quarter of 1996.
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.
INCOME TAXES
- --------------------------------------------------------------------------------
The Company has provided $777,000 for federal income taxes in 1996, $1,020,000
in 1995 and $669,000 in 1994. 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 13 in the consolidated
financial statements for additional analysis of the tax position of the Company.
A-8
<PAGE> 8
REVIEW OF MAJOR ASSET PORTFOLIOS
- --------------------------------------------------------------------------------
The Company's total assets decreased $7.6 million from $354.5 million at
December 31, 1995 to $346.9 million at December 31, 1996. Although loans
increased $10.2 million, other earning assets decreased $15.5 million. The
following table shows each individual asset category as a percent of total
assets.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------
1996 1995
------------------------ ---------------------
Percent of Percent of
Balance Assets Balance Assets
------- ------ ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Due from banks-interest bearing $ 100 - $ 100 -
Federal funds sold 2,822 .8% 4,396 1.2%
Investment securities 33,990 9.8 47,184 13.3
Mortgage-backed securities 2,010 .6 2,754 .8
Loans-net 293,792 84.7 283,560 80.0
-------- ----- -------- -----
Total earning assets 332,714 95.9 337,994 95.3
Cash 5,489 1.6 7,647 2.2
Premises and equipment 4,176 1.2 3,953 1.1
Accrued interest and other assets 4477 1.3 4,911 1.4
-------- ----- -------- -----
$346,856 100.0% $354,505 100.0%
======== ===== ======== =====
</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,
----------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Real estate loans: (In thousands)
<S> <C> <C> <C> <C> <C>
Conventional:
One-to-four units $194,804 $194,894 $204,807 $174,250 $156,275
Over four units 14,254 12,551 10,354 12,516 12,528
Construction:
Residential 1,272 1,616 3,490 3,859 2,993
Commercial 3,000 - - 650 650
Commercial real estate 30,244 30,736 30,876 33,478 39,047
Land 3,682 4,461 3,359 1,611 801
Consumer loans 45,028 40,055 31,431 27,554 30,129
Business loans 6,720 4,758 1,673 999 -
-------- -------- -------- -------- --------
299,004 289,071 285,990 254,917 242,423
-------- -------- -------- -------- --------
Less:
Undisbursed portion of loans in process (1,293) (1,711) (2,640) (3,594) (3,019)
Unearned income on consumer loans (6) (18) (40) (69) (115)
Amount due other financial institutions
relating to wrap-around mortgage loans (114) (145) (175) (297) (472)
Net deferred loan fees (877) (903) (790) (340) (777)
Allowance for loan losses (2,922) (2,734) (2,665) (2,612) (1,721)
-------- -------- -------- -------- --------
(5,212) (5,511) (6,310) (6,912) (6,104)
-------- -------- -------- -------- --------
Total loans held for investment $293,792 $283,560 $279,680 $248,005 $236,319
======== ======== ======== ======== ========
Loans held for sale $ - $ - $ - $ 13,386 $ 7,750
======== ======== ======== ======== ========
</TABLE>
A-9
<PAGE> 9
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,
-----------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Loans originated: (In thousands)
<S> <C> <C> <C> <C> <C>
Real estate loans:
Loans for purchase of existing property $65,517 $63,262 $101,399 $ 173,931 $154,791
Construction 3,322 1,211 5,916 6,845 5,429
Loans refinanced 7.171 7,587 12,372 19,163 18,942
------- ------- -------- --------- --------
Total real estate loans originated 76,010 72,060 119,687 199,939 179,162
Business loans originated 4,860 3,724 679 1,000 -
Other originations (1) 3,691 3,523 3,266 3,443 3,507
------- ------- -------- --------- --------
Total loans originated 84,561 79,307 123,632 204,382 182,669
Loans purchased 10,401 855 364 854 1,026
Loans sold - - (23,717) (79,600) (73,671)
Loan principal payments (84,299) (76,229) (81,528) (107,144) (91,777)
Other decreases (431) (53) (462) (1,170) (888)
------- ------- -------- --------- --------
Change in net loan portfolio including
loans held for sale $10,232 $ 3,880 $ 18,289 $ 17,322 $ 17,359
======= ======= ======== ========= ========
- -----------------------------
<FN>
(1) Other loans consist of MasterCard, property improvement, student, and
savings account loans.
</TABLE>
CREDIT RISK MANAGEMENT
- --------------------------------------------------------------------------------
The Company has consistently maintained a conservative posture with respect to
credit risk. The Company has no investment securities that 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. 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.
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,
-------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Residential real estate (.002)% .004% .002% (.007)% .012%
Commercial real estate - - - - 1.918%
Business .412% - - -
Consumer .236% .114% .126% .054% .080%
Net charge-offs/
average loans outstanding .042% .019% .016% .002% .380%
</TABLE>
A-10
<PAGE> 10
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,
------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
Residential real estate $ 773 $1,002 $1,091 $ 591 $1,093
Commercial real estate 514 99 170 - 582
Business 1,170 - - - -
Consumer 240 202 54 280 273
------ ------ ------ ------ ------
Total 2,697 1,303 1,315 871 1,948
------ ------ ------ ------ ------
Accruing loans delinquent more than 90 days:
Residential real estate - - - - -
Commercial real estate - - - - -
Business
Consumer 5 21 44 11 13
------ ------ ------ ------ ------
Total 5 21 44 11 13
------ ------ ------ ------ ------
Total nonperforming loans 2,702 1,324 1,359 882 1,961
------ ------ ------ ------ ------
Repossessed assets:
Residential real estate - 197 695 567 208
Commercial real estate - 540 - 103 922
Business - - - - -
Consumer - - - - -
------ ------ ------ ------ ------
Total - 737 695 670 1,130
------ ------ ------ ------ ------
Total nonperforming assets $2,702 $2,061 $2,054 $1,552 $3,091
====== ====== ====== ====== ======
Nonperforming loans as a percent of
total loans .90% .46% .48% .35% .81%
=== === === === ===
Nonperforming assets as a percent of
total assets .78% .58% .65% .50% .97%
=== === === === ===
</TABLE>
The loans included above are secured by real estate or other collateral which
limits the Company's exposure to loss. At December 31, 1996, there were no
commitments to lend additional funds to borrowers with nonperforming loans. As
of December 31, 1996, 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 $1.0 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 1996. The borrower is working to cure the vacancies; however,
continued high vacancies and cash flow shortages could cause management to place
this loan on nonaccrual status.
A-l1
<PAGE> 11
The ratio of nonperforming loans to total loans increased from December 31,
1995 to December 31, 1996. Management does not believe this increase represents
a trend. This increase is primarily due to one business loan being placed on
nonaccrual status. Excluding this loan, nonperforming loans as a percent of
total loans would have decreased form .46% at December 31, 1995 to .44% at
December 31, 1996. The Bank is working with the borrower on this nonaccrual
loan to cure the delinquency. Management does not anticipate a material loss on
this business loan which is secured by both real estate and other collateral.
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,
---------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Income potential based on original terms $81 $131 $130 $99 $191
Income recorded - - - - 1
--- ---- ---- --- ----
Interest foregone $81 $131 $130 $99 $190
=== ==== ==== === ====
Activity in the loan loss allowance over the past five years is presented below.
Year Ended December 31,
----------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 2,734 $ 2,665 $ 2,612 $ 1,721 $ 1,839
Provision for loan losses 309 123 97 897 750
Charge-offs:
Residential real estate (1) (8) (4) - (27)
Commercial real estate - - - - (824)
Business (16) - - -
Consumer (128) (52) (40) (18) (26)
--------- --------- --------- --------- ---------
Total charge-offs (145) (60) (44) (18) (877)
--------- --------- --------- --------- ---------
Recoveries:
Residential real estate 5 - - 12 9
Commercial real estate - - - - -
Business - - - - -
Consumer 19 6 - - -
--------- --------- --------- --------- ---------
Total recoveries 24 6 - 12 9
--------- --------- --------- --------- ---------
Net (charge-offs) recoveries (121) (54) (44) (6) (868)
--------- --------- --------- --------- ---------
Balance at end of year $ 2,922 $ 2,734 $ 2,665 $ 2,612 $ 1,721
========= ========= ========= ========= =========
Average loans $ 290,294 $ 284,385 $ 273,927 $ 255,661 $ 228,417
Loans at end of period 299,004 289,071 285,990 254,918 242,423
Allowance/average loans 1.01% .96% .97% 1.02% .75%
Allowance/end-of-period loans .98% .95% .93% 1.02% .71%
Net charge-offs/allowance 4.14% 1.98% 1.65% .23% 50.44%
Net charge-offs/provision for
loan losses 39.16% 3.90% 45.36% .67% 115.73%
Allowance/nonperforming loans 108.14% 206.50% 196.10% 296.15% 87.76%
Allowance/nonperforming assets 108.14% 132.65% 129.75% 168.30% 55.68%
</TABLE>
A-12
<PAGE> 12
An allocation of the ending allowance for loan losses by major loan type
follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Residential real estate $1,353 $1,251 $1,293 $ 935 $ 510
Commercial real estate 729 665 643 684 1,00
Business 274 87 - - -
Consumer 206 179 143 114 184
Unallocated 360 552 586 879 18
------ ------ ------ ------ ------
$2,922 $2,734 $2,665 $2,612 $1,721
====== ====== ====== ====== ======
</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' 5 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, 1996, 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.
DEPOSITS
- --------------------------------------------------------------------------------
The Company's deposits decreased $38.7 million from $317.8 million at December
31, 1995 to $279.1 million at December 31, 1996. The Company had no brokered
deposits at December 31, 1996, 1995 and 1994. The following table sets forth the
distribution of deposits at the dates indicated.
<TABLE>
<CAPTION>
December 31 1996 December 31, 1995 December 31, 1994
---------------- ----------------- -----------------
%of %of %of
Balance Deposits Balance Deposits Balance Deposits
------- -------- ------- -------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing NOW accounts $ 7,115 2.5% $ 11,072 3.5% $ 11,286 4.0%
NOW accounts 17,188 6.2 13,804 4.3 14,344 5.1
Passbook/statement accounts 39,305 14.1 45,564 14.3 56,533 20.2
Money market fund accounts 62,263 22.3 53,876 17.0 36,342 13.1
-------- ----- -------- ----- -------- -----
Total non-certificate accounts 125,871 45.1 124,316 39.1 118,505 42.4
-------- ----- -------- ----- -------- -----
Certificate accounts:
Time deposits ($100,000 and over) 10,860 3.9 7,825 2.5 7,792 2.8
7-31 day accounts 27 - 27 - 47 -
32-91 day accounts 1,162 .4 1,312 .4 920 .3
92-182 day accounts 9,643 4.5 14,178 4.5 14,348 5.2
Greater than 6 months through 1
year accounts 42,786 17.0 54,131 17.0 33,294 11.9
Greater than 1 year to 2 1/2 year
accounts 29,187 13.5 42,974 13.5 53,229 19.1
2 1/2 year and over accounts 59,537 23.0 73,016 23.0 51,134 18.3
-------- ----- -------- ----- -------- -----
Total certificate accounts 153,202 54.9 193,463 60.9 160,764 57.6
-------- ----- -------- ----- -------- -----
Total deposits $279,073 100.0% $317,779 100.0% $279,269 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
A-13
<PAGE> 13
The following table provides the maturity distribution of time deposits in
amounts of $100,000 or more at December 31,1996,1995 and 1994.
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Time remaining to maturity:
Three months or less $ 3,445 $2,771 $3,015
Three through six months 2,696 1,000 901
Six through twelve months 2,168 1,100 723
Over twelve months 2,551 2,954 3,153
----- ----- -----
Total $10,860 $7,825 $7,792
======= ====== ======
</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 (borne) 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, 1996 and
1995. See note 12 to the Consolidated Financial Statements.
At December 31, 1996, shareholders' equity totaled $28.4 million, an increase of
$294,000 over year-end 1995. The primary sources of this increase was the
retention of earnings.
Dividends have been increased each year since 1985, and amounted to $.54 per
share in 1996 for a dividend payout ratio of 68.35%. 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.
The primary investing activity during each period was lending. New loan
originations were funded by significant principal repayments and maturities on
loans and investment securities, which totaled $110.3 million in 1996, $95.6
million in 1995 and $85.9 million in 1994).
Under financing activities, cash was used in 1996 primarily to fund a net
decrease in certificate of deposit accounts, while cash was provided by
borrowings. In 1995 and 1994, funds were provided by net increases in
certificate of deposit accounts.
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
A-14
<PAGE> 14
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, 1996, the Company had $30.0
million in outstanding borrowings from the FHLB.
Currently, the Company anticipates that it will have sufficient funds to meet
its existing loan commitments. At December 31, 1996, the commitments to
borrowers for unused lines of credit and to originate loans totaled $75.5
million. Certificates of deposit which were scheduled to mature in one year or
less at December 31, 1996 totaled $95.4 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, 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.
In June, 1996, the Company renewed a one-year secured revolving credit facility
from a third-party lender in the amount of $l.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.
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.
FOURTH QUARTER RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The Company's net income for the three months ended December 31, 1996 was
$830,000 or $.43 per share compared with $699,000 or $.37 per share for the
three months ended December 31, 1995. The 18.7% increase in 1996 compared to
1995 was due to an increase in net interest income to $3,155,000 for the three
months ended December 31, 1996, compared to $2,952,000 for the three months
ended December 31, 1995 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 1996 decreased $318,000 over the fourth
quarter of 1995, due mainly to the gain on the sale of the Bank's Madison
Avenue office in December 1995. Noninterest expense decreased $488,000 or 18.3%
compared to the same period in 1995, principally due to an insurance recovery
received in the fourth quarter of 1996.
A-15
<PAGE> 15
QUARTERLY FINANCIAL DATA (UNAUDITED)
- --------------------------------------------------------------------------------
The following is a summary of selected quarterly financial data for the periods
indicated.
<TABLE>
<CAPTION>
1996
------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter(1) Quarter
------- ------- ------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income $6,869 $6,694 $ 6,806 $6,923
Net interest income 3,065 3,193 3,137 3,155
Provision for loan losses 34 34 34 207
Noninterest income 521 462 534 488
Noninterest expense 2,585 2,651 4,547 2,179
Net income (loss) 638 640 (601) 830
Net income (loss) per share $ .34 $ .33 $(.31) $ .43
- ---------------------
<FN>
(1) Included in noninterest expense is a one-time, nonrecurring charge
associated with the recapitalization of the Savings Association Insurance
Fund ("SAIF") in the amount of $1,962. Excluding the nonrecurring SAIF
assessment, earnings for the third quarter of 1996 totaled $693 or $.37 per
share.
</FN>
1995
------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In thousands, except per share data)
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 $ .20 $ .24 $ .25 $ .37
</TABLE>
A-16
<PAGE> 16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Haverfield Corporation
----------------------
Registrant
By: /s/ William A. Valerian Dated: August 11, 1997
------------------------------------- ---------------
William A. Valerian
Chairman of the Board,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
/s/ William A. Valerian Dated: August 11, 1997
- ----------------------------------------- --------------
William A. Valerian, Chairman of the Board,
President and Chief Executive Officer
/s/ Michael T. Gaul Dated: August 11, 1997
- ----------------------------------------- --------------
Michael T. Gaul, Director
/s/ Mark R. Magnotto Dated: August 11, 1997
- ----------------------------------------- --------------
Mark R. Magnotto, Director
/s/ Robert M. Mooney Dated: August 11, 1997
- ----------------------------------------- --------------
Robert M. Mooney, Director
/s/ David A. Nolan Dated: August 11, 1997
- ----------------------------------------- --------------
David A. Nolan, Director
/s/ Jacques C. Pomeroy Dated: August 11, 1997
- ----------------------------------------- --------------
Jacques C. Pomeroy, Director
/s/ Peter E. Shimrak Dated: August 11, 1997
- ----------------------------------------- --------------
Peter E. Shimrak, Director
/s/ Richard C. Ebner Dated: August 11, 1997
- ----------------------------------------- --------------
Richard C. Ebner, Executive Vice President,
Chief Operating Officer, Chief Financial
Officer and Treasurer
20
