<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- --------------------------------------------------------------------------------
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 1996
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
--------- ---------
COMMISSION FILE NUMBER: 000-22201
EMERALD FINANCIAL CORP.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
OHIO 34-1842953
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14092 PEARL ROAD
STRONGSVILLE, OHIO 44136
- -------------------- -----
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (216) 238-7311
Securities registered pursuant to Section 12(b) of the Act: NONE
<TABLE>
<S> <C>
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, WITHOUT PAR VALUE
-------------------------------
Title of Class
</TABLE>
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. [X]
The registrant's voting stock is authorized for quotation on the National
Association of Securities Dealers Automated Quotation System National Market
System under the symbol "EMLD." As of March 7, 1997, the registrant had
2,530,800 shares of common stock, without par value, outstanding. The aggregate
market value of the voting stock held by nonaffiliates of the registrant, based
on the average of the bid and asked prices of such stock as of March 7, 1997,
was $40,636,376.
DOCUMENTS INCORPORATED BY REFERENCE
PARTS II AND IV of Form 10-K - Portions of Annual Report to Shareholders for the
Fiscal Year Ended December 31, 1996
PART III of Form 10-K - Proxy Statement for the 1997 Annual Meeting of
Shareholders
<PAGE> 2
SIGNATURES
Pursuant to the requirements of Section 13 or Section 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.
EMERALD FINANCIAL CORP.
By: /s/ THOMAS P. PERCIAK
--------------------------------------
Thomas P. Perciak
President and Chief Executive Officer
Date: April 16, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ THOMAS P. PERCIAK April 16, 1997
- ------------------------------------------------
Thomas P. Perciak
Director, President and Chief Executive Officer
(principal executive officer)
/s/ JOHN F. ZIEGLER April 16, 1997
- ------------------------------------------------
John F. Ziegler
Director, Executive Vice President
and Chief Financial Officer
(principal accounting and financial officer)
/s/ MIKE KALINICH April 16, 1997
- ------------------------------------------------
Mike Kalinich
Director, Chairman of the Board
/s/ KENNETH J. PIECHOWSI April 16, 1997
- ------------------------------------------------
Kenneth J. Piechowski
Director
/s/ JOAN M. DZURILLA April 16, 1997
- ------------------------------------------------
Joan M. Dzurilla
Director
2
<PAGE> 3
/s/ WILLIAM A. FRAUNFELDER, JR. April 16, 1997
- --------------------------------------------
William A. Fraunfelder, Jr.
Director
/s/ GLENN W. GOIST April 16, 1997
- --------------------------------------------
Glenn W. Goist, DDS
Director
/s/ JOHN J. PLUCINSKY April 16, 1997
- --------------------------------------------
John J. Plucinsky, MD
Director
/s/ GEORGE BOHNERT April 16, 1997
- --------------------------------------------
George Bohnert, Jr., CPA
Director
3
<PAGE> 4
EMERALD FINANCIAL CORP.
INDEX TO EXHIBITS TO FORM 10-K/A FOR THE YEAR ENDED DECEMBER 31, 1996
Exhibit Description
------------------------------------------------------------
(13) Annual Report to Shareholders
4
<PAGE> 1
Exhibit 13
Strongsville Savings Bank
MARKET INFORMATION
The capital stock of Emerald Financial Corp. (Emerald or Company) began trading
under the symbol "EMLD" on the National Association of Securities Dealers
Automated Quotation System (NASDAQ) National Market System on March 7, 1997.
Emerald is a unitary thrift holding company whose subsidiary is The Strongsville
Savings Bank (Bank). The reorganization resulting in Emerald becoming the
holding company of the Bank was completed on March 6, 1997. Prior to completion
of the holding company reorganization, the Bank's capital stock traded under the
Symbol "SSBK" on the National Association of Securities Dealers Automated
Quotation System (NASDAQ) Small-Cap Issues. As of January 31, 1997, there were
approximately 420 holders of record of the Company's capital stock. Emerald
offers a Dividend Reinvestment Program (DRIP) to shareholders of record. For
information regarding the Company's DRIP, contact Key Services Corporation at
(216) 689-5372.
The following table sets forth the high and low prices of the Company's capital
stock and cash dividends per share for the periods shown. The prices reflect
inter-dealer quotations without retail markup, markdown or commissions, and do
not necessarily represent actual transactions.
<TABLE>
<CAPTION>
DIVIDENDS
YEAR PERIOD HIGH LOW PAID PER SHARE
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1994 FIRST QUARTER $ 20.50 $ 16.50 7.5(cent)
SECOND QUARTER 19.25 16.50 7.5(cent)
THIRD QUARTER 20.00 18.00 7.5(cent)
FOURTH QUARTER 20.00 16.50 9.0(cent)
----------
31.5(cent)
==========
1995 FIRST QUARTER 18.00 17.00 9.0(cent)
SECOND QUARTER 19.00 17.00 9.0(cent)
THIRD QUARTER 19.50 18.00 9.0(cent)
FOURTH QUARTER 19.50 18.00 11.0(cent)
----------
38.0(cent)
==========
1996 FIRST QUARTER 20.00 18.50 11.0(cent)
SECOND QUARTER 21.75 19.50 12.0(cent)
THIRD QUARTER 22.50 20.50 12.0(cent)
FOURTH QUARTER 22.50 21.00 12.0(cent)
----------
47.0(cent)
==========
</TABLE>
ANNUAL MEETING
The Annual Meeting of Emerald Financial Corp. will be held on April 24, 1997 at
10:30 AM at Quality Catering Party Center, 9200 Pearl Road, Strongsville, Ohio.
2
<PAGE> 2
SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
1996 1995 1994 1993 1992
=============================================================================================================================
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income $ 39,858 $ 35,410 $ 27,122 $ 23,646 $ 23,806
Interest expense 24,494 21,342 14,113 11,818 13,577
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income 15,364 14,068 13,009 11,828 10,229
Provision for loan losses 305 238 92 77 296
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 15,059 13,830 12,917 11,751 9,933
Net gain on sale of assets 1,091 997 228 1,799 1,735
Other noninterest income 1,344 1,055 966 1,063 1,069
Amortization of goodwill 134 143 151 158 165
Other noninterest expense 9,390 8,483 7,219 5,971 5,565
One-time SAIF assessment 2,481 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Income before federal income taxes 5,489 7,256 6,741 8,484 7,007
Federal income taxes 1,941 2,539 2,331 2,915 2,430
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 3,548 $ 4,717 $ 4,410 $ 5,569 $ 4,577
=============================================================================================================================
SUMMARY OF FINANCIAL CONDITION
Total assets $ 567,490 $ 492,097 $ 419,258 $ 332,729 $ 294,091
Investment securities 69,680 75,949 79,700 61,909 34,509
Total gross loans 457,919 364,766 306,921 263,364 233,688
Loans--net 425,855 336,351 281,843 242,395 216,890
Mortgage-backed securities 52,180 52,005 37,274 12,426 17,071
Goodwill 786 920 1,062 1,213 1,371
Deposits 493,471 432,563 363,050 294,750 269,733
Advances from Federal Home Loan Bank 25,234 13,333 15,583 -- --
Shareholders' equity 43,158 41,091 37,153 33,578 20,980
=============================================================================================================================
PER SHARE INFORMATION
Net income $ 1.40 $ 1.86 $ 1.74 $ 2.73 $ 2.43
Earnings before effect of one-time
SAIF assessment 2.05 1.86 1.74 2.73 2.43
Dividends paid 0.47 0.40 0.315 0.28 0.26
Book value 17.05 16.24 14.68 13.27 11.12
Tangible book value (1) 16.78 15.87 14.26 12.79 10.40
OTHER STATISTICAL AND OPERATING DATA
Return on average assets (ROAA) 0.68% 1.03% 1.18% 1.79% 1.64%
ROAA before effect of one-time
SAIF assessment 0.99 -- -- -- --
Return on average equity (ROAE) 8.38 12.07 12.47 22.15 24.09
ROAE before effect of one-time
SAIF assessment 12.25 -- -- -- --
Net yield on average interest-earning assets (2) 3.00 3.15 3.58 3.91 3.80
Interest rate spread during period (3) 2.62 2.76 3.24 3.64 3.55
Other noninterest expense to average assets (4) 1.79 1.85 1.93 1.92 2.00
Dividend payout ratio excluding one-time
SAIF assessment 22.94 21.46 18.08 10.41 10.72
Total allowance for loan losses to
nonperforming loans 83.76 56.91 120.11 315.80 252.06
Total allowance for loan losses to total loans 0.33 0.35 0.34 0.35 0.33
Nonperforming loans to total loans 0.40 0.61 0.28 0.11 0.13
Nonperforming assets to total assets 0.30 0.42 0.19 0.08 0.15
Net charge-offs (recoveries) to average loans (5) 0.01 0.01 (0.01) (0.02) 0.07
Number of full-service offices 14 12 10 9 9
Weighted average common
shares outstanding 2,530,800 2,530,800 2,530,800 2,042,066 1,886,800
CAPITAL RATIOS
Equity to assets:
Average for the period 8.06% 8.52% 9.46% 8.08% 6.82%
At period end 7.61 8.35 8.86 10.09 7.13
Tangible capital (1) 7.49 8.14 8.64 9.76 6.70
Core capital 7.49 8.14 8.87 10.10 7.12
Risk-based capital 12.93 13.51 14.22 14.99 11.77
=============================================================================================================================
<FN>
(1) Tangible book value and tangible capital each represent shareholders' equity less goodwill.
(2) Net interest income divided by average interest-earning assets.
(3) The difference between the weighted average yield on interest-earning assets and the weighted
average rate paid on interest-bearing liabilities.
(4) Goodwill amortization is excluded from the numerator of this ratio.
(5) Net charge-offs during the period to average loans outstanding during the period.
</TABLE>
6
<PAGE> 3
Strongsville Savings Bank
MANAGEMENT'S DISCUSSION AND ANALYSIS
Emerald Financial Corp. (Emerald or Company), a unitary thrift holding company,
became the holding company of The Strongsville Savings Bank (Strongsville
Savings or Bank) in a tax-free exchange of shares of the Bank for shares of
Emerald on March 6, 1997. As a result, Emerald owns and operates the Bank. All
references to the Company or Emerald, unless otherwise indicated, refer to the
Bank and its subsidiary on a consolidated basis.
Strongsville Savings takes great pride in its history of providing friendly and
professional service to its customers. Our commitment to providing customers
with the financial products and services they need and want has brought success
to Strongsville Savings and to our customers. We help our customers achieve
their financial goals by providing a variety of products including two new
products introduced during 1996: The Emerald Reserve Account and The Emerald
Basic Checking Account. The Emerald Reserve Account is a line of credit which
enables customers to utilize the equity in their homes to finance their needs
and dreams. The Emerald Basic Checking Account provides customers with a
fee-free checking account. The Bank also offers its traditional product line
which includes NOW accounts, IRA accounts and a variety of term deposit,
passbook and other deposit vehicles. Many customers have enjoyed the American
dream of home-ownership with mortgage loan financing from Strongsville Savings.
We also offer loans for residential construction and development, commercial
property and many other purposes.
Strongsville Savings' franchise is strong--with a network of 14 Community
Financial Centers (Offices) throughout Southwestern Cuyahoga County, Lorain
County and Medina County. Our goal is to position our full service Offices in
communities poised for growth. Our customer service approach has proved
successful as evidenced by our strong growth at each Office. We expect the
tradition to continue through our close attention to the marketplace, to our
customers and to their financial needs.
FINANCIAL CONDITION
The Company's total assets were $567.5 million at December 31, 1996,
representing an increase of $75.4 million or 15.3% over the previous year total
assets of $492.1 million. The Company's 26.6% loan growth was funded by
increases in deposits and Federal Home Loan Bank advances and by decreases in
investments. Strongsville Savings' deposits increased 14.1% during 1996 from
$432.6 million to $493.5 million.
7
<PAGE> 4
The composition of Strongsville Savings' assets and liabilities at year end 1996
and 1995 are displayed below.
- -----------------------------------------------
DECEMBER 31, 1996
TOTAL ASSETS
[GRAPH]
<TABLE>
<S> <C>
TOTAL LOANS - NET 75%
OTHER 2%
CASH & INVESTMENTS 23%
</TABLE>
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY
[GRAPH]
<TABLE>
<S> <C>
TOTAL DEPOSITS 87%
OTHER 5%
SHAREHOLDERS' EQUITY 8%
</TABLE>
- -----------------------------------------------
DECEMBER 31, 1995
TOTAL ASSETS
[GRAPH]
<TABLE>
<S> <C>
TOTAL LOANS - NET 68%
OTHER 2%
CASH & INVESTMENTS 30%
</TABLE>
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY
[GRAPH]
<TABLE>
<S> <C>
TOTAL DEPOSITS 88%
OTHER 4%
SHAREHOLDERS' EQUITY 8%
</TABLE>
- -----------------------------------------------
Shareholders' equity increased $2.1 million, or 5.0%, to $43.2 million during
1996, primarily through the retention of net income of $3.5 million offset by
dividends of $1.2 million.
Strongsville Savings' dividend payments have increased over the past five years
as noted below. The Bank paid quarterly dividends totaling 47(cent) per share
for 1996, an increase of 17.5% over the 40(cent) per share paid in 1995. On
December 18,1996, the Board of Directors approved a first quarter 1997 dividend
of 12(cent) per share, or 48(cent) per share, annualized.
DIVIDENDS PER SHARE
[GRAPH]
<TABLE>
<S> <C>
1992 $0.26
1993 $0.28
1994 $0.315
1995 $0.40
1996 $0.47
</TABLE>
8
<PAGE> 5
Strongsville Savings Bank
The Bank's capital exceeded all regulatory capital requirements for both capital
adequacy and to be considered well-capitalized under the regulatory framework
for prompt corrective action. The graph below illustrates the capital required
by federal regulations and the Bank's ability to meet and exceed those
requirements at December 31, 1996, 1995 and 1994.
The Bank has endeavored to leverage its capital as much as possible to generate
earnings for its shareholders. In addition to the Bank's ability to exceed
regulatory capital requirements, the chart below illustrates management's
strategy to leverage capital by investing excess capital in earning assets.
[GRAPH]
<TABLE>
<CAPTION>
1994 1995 1996
<S> <C> <C> <C>
Tangible Capital
to Adjusted total Assets
Required 1.5% 1.5% 1.5%
Actual 8.64% 8.14% 7.49%
Core Capital
to Adjusted Total Assets
Required 3.0% 3.0% 3.0%
Actual 8.87% 8.14% 7.49%
Risk-Based Capital
to Adjusted Total Assets
Required 8.0% 8.0% 8.0%
Actual 14.22% 13.51% 12.93%
</TABLE>
RESULTS OF OPERATIONS
Strongsville Savings strives to produce strong, stable core earnings from
operations. Core earnings consist of net interest income and recurring,
noninterest income, reduced by recurring noninterest expenses. During 1996 the
Congress passed legislation to recapitalize the Savings Association Insurance
Fund (SAIF) of the Federal Deposit Insurance Corporation (FDIC). This
legislation required thrifts, such as the Bank, to pay a one-time special
assessment of 65.7(cent) per $100 of deposits as of March 31, 1995. This
one-time SAIF assessment is considered a nonrecurring expense, and resulted in a
pre-tax charge to earnings of $2.5 million. Recurring, noninterest income
excludes gains (losses) on sales of loans and other assets.
Core earnings before federal income tax for the three years
ended December 31, 1996 are noted below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
DECEMBER 31
1996 1995 1994
================================================================================
(In Millions)
<S> <C> <C> <C>
Net interest income $ 15.4 $ 14.1 $ 13.0
Less provision for loan losses 0.3 0.2 0.1
- --------------------------------------------------------------------------------
15.1 13.9 12.9
Noninterest income (recurring) 1.3 1.1 1.0
Noninterest expense (recurring) 9.5 8.6 7.4
- --------------------------------------------------------------------------------
CORE EARNINGS $ 6.9 $ 6.4 $ 6.5
================================================================================
</TABLE>
Strongsville Savings' net interest income has advanced steadily over the past
three years, primarily due to growth in the portfolio of interest earning
assets. Over the past three years, the Bank's franchise has also grown from nine
Offices in 1993 to fourteen in 1996. This franchise expansion has increased
certain noninterest expenses, such as human resources and occupancy. The Bank
anticipated these increases and determined that the benefits of market presence,
market penetration and future earnings growth exceeded the rise in operating
expenses.
9
<PAGE> 6
NET INTEREST INCOME
Net interest income is the chief component of net income. Net interest income is
the difference between interest income on interest-earning assets and interest
expense on interest-bearing liabilities. Interest-bearing liabilities include
deposit accounts and FHLB advances that provide funds to invest in
interest-earning assets. Net interest income is determined by changes in the
composition of interest-earning assets and interest-bearing liabilities and
fluctuations in the levels of interest rates.
Interest rates in general declined slightly during 1996, following two years of
generally increasing rates. Yields on interest-earning assets declined 14 basis
points during 1996, while costs on interest-bearing liabilities remained stable
at 5.16% in 1996 and 1995.
INTEREST INCOME
Strongsville Savings' primary source of income is interest income from its loan
portfolio and other interest-earning assets. The Bank's commitment to providing
residential home loans is evident by its $338.3 million portfolio of permanent
and construction, single-family, residential mortgage loans. The Bank's
interest-earning assets include the residential mortgage loan portfolio, the
residential acquisition and development loan portfolio, the other loan
portfolios and the investment securities and mortgage-backed securities
portfolios.
Strongsville Savings' interest income was $39.9 million in 1996, $35.4 million
in 1995 and $27.1 million in 1994, representing annual increases of 12.6% and
30.6% for the years ended December 31, 1996 and 1995, respectively. These
increases are attributable to a combination of the effects of increases in
volume and changes in rate that are set forth in Table II. Average
interest-earning assets were $512.2 million with an average yield of 7.8% in
1996, $447.2 million with an average yield of 7.9% in 1995 and $363.6 million
with an average yield of 7.5% in 1994. See Table I for more details regarding
average interest-earning assets and their yields.
INTEREST EXPENSE
Strongsville Savings' primary source of funding for interest-earning assets is
retail deposits. Management believes that by providing friendly and professional
service, the Bank has achieved deposit growth during a period characterized by
disintermediation. As financial institutions often struggle to retain retail
deposits, the Bank has been able to increase deposits by 14.1% during 1996.
Management has dedicated resources to focus employees' attention on providing
excellent customer service and understanding the attributes of the Bank's
products. Savings counselors, tellers and other employees are encouraged to
cross-sell the Bank's products and services to current and future customers.
Management believes the Bank has a stable deposit base because the base consists
of retail deposits in communities we have made a commitment to serve.
Strongsville Savings' interest expense was $24.5 million in 1996, $21.3 million
in 1995 and $14.1 million in 1994. The change in interest expense was primarily
a result of the growth in deposits, principally in certificates of deposit.
Changes in interest rates did not contribute to the change during 1996, as the
average cost of interest-bearing liabilities remained unchanged at 5.16% during
1996 and 1995. During 1995, however, the average cost of interest-bearing
liabilities increased 94 basis points from its 1994 level. See tables I and II
for more information regarding average balances, average rates and changes in
interest expense attributable to changes in volume and changes in rates.
10
<PAGE> 7
Strongsville Savings Bank
Table I presents information regarding the average balances of interest-earning
assets and interest-bearing liabilities, the total dollar amount of interest
income from interest-earning assets and their average yields, and the total
dollar amount of interest expense on interest-bearing liabilities and their
average rates. The table also presents net interest income, interest rate
spread, net interest margin and the ratio of average interest-earning assets to
average interest-bearing liabilities. Interest rate spread represents the
difference between the weighted average yield on interest-earning assets and the
weighted average cost of interest-bearing liabilities, and net interest margin
represents net interest income as a percent of average interest-earning assets.
Average balance calculations were based on daily balances. Assets available for
sale are included in the major asset category as if they were held-to-maturity.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
TABLE I YEAR ENDED DECEMBER 31
1996 1995 1994
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
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 receivable, net (1) $394,329 $ 32,442 8.23% $305,605 $ 26,424 8.65% $256,529 $ 22,040 8.59%
Investment securities 63,189 3,836 6.07 80,822 4,982 6.16 72,550 3,391 4.67
Mortgage-backed securities 44,792 3,110 6.94 45,399 3,192 7.03 21,126 1,230 5.82
Other interest-earning assets 9,937 470 4.73 15,364 812 5.29 13,371 461 3.45
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 512,247 39,858 7.78 447,190 35,410 7.92 363,576 27,122 7.46
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest-earning assets 12,808 11,787 10,166
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $525,055 $458,977 $373,742
====================================================================================================================================
INTEREST-BEARING LIABILITIES
Deposits (2) 457,974 23,516 5.13 $399,460 20,428 5.11 $328,326 13,762 4.19
Advances from FHLB 16,303 978 6.00 14,420 914 6.34 6,035 351 5.82
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 474,277 24,494 5.16 413,880 21,342 5.16 334,361 14,113 4.22
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing liabilities 8,434 6,013 4,013
- ------------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity 42,344 39,084 35,368
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $525,055 $458,977 $373,742
====================================================================================================================================
Net interest income $ 15,364 $ 14,068 $ 13,009
Interest rate spread 2.62% 2.76% 3.24%
Net interest margin 3.00% 3.15% 3.58%
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities 108.01% 108.05% 108.74%
====================================================================================================================================
<FN>
(1) Average balances include non-accrual loans. Interest income includes
deferred loan fee amortization of $1,650,000, $1,676,000 and $1,560,000 for
the years ended December 31, 1996, 1995 and 1994, respectively.
(2) Deposits include noninterest-bearing demand accounts, which were
$11,535,000, $11,728,000 and $10,159,000 at December 31, 1996, 1995 and
1994, respectively.
</TABLE>
11
<PAGE> 8
Table II presents certain information regarding changes in interest income and
interest expense of the Bank for the years ended December 31, 1996, 1995 and
1994. The table shows the changes in interest income and expense, by major
category, attributable to changes in the average balance (volume) and changes in
interest rates. The net change not attributable to either rate or volume is
allocated on a pro-rata basis to the change in rate or volume. Assets available
for sale are included in the major asset category as if they were
held-to-maturity.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
TABLE II 1996 COMPARED TO 1995 1995 COMPARED TO 1994
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGES IN: DUE TO CHANGES IN:
VOLUME RATE TOTAL VOLUME RATE TOTAL
===========================================================================================
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME ON
INTEREST-EARNING ASSETS
Loans, net $7,227 ($1,209) $6,018 $4,230 $ 154 $4,384
Investment securities (1,074) (72) (1,146) 419 1,172 1,591
Mortgage-backed
securities (42) (40) (82) 1,661 301 1,962
Other (263) (79) (342) 77 274 351
- -------------------------------------------------------------------------------------------
Total 5,848 (1,400) 4,448 6,387 1,901 8,288
- -------------------------------------------------------------------------------------------
INTEREST EXPENSE ON
INTEREST-BEARING LIABILITIES
Deposits 3,007 81 3,088 3,311 3,355 6,666
Borrowings 110 (46) 64 351 212 563
- -------------------------------------------------------------------------------------------
Total 3,117 35 3,152 3,662 3,567 7,229
- -------------------------------------------------------------------------------------------
CHANGE IN NET INTEREST INCOME $2,731 ($1,435) $1,296 $2,725 ($1,666) $1,059
===========================================================================================
</TABLE>
PROVISIONS FOR LOAN LOSSES
The provision for loan losses represents a charge to income for possible credit
losses. The Bank maintains the level of the allowance for loan losses at an
amount adequate to absorb potential losses inherent in the loan portfolio. A
quarterly review of the adequacy of the allowance for loan losses considers
growth in the loan portfolio, potential losses identified by the portfolio
review process, and the Bank's historical loan loss experience. In addition, the
Bank considers economic conditions, including the overall level of interest
rates and the general trend of the national economy, local economy and housing
markets. The allowance is determined in accordance with generally accepted
accounting principles.
The provision for loan losses was $305,000 in 1996, $238,000 in 1995 and $92,000
in 1994. The provision for 1996 was increased primarily as a result of growth in
the overall loan portfolio. The provisions for the three years ended December
31, 1996, reflect generally stable economic conditions in the Strongsville
Savings' market area, as well as the high credit quality of the Bank's loan
portfolio. The allowance for loan losses throughout 1996, 1995 and 1994 was
commensurate with management's estimate of the credit risk in the loan
portfolio.
12
<PAGE> 9
Strongsville Savings Bank
NONINTEREST INCOME
Noninterest income is comprised mainly of fees the Bank earns from services
performed for customers and for servicing loans sold to the secondary market.
Loan servicing and other fee income were $1,303,000 in 1996, $1,001,000 in 1995
and $933,000 in 1994. The increases are due principally to growth in the Bank's
loan portfolio and changes in loans serviced for investors.
Gains on the sale of loans to the secondary market and gains on sales of
securities and other assets are included in noninterest income. This is the
component of noninterest income with the greatest level of variation. Gains on
sales of loans experience variations due to the number of loans the Bank sells
to the secondary market and to the price offered by the secondary market for
such loans. The Bank sells loans to the secondary market, in conjunction with
certain fixed-rate loan programs, to provide funding, and as an interest rate
risk management tool. The Bank recorded gains on loan sales of $711,000 in 1996,
$964,000 in 1995 and $228,000 in 1994.
In 1995 the Bank adopted Statement of Financial Accounting Standards (SFAS) No.
122, Accounting for Mortgage Servicing Rights, which enabled the Bank to
capitalize the fair market value of originated mortgage servicing rights for
loans sold. The Bank realized gains on loan sales of $282,000 in 1996 and
$281,000 in 1995 (pre-tax) as a result of adopting SFAS No. 122.
NONINTEREST EXPENSES
Strongsville Savings has made a commitment to expand its franchise value by
blanketing its market area with easy access Community Financial Centers. We
believe the expansion of the Bank's financial network will benefit current and
future customers by bringing our Offices close to their homes. There are
operating costs involved in franchise expansion; however, we believe the
benefits of expanding to provide full coverage to our targeted market are worth
the investment. We have added five Offices in the past three years, and deposits
at these Offices stood at $66.2 million at December 31, 1996.
As Strongsville Savings grows and expands its franchise and services into more
communities, management has worked hard to control costs. The Bank's ratio of
noninterest expense (excluding the one-time SAIF assessment) to average assets
was 1.79% in 1996, 1.85% in 1995 and 1.93% in 1994. The common industry
benchmark for this ratio is 2.00% or less. According to SNL Securities Thrift
Performance as of September 30, 1996, industry averages were 2.23% for the
twelve months ended September 30, 1996, and 2.26% and 2.27% for the years ended
December 31, 1995 and 1994, respectively.
Noninterest expense was $9,524,000 in 1996, $8,626,000 in 1995 and $7,370,000 in
1994. The increases were primarily due to the Bank's franchise expansion program
which added two Community Financial Centers in 1996, bringing the three year
total to five new Offices. Human resources, occupancy and deposit insurance
premiums increased as a result of the franchise expansion. Other increases were
related to investment in technology, higher franchise taxes and general price
increases.
Congress passed legislation to recapitalize the SAIF fund of the FDIC during
1996 that required thrift institutions, such as Strongsville Savings, to pay a
one-time assessment to recapitalize the SAIF fund of the FDIC of 65.7(cent) per
$100 of deposits as of March 31, 1995. The Bank recognized a charge to earning
of $2.5 million (pre-tax) as a result. Deposit insurance premiums are expected
to decline sharply in 1997 as a result of a lower premium schedule issued by the
FDIC following the SAIF fund recapitalization. Prior to this recapitalization,
the Bank's deposit insurance premiums were 23(cent) per $100 of deposits; under
the new premium schedule, Strongsville Savings expects to pay 6.48(cent) per
$100 of deposits in 1997. This represents an anticipated cost reduction of
$672,000 or 71.9% based on 1996 deposit levels.
13
<PAGE> 10
FEDERAL INCOME TAXES
The Bank provided for federal income taxes as follows: $1,941,000 in 1996,
$2,539,000 in 1995 and $2,331,000 in 1994. The changes in the level of the
Bank's provision for federal income taxes were primarily due to changes in the
level of pre-tax income. The effective tax rates for the periods were 35.9% in
1996, 35.0% in 1995 and 34.5% in 1994.
LENDING ACTIVITIES
The cornerstone of Strongsville Savings' lending activities is providing
mortgage loans to homeowners. The Bank principally originates conventional first
mortgage loans secured by residential real estate. In December 1996, the Bank
introduced the Emerald Reserve Account (the Emerald Line), a line of credit
which enables our customers to utilize the equity in their homes to fund
improvements, education or whatever they choose. The Emerald Line's interest
rate is based on the Bank's prime rate. Loans made to homeowners on
owner-occupied, one-to-four-family residences typically have low credit risk
because the borrower occupies the home. Credit risk management is also enhanced
by the historically stable real estate values in Northeastern Ohio.
Strongsville Savings has developed a niche in the residential construction loan
market. The Bank makes residential land development loans to local builders and
developers with whom strong business relationships have been developed. These
loans are made on land zoned for residential use which will be developed into
residential building lots. In addition, the Bank provides construction loans to
builders for the construction of homes, most of which are pre-sold, and to
individuals for the construction of their homes.
Management considers these development and construction loans as having somewhat
greater credit risk than conventional residential mortgage loans because there
is uncertainty related to the completion of projects within their time and cost
budgets. Strongsville Savings' management constantly monitors these loans and
reviews the progress of each with the borrowers and contractors to manage and
mitigate the risk involved.
Management believes that loans secured by commercial property may present a
higher degree of credit risk than residential loans. The factors that tend to
increase the credit risk of these loans include the concentration of principal
in a limited number of loans and borrowers, the effects of general economic
conditions on income-producing properties and the increased difficulty of
evaluating and monitoring such properties. Furthermore, the repayment of loans
secured by commercial real estate is typically dependent upon the cash flows of
the related business enterprise. The Bank has instituted procedures to monitor
the cash flows of its commercial real estate loan customers.
The following table illustrates the composition of the Bank's loan portfolio:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
DECEMBER 31
LOAN COMPOSITION 1996 1995 1994
==============================================================================
(In Millions)
<S> <C> <C> <C>
REAL ESTATE LOANS
One-to-four-family $ 302.1 $ 225.9 $ 194.6
Multi-family & commercial 48.1 43.6 39.8
Construction 39.6 33.9 34.4
RESIDENTIAL ACQUISITION
& DEVELOPMENT 54.7 48.5 29.1
OTHER LOANS 13.4 12.9 9.0
- ------------------------------------------------------------------------------
TOTAL LOANS $ 457.9 $ 364.8 $ 306.9
==============================================================================
</TABLE>
14
<PAGE> 11
Strongsville Savings Bank
Loan originations by type were as follows for the years ended:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
LOAN ORIGINATIONS 1996 1995 1994
==============================================================================
(In Millions)
<S> <C> <C> <C>
REAL ESTATE LOANS
One-to-four-family $ 154.5 $ 86.0 $ 63.1
Multi-family & commercial 8.6 5.2 2.7
Construction 50.5 43.6 50.2
RESIDENTIAL ACQUISITION
& DEVELOPMENT 39.9 43.2 30.5
OTHER LOANS 7.2 8.9 5.7
- ------------------------------------------------------------------------------
TOTAL LOAN ORIGINATIONS $ 260.7 $ 186.9 $ 152.2
==============================================================================
</TABLE>
ASSET QUALITY
Management has designed stringent underwriting standards to minimize credit risk
in the Bank's loan portfolio. All loans are subject to these standards, which
include evaluating each applicant's ability to make periodic payments, his or
her equity in the property, and the value of the underlying collateral.
Management monitors the loan portfolio to determine that the level of credit
risk remains stable and acceptable.
The Bank defines non-performing loans as those loans where there is an
indication that the borrower no longer has the ability to repay. Generally,
these loans are more than 90 days delinquent. Non-performing assets include
non-performing loans and in-substance foreclosed loans. The Bank's
non-performing assets have consistently been below peer group averages. The
Bank's ratio of non-performing assets to total assets was 0.30%, 0.42% and 0.19%
at December 31, 1996, 1995 and 1994, respectively. According to the SNL
Securities Thrift Performance as of September 30, 1996, the industry average
ratio of non-performing assets to total assets was 0.65% at September 30, 1996
and 0.63% and 0.82% at December 31, 1995 and 1994, respectively.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
DECEMBER 31
NON-PERFORMING ASSETS 1996 1995 1994
===============================================================================
(Dollars in Thousands)
<S> <C> <C> <C>
Total non-performing loans $ 1,699 $ 2,052 $ 789
Other non-performing assets -- -- --
- -------------------------------------------------------------------------------
Total non-performing assets $ 1,699 $ 2,052 $ 789
===============================================================================
Non-performing assets to
total assets 0.30% 0.42% 0.19%
Allowance for loan losses to
non-performing loans 83.76% 56.91% 120.11%
Net charge-offs (recoveries) to average
loans outstanding for the year 0.01% 0.01% (0.01%)
===============================================================================
</TABLE>
At December 31, 1996, non-performing loans included twelve residential loans
totaling $1,241,000, four construction loans totaling $453,000, and two consumer
loans totaling $5,000. The ratio of net charge-offs to average loans outstanding
illustrates the Bank's commitment to minimizing credit risk through its strict
underwriting standards and collection procedures.
At December 31, 1996, there were two loans secured by funeral homes to a single
borrower totaling $1.1 million which are not included in the table above.
Indications of possible cash flow problems have caused management concern
regarding the borrower's ability to comply with present loan repayment terms and
may result in the classification of these loans as non-performing in the future.
Based on written opinions from an independent fee appraiser, the collateral
value of the properties are sufficient to cover the total outstanding debt.
15
<PAGE> 12
ASSET AND LIABILITY MANAGEMENT
The Bank's asset and liability management program is intended to minimize the
impact of significant changes in interest rates on net interest income.
Management believes the keys to successful interest rate and credit risk
management include the monitoring and management of interest rate sensitivity
and the quality of assets, discussed above. Interest rate risk is the risk that
net interest income or net portfolio value will decline significantly in periods
of changing interest rates.
Strongsville Savings has endeavored to buffer net income from the effect of
changes in interest rates by reducing the maturity or repricing mismatch between
its interest-earning assets and interest-bearing liabilities. The Bank's
strategy includes originating adjustable rate mortgage (ARM) loans, selling
certain fixed-rate residential mortgage loans to the Federal Home Loan Mortgage
Corporation (Freddie Mac) and investing in securities with short to medium
terms. This strategy has resulted in an investment of $193.7 million, or 42.3%
of the Bank's total mortgage loan portfolio in ARM loans at December 31, 1996.
The Bank originated $97.7 million, $95.7 million and $66.4 million in ARM loans
in 1996, 1995 and 1994, respectively. Although the Bank is committed to
originating ARM loans, management believes that discounted "teaser" rate loans
diminish the effectiveness of ARM loans for managing interest rate risk;
therefore the Bank does not offer teaser rate loans.
Strongsville Savings sold $53.8 million in long-term, fixed-rate loans to
Freddie Mac during 1996, $42.6 million in 1995 and $21.6 million in 1994. The
Bank only sells loans to the secondary market on a non-recourse basis with
servicing retained.
The Bank's investment portfolio consists primarily of investment grade corporate
debt, government agency debt and mortgage-backed securities issued by government
agencies. Substantially all of the corporate debt and government agency debt
matures in three years or less.
The Bank's strategy to reduce the maturity or repricing mismatch between its
interest rate sensitive assets and liabilities includes reducing the terms to
maturity of its long-term, interest-earning assets, as noted above, and
lengthening the terms to repricing or maturity of its interest-bearing
liabilities. At December 31, 1996, the Bank's long-term, fixed-rate deposits
with terms exceeding three years were $54.7 million.
A common industry measure of a financial institution's general sensitivity to
interest rates is called the gap (GAP). The GAP represents the difference
between the Bank's interest-earning assets and interest-bearing liabilities
maturing within certain time frames, as a percent of the Bank's total assets.
Table III illustrates the Bank's interest rate GAP at December 31, 1996.
16
<PAGE> 13
Strongsville Savings Bank
Table III illustrates the maturities or repricing of the Bank's assets and
liabilities at December 31, 1996 based on information from the financial model
used by Strongsville Savings concerning prepayments and decay rates of major
asset and liability categories.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
TABLE III DECEMBER 31, 1996
MATURING OR WITHIN 6-12 1-3 3-5 5-10 10 OR TOTAL
REPRICING PERIODS 6 MONTHS MONTHS YEARS YEARS YEARS MORE
(Dollars in Thousands)
=========================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING
ASSETS
Adjustable-rate mortgage loans $23,490 $18,567 $21,537 $ -- $ -- $ -- $63,594
Fixed-rate mortgage loans 16,787 15,834 55,260 43,256 71,789 42,826 245,752
Other loans 77,809 15,287 22,896 2,989 2,549 365 121,895
Investments 62,833 36,950 21,129 4,466 2,015 1,517 128,910
- -------------------------------------------------------------------------------------------------------------------------
Total 180,919 86,638 120,822 50,711 76,353 44,708 560,151
- -------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING
LIABILITIES
Certificate of deposit accounts 150,926 121,187 61,588 54,658 -- -- 388,359
Money market deposit accounts 3,245 2,656 6,603 2,964 2,088 326 17,882
NOW and passbook accounts 10,141 8,782 24,838 13,972 13,700 4,262 75,695
Advances from FHLB 21,530 520 1,676 1,508 -- -- 25,234
- -------------------------------------------------------------------------------------------------------------------------
Total 185,842 133,145 94,705 73,102 15,788 4,588 507,170
- -------------------------------------------------------------------------------------------------------------------------
INTEREST RATE SENSITIVITY GAP (4,923) (46,507) 26,117 (22,391) 60,565 40,120 $52,981
- ---------------------------------------------------------------------------------------------------------------- =======
CUMULATIVE GAP ($4,923) ($51,430) ($25,313) ($47,704) $12,861 $52,981
=============================================================================================================
CUMULATIVE INTEREST RATE
SENSITIVITY GAP AS A PERCENT
OF TOTAL ASSETS AT
DECEMBER 31, 1996 (0.87%) (9.06%) (4.46%) (8.41%) 2.27% 9.34%
- -------------------------------------------------------------------------------------------------------------------------
CUMULATIVE INTEREST RATE
SENSITIVITY GAP AS A PERCENT
OF TOTAL ASSETS AT
DECEMBER 31, 1995 5.23% (0.38%) 2.56% (6.37%) 2.63% 10.02%
=========================================================================================================================
</TABLE>
The table presents the repricing dates of the Bank's interest-earning assets and
interest-bearing liabilities at December 31, 1996. The annual prepayment and
decay rates used in this table are obtained from an independent analysis
service. Annual prepayment assumptions for 1996 range from 7% to 18% on
fixed-rate mortgage loans, 10% to 24% on ARM loans, 12% to 19% on
non-residential real estate mortgage loans, and 12% to 21% on other loans.
Annual prepayment assumptions for 1995 ranged from 8% to 21% on fixed-rate
mortgage loans, 18% to 28% on ARM loans, 9% to 22% on non-residential real
estate mortgage loans, and 5% to 7% on other loans. The NOW, money market
deposit and passbook accounts' decay rates for 1996 were assumed to vary across
time horizons from 0% to 37% in 1996 and 0% to 33% in 1995.
The method used to analyze interest-rate sensitivity in Table III has a
number of limitations. Certain assets and liabilities may react differently to
changes in interest rates even though they reprice or mature in the same or
similar time periods. The interest rates on certain assets and liabilities may
change at different times from changes in market rates, with some changing in
advance of changes in market rates, and some lagging behind changes in market
rates. Also, certain assets, e.g. ARM loans, often have provisions that may
limit changes in interest rates each time the interest rate changes, and on a
cumulative basis over the life of the loan. Additionally, the actual prepayments
and withdrawals experienced in the event of a change in interest rates could
deviate significantly from those assumed in calculating the data shown in the
table. Finally, the ability of some borrowers to service their debt may decrease
in the event of an interest rate increase.
17
<PAGE> 14
LIQUIDITY
The Bank is required to maintain an average daily balance of liquid assets
(cash; certain time deposits; bankers' acceptances; specified United States
Government, state or federal agency obligations; shares of certain mutual funds
and certain corporate debt securities and commercial paper) equal to a monthly
average of not less than specified percentages of its net withdrawable deposit
accounts plus short-term borrowings. The average eligible liquidity at December
31, 1996 was 16.07%, which exceeded the 5.0% requirement. The Bank's short-term
liquidity at December 31, 1996, was 8.21%, which exceeded the 1.0% requirement.
Financial institutions, such as Strongsville Savings, must ensure that
sufficient funds are available to meet deposit withdrawals, loan commitments and
expenses. Management of the Bank's cash flows requires the anticipation of
deposit flows and loan payments. The Bank's primary sources of funds are
deposits and principal and interest payments on loans. The Bank uses funds from
deposit inflows and principal and interest payments on loans primarily to
originate loans, and to purchase short-term investment securities and
interest-earning deposits.
At December 31, 1996, loans-in-process to be funded over a future period of time
totaled $26.7 million, and loan commitments or loans committed but not closed
totaled $34.8 million. There were no commitments to purchase or sell loans at
December 31, 1996. Funding for these amounts is expected to be provided by the
sources described above. Management believes the Bank has adequate resources to
meet its normal funding requirements.
The Bank is a party to a credit agreement with the Federal Home Loan Bank (FHLB)
of Cincinnati whereby The Bank can obtain advances. The Bank had $25.2 million
in advances outstanding from FHLB of Cincinnati at December 31, 1996.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data herein have been prepared in
accordance with generally accepted accounting principles, which require
measurement of financial condition and results of operations in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation.
Changes in the general level of prices for goods and services have a relatively
minor impact on the Bank's total expenses because the Bank's primary assets and
liabilities are monetary in nature. Increases in operating expenses such as
salaries and maintenance are in part attributable to inflation. However,
interest rates have a far more significant effect than inflation on the
performance of financial institutions, including the Bank.
NEW ACCOUNTING PRONOUNCEMENTS
See the Notes to the Consolidated Financial Statements, Note 1, caption New
Accounting Standards for a discussion of accounting and reporting developments
affecting the Bank.
18
<PAGE> 15
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of
Financial Condition
21
Consolidated Statements of Income
22
Consolidated Statements of Cash Flows
23
Consolidated Statements of
Shareholders' Equity
24
Notes to Consolidated Financial Statements
25 - 38
Independent Auditors' Report
39
<PAGE> 16
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars In Thousands)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
DECEMBER 31
1996 1995
=====================================================================================
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS
Cash and deposits with banks $ 3,146 $ 3,574
Interest-bearing deposits with banks 4,406 11,935
INVESTMENT SECURITIES
Held-to-maturity (fair values of $47,496
and $49,640 at December 31,1996 and
1995, respectively) 47,684 49,354
Available for sale (at fair value) 21,996 26,595
MORTGAGE-BACKED SECURITIES
Held-to-maturity (fair values of $33,104
and $37,819 at December 31, 1996 and
1995, respectively) 32,536 37,256
Available for sale (at fair value) 19,644 14,749
LOANS -- NET
(including allowance for loan losses of $1,423
and $1,168 at December 31, 1996 and
1995, respectively) 425,060 331,017
LOANS HELD FOR SALE 795 5,334
ACCRUED INTEREST RECEIVABLE 3,238 3,299
FEDERAL HOME LOAN BANK STOCK-- AT COST 2,831 2,407
PREMISES AND EQUIPMENT-- NET 3,939 4,334
PREPAID EXPENSES AND OTHER ASSETS 2,215 2,243
- -------------------------------------------------------------------------------------
TOTAL ASSETS $ 567,490 $492,097
=====================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $ 493,471 $432,563
Advances from Federal Home Loan Bank 25,234 13,333
Advance payments by borrowers for
taxes and insurance (escrow) 1,502 1,222
Deferred federal income tax 1,584 1,583
Accrued interest payable 586 425
Accounts payable and other accrued expenses 1,955 1,880
- -------------------------------------------------------------------------------------
TOTAL LIABILITIES 524,332 451,006
- -------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock, no par value; 10,000,000
shares authorized, 2,530,800 shares
issued and outstanding 9,831 9,831
Retained earnings (substantially restricted) 33,422 31,064
Net unrealized gains (losses) in the fair
value of securities (95) 196
- -------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 43,158 41,091
- -------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 567,490 $492,097
=====================================================================================
</TABLE>
See notes to consolidated financial statements.
21
<PAGE> 17
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
1996 1995 1994
===================================================================================
<S> <C> <C> <C>
INTEREST INCOME
Loans $ 32,442 $ 26,424 $ 22,040
Investment securities 3,836 4,982 3,391
Mortgage-backed securities 3,110 3,192 1,230
Other investments 470 812 461
- -----------------------------------------------------------------------------------
39,858 35,410 27,122
- -----------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 23,516 20,428 13,762
Advances from Federal Home Loan Bank 978 914 351
- -----------------------------------------------------------------------------------
24,494 21,342 14,113
- -----------------------------------------------------------------------------------
Net interest income 15,364 14,068 13,009
- -----------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES 305 238 92
- -----------------------------------------------------------------------------------
Net interest income after
provision for loan losses 15,059 13,830 12,917
NONINTEREST INCOME
Gain on sale of loans and other assets 1,091 997 228
Loan servicing fees 623 464 545
Service fees and other charges 680 537 388
Other 41 54 33
- -----------------------------------------------------------------------------------
2,435 2,052 1,194
- -----------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 3,716 3,487 2,935
Net occupancy and equipment 1,549 1,392 1,112
Federal deposit insurance premium 935 850 703
Franchise tax 560 491 443
Other 2,764 2,406 2,177
- -----------------------------------------------------------------------------------
Non-interest expense before one-time
SAIF assessment 9,524 8,626 7,370
One-time SAIF assessment 2,481 -- --
- -----------------------------------------------------------------------------------
12,005 8,626 7,370
- -----------------------------------------------------------------------------------
Income before federal income taxes 5,489 7,256 6,741
FEDERAL INCOME TAXES 1,941 2,539 2,331
- -----------------------------------------------------------------------------------
NET INCOME $ 3,548 $ 4,717 $ 4,410
===================================================================================
EARNINGS PER COMMON SHARE $ 1.40 $ 1.86 $ 1.74
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 2,530,800 2,530,800 2,530,800
===================================================================================
</TABLE>
See notes to consolidated financial statements.
22
<PAGE> 18
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
1996 1995 1994
==========================================================================================
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,548 $ 4,717 $ 4,410
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Provision for loan losses 305 238 92
Gain on sale of loans and other assets (1,091) (997) (228)
Amortization of deferred yield items (2,780) (2,484) (2,103)
Proceeds from sale of loans originated for sale 54,222 38,351 21,551
Disbursements on loans originated for sale (49,251) (43,258) (7,795)
Depreciation and amortization 815 821 741
Effect of change in accrued
interest receivable and payable 222 (595) (583)
Deferred federal income taxes 151 597 1,192
Other (282) (84) (2,057)
- ------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 5,859 (2,694) 15,220
- ------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans (89,255) (50,416) (50,965)
Purchases of:
Mortgage-backed securities and loans (19,887) (22,284) (29,383)
Investment securities (44,020) (59,176) (58,689)
Federal Home Loan Bank Stock (239) (437) --
Premises and equipment (566) (1,489) (746)
Proceeds from:
Investment security maturities 50,224 60,528 36,833
Mortgage-backed security principal
repayments and maturities 10,639 7,103 4,534
Sales of available for sale securities 6,744 2,518 3,995
Sales of premises and equipment 645 -- --
Sales of loans -- 4,725 --
Other -- 11 27
- ------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (85,715) (58,917) (94,394)
- ------------------------------------------------------------------------------------------
Net increase in deposits 60,908 69,513 68,300
Proceeds from advances from
Federal Home Loan Bank (FHLB) 73,650 2,000 16,000
Payments on advances from FHLB (61,749) (4,250) (417)
Payment of dividends on common stock (1,190) (1,013) (797)
Increase (decrease) in escrow 280 221 (147)
- ------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 71,899 66,471 82,939
- ------------------------------------------------------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (7,957) 4,860 3,765
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR 15,509 10,649 6,884
- ------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF THE YEAR $ 7,552 $ 15,509 $ 10,649
==========================================================================================
</TABLE>
See notes to consolidated financial statements.
23
<PAGE> 19
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
NET UNREALIZED
GAIN (LOSS) TOTAL
COMMON IN THE FAIR VALUE RETAINED SHAREHOLDERS'
STOCK OF SECURITIES EARNINGS EQUITY
==============================================================================================
<S> <C> <C> <C> <C>
Balance, January 1, 1994 $9,831 $ -- $ 23,747 $ 33,578
Dividends-- $0.315 per share -- -- (797) (797)
Net unrealized (loss) in the
fair value of securities -- (38) -- (38)
Net income -- -- 4,410 4,410
- ----------------------------------------------------------------------------------------------
Balance, December 31, 1994 9,831 (38) 27,360 37,153
Dividends-- $0.40 per share -- -- (1,013) (1,013)
Net unrealized gain in the
fair value of securities -- 234 -- 234
Net income -- -- 4,717 4,717
- ----------------------------------------------------------------------------------------------
Balance, December 31, 1995 9,831 196 31,064 41,091
Dividends-- $0.47 per share -- -- (1,190) (1,190)
Net unrealized (loss) in the
fair value of securities -- (291) -- (291)
Net income -- -- 3,548 3,548
- ----------------------------------------------------------------------------------------------
Balance, December 31, 1996 $9,831 $ (95) $ 33,422 $ 43,158
==============================================================================================
</TABLE>
See notes to consolidated financial statements.
24
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Strongsville Savings Bank conducts its principal activities from
its Community Financial Centers located in southwestern Cuyahoga,
Lorain and Medina counties. The Bank's principal activities include
residential lending and retail banking. Emerald Financial Corporation
(Emerald or Company) is a unitary thrift holding company whose wholly
owned subsidiary is The Strongsville Savings Bank (Bank). Emerald
became the Bank's holding company in a tax-free exchange of shares of
the Bank for shares of Emerald consummated on March 6, 1997.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Bank
and its subsidiary. All material intercompany transactions and
balances have been eliminated. Certain prior period data has been
reclassified to conform to current year presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make assumptions
and estimates that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from
those estimates.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
Securities are classified as held-to-maturity, available for sale or
trading. Only those securities classified as held-to-maturity are
reported at amortized cost. Management has the intent and ability to
hold securities classified as held-to-maturity, to maturity.
Securities classified as available for sale and trading are reported
at their fair values. Unrealized gains and losses, net of deferred
income taxes, on available for sale securities are included in
shareholders' equity. Unrealized gains and losses, net of deferred
income taxes, on trading securities are included in income. Realized
securities gains or losses are reported in the Consolidated Statements
of Income. The cost of securities sold is based on the specific
identification method.
On December 30, 1995, management took a permitted one-time opportunity
to re-evaluate securities classification under SFAS No. 115 and
reclassified securities with an amortized cost of $40,047,000 from
held-to-maturity to available for sale. The unrealized gain at the
time of the transfer was $297,000.
LOANS
Interest income on loans is based on the principal balance
outstanding. Interest is accrued as earned unless there is a distinct
indication that the borrower's cash flow or collateral may not be
sufficient to meet his/her contractual obligations. Loans are also
placed on nonaccrual status when principal or interest is past due
more than ninety days, unless the loan is well secured by real estate.
When a loan is placed on nonaccrual status, all previously accrued and
unpaid interest is charged against income. Interest is subsequently
recognized only to the extent that cash payments are received. When
the borrower has demonstrated that he/she has the intent and ability
to make scheduled principal and interest payments, the loan may be
returned to accrual status.
Loan origination fees, net of certain direct loan origination costs,
are deferred and amortized over the life of the related loans as a
yield adjustment for loans originated for investment. Loan origination
fees, net of certain direct loan origination costs, are deferred and
recognized as a basis adjustment for loans originated for sale. Loan
commitment fees are deferred and recognized as yield adjustments over
the estimated life of the related loans.
Residential mortgage loans held for sale are valued at the lower of
aggregate cost or market value and were $795,000 at December 31, 1996.
Gains or losses on sales are recognized in noninterest income or
noninterest expense, respectively, upon delivery.
25
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Bank adopted SFAS No. 122, Accounting for Mortgage Servicing
Rights, effective January 1, 1995, which requires an entity that sells
or securitizes loans with servicing rights retained to allocate the
total cost of the mortgage loans to the mortgage servicing rights and
the loans based on their relative fair values. The resulting
capitalized mortgage servicing rights must be assessed for impairment
periodically based on fair value, with any impairment recognized
through a valuation allowance. The effect of adopting SFAS No. 122 in
1995 was to increase the gain on sales of loans by $281,000 (pre-tax).
The Bank adopted SFAS No. 114, Accounting by Creditors for Impairment
of a Loan, as amended by SFAS No. 118, Accounting by Creditors for
Impairment of a Loan--Income Recognition and Disclosure, effective
January 1, 1995. This statement requires that impaired loans be
measured based on the present value of expected future cash flows
discounted at the loan's effective interest rates or the fair value of
the underlying collateral. The statement also specifies alternative
methods for recognizing interest income on loans that are impaired, or
for which there are credit concerns. For purposes of applying this
standard, impaired loans have been defined as all non one-to-four
family residential mortgage loans greater than $500,000 on nonaccrual
status. The Bank's policy for income recognition was not affected by
the adoption of SFAS Nos. 114 and 118. The adoption of this statement
did not have a material impact on the Bank's 1995 consolidated
financial statements.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level management
considers adequate to absorb potential loan losses. Loans charged-off
are charged to, and recoveries are credited to, the allowance.
Provisions for loan losses are based on management's review of the
historical loan loss experience, known and inherent risks in the
portfolio, current economic conditions and such other factors that, in
management's judgment, are relevant.
PREMISES AND EQUIPMENT
Bank premises and equipment, including leasehold improvements, are
stated at cost less accumulated depreciation and amortization.
Depreciation is computed on the straight-line method over the
estimated useful lives of the related assets. Amortization of
leasehold improvements is computed on the straight-line method over
the lives of the related leases or the useful lives of the related
assets, whichever is shorter. Maintenance, repairs and minor
improvements are charged to operating expenses as incurred.
INTANGIBLE ASSETS
Cost in excess of the fair value of net assets acquired (goodwill) is
stated net of accumulated amortization and is included in prepaid
expenses and other assets in the Consolidated Statements of Financial
Condition. Goodwill for acquisitions after September 30, 1982 is being
charged to operations over the estimated remaining life of the
long-term interest-bearing assets acquired using the level-yield
method. Goodwill for acquisitions before October 1, 1982 is being
charged to operations over twenty-five years using the straight-line
method.
EARNINGS PER SHARE
Net income per share is calculated by dividing net income for the
period by the weighted average number of shares of common stock
outstanding during the period. Net income per share has not been
adjusted for the effect of stock options as the dilutive effect is
less than 3% in any year.
SHAREHOLDERS' EQUITY
The Bank paid dividends of $1,190,000 in 1996 and $1,013,000 in 1995.
The Bank's ability to make capital distributions is restricted by OTS
regulations. As a Tier 1 Association under OTS regulations, the Bank
is granted the greatest flexibility in capital distributions. The Bank
is authorized to distribute the greater of: (1) 100% of year-to-date
net income plus 50% of excess capital at the beginning of the year or
(2) 75% of net income over the most recent four-quarter period.
Dividend payments were limited to $11,934,000 at December 31, 1996.
26
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STATEMENT OF CASH FLOWS
The Bank considers all cash and deposits with banks maturing in three
months or less to be cash equivalents for the Statement of Cash Flows.
Income tax payments of $1,863,000, $1,718,000 and $1,989,000 were made
for the years ended December 31, 1996, 1995 and 1994, respectively.
Interest paid totaled $24,333,000, $21,217,000 and $13,925,000 for the
years ended December 31, 1996, 1995 and 1994, respectively. Transfers
from loans to real estate owned were $696,000 and $113,000 during the
years ended December 31, 1996 and 1994, respectively. Loans made to
finance the sale of real estate owned were $600,000 and $100,000
during the years ended December 31, 1996 and 1994, respectively. There
were no transfers from loans to real estate owned during the year
ended December 31, 1995, nor any loans made to finance the sale of
real estate owned.
NEW ACCOUNTING STANDARDS
SFAS No. 123, Accounting for Stock-Based Compensation, encourages, but
does not require, adoption of a fair-value-based accounting method for
employee stock-based compensation arrangements and was effective
January 1, 1996. Management has elected to continue to use the
Accounting Principles Board Opinion 25, Accounting for Stock Issued to
Employees, intrinsic value method for measurement and recognition of
stock-based compensation. There were no options granted in 1996 or in
1995, therefore no pro-forma disclosures have been included.
SFAS No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, provides accounting and
reporting standards for transfers and servicing of financial assets
and extinguishment of liabilities based on the consistent application
of a financial-components approach. Under the financial-components
approach, after a transfer of financial assets, an entity recognizes
the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. This
statement is effective January 1, 1997. SFAS No. 127, defers the
effective date of certain provisions of statement 125 until January 1,
1998. Management has not completed the process of evaluating this
statement and, therefore, has not determined the impact, if any, that
adopting this statement will have on the financial position and
results of operations of the Bank.
2. INVESTMENT SECURITIES
Amortized cost, fair values, maturities and yields for held-to-maturity
securities are summarized as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1996
WEIGHTED
AMORTIZED GROSS GROSS FAIR AVERAGE
COST UNREALIZED GAIN UNREALIZED LOSS VALUE YIELD
==================================================================================================================
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS
Due in one year or less $ 19,100 $ -- $ -- $19,100 5.36%
Due after one year through five years 201 -- 3 198 4.76
- ------------------------------------------------------------------------------------------------------------------
19,301 -- 3 19,298 5.35
- ------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS
Due in one year or less 20,972 68 15 21,025 6.43
Due after one year through five years 5,857 2 19 5,840 5.80
- ------------------------------------------------------------------------------------------------------------------
26,829 70 34 26,865 6.29
- ------------------------------------------------------------------------------------------------------------------
OTHER
Due in one year or less 815 -- 162 653 7.23
Due after one year through five years 739 2 61 680 7.24
- ------------------------------------------------------------------------------------------------------------------
1,554 2 223 1,333 7.24
- ------------------------------------------------------------------------------------------------------------------
TOTAL $ 47,684 $ 72 $ 260 $47,496 5.94%
==================================================================================================================
</TABLE>
27
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENT SECURITIES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1995
WEIGHTED
AMORTIZED GROSS GROSS FAIR AVERAGE
COST UNREALIZED GAIN UNREALIZED LOSS VALUE YIELD
===================================================================================================================
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS
Due in one year or less $ 1,200 $ -- $ -- $ 1,200 5.95%
- -------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS
Due in one year or less 20,388 56 31 20,413 5.95
Due after one year through five years 23,845 277 36 24,086 6.36
- -------------------------------------------------------------------------------------------------------------------
44,233 333 67 44,499 6.17
- -------------------------------------------------------------------------------------------------------------------
OTHER
Due in one year or less 23 -- -- 23 6.12
Due after one year through five years 3,898 21 1 3,917 7.55
- -------------------------------------------------------------------------------------------------------------------
3,921 21 1 3,941 7.55
- -------------------------------------------------------------------------------------------------------------------
TOTAL $49,354 $354 $ 68 $49,640 6.27%
===================================================================================================================
</TABLE>
At December 31, 1996 and 1995, securities with a book value of $ 7,928,000 and $
1,200,000, respectively, were pledged as collateral for public funds and
treasury, tax and loan deposits.
Amortized cost, fair values, maturities and yields for available for sale
securities are summarized as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1996
WEIGHTED
AMORTIZED GROSS GROSS FAIR AVERAGE
COST UNREALIZED GAIN UNREALIZED LOSS VALUE YIELD
===================================================================================================================
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS
Due in one year or less $ 1,100 $-- $ 2 $ 1,098 5.45%
Due after one year through five years 15,834 16 65 15,785 5.96
- -------------------------------------------------------------------------------------------------------------------
16,934 16 67 16,883 5.93
- -------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS
Due in one year or less 4,086 -- 9 4,077 5.61
Due after one year through five years 1,041 -- 5 1,036 5.99
- -------------------------------------------------------------------------------------------------------------------
5,127 -- 14 5,113 5.69
- -------------------------------------------------------------------------------------------------------------------
TOTAL $22,061 $16 $ 81 $21,996 5.87%
===================================================================================================================
<CAPTION>
DECEMBER 31, 1995
===================================================================================================================
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS
Due in one year or less $ 3,039 $ 5 $ -- $ 3,044 5.67%
Due after one year through five years 22,509 49 6 22,552 6.45
- -------------------------------------------------------------------------------------------------------------------
25,548 54 6 25,596 6.36
- -------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS
Due in one year or less 1,000 -- 1 999 5.50
- -------------------------------------------------------------------------------------------------------------------
TOTAL $26,548 $54 $ 7 $26,595 6.32%
===================================================================================================================
</TABLE>
There were no sales of securities held-to-maturity in 1996, 1995, or 1994. Sales
of securities available for sale resulted in gross realized gains of $26,000 in
1995 and in losses of $31,000 in 1994. There were no sales of securities
available for sale in 1996.
28
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. MORTGAGE-BACKED SECURITIES
Amortized cost and fair values of mortgage-backed securities
held-to-maturity are summarized below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
DECEMBER 31, 1996
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
=============================================================================================
(In Thousands)
<S> <C> <C> <C> <C>
MORTGAGE POOL SECURITIES
Federal Home Loan Mortgage
Corporation participation certificates $ 4,291 $ 54 $ 16 $ 4,329
Federal National Mortgage Association 941 -- 12 929
Government National Mortgage
Association 6,109 225 -- 6,334
Other 5,235 -- 6 5,229
- ---------------------------------------------------------------------------------------------
16,576 279 34 16,821
- ---------------------------------------------------------------------------------------------
REAL ESTATE MORTGAGE INVESTMENT TRUSTS
& COLLATERALIZED MORTGAGE OBLIGATIONS
Federal Home Loan Mortgage
Corporation participation certificates $ 3,302 46 -- 3,348
Federal National Mortgage Association 6,531 193 -- 6,724
Other 6,127 88 4 6,211
- ---------------------------------------------------------------------------------------------
15,960 327 4 16,283
- ---------------------------------------------------------------------------------------------
TOTAL $32,536 $ 606 $ 38 $33,104
=============================================================================================
<CAPTION>
- --------------------------------------------------------------------------------------------
DECEMBER 31, 1995
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
============================================================================================
(In Thousands)
<S> <C> <C> <C> <C>
MORTGAGE POOL SECURITIES
Federal Home Loan Mortgage
Corporation participation certificates $ 4,026 $ 12 $ 11 $ 4,027
Government National Mortgage
Association 7,194 234 -- 7,428
Other 6,619 -- 15 6,604
- --------------------------------------------------------------------------------------------
17,839 246 26 18,059
- --------------------------------------------------------------------------------------------
REAL ESTATE MORTGAGE INVESTMENT TRUSTS
& COLLATERALIZED MORTGAGE OBLIGATIONS
Federal Home Loan Mortgage
Corporation participation certificates $ 3,887 54 -- 3,941
Federal National Mortgage Association 6,652 179 -- 6,831
Other 8,878 110 -- 8,988
- --------------------------------------------------------------------------------------------
19,417 343 -- 19,760
- --------------------------------------------------------------------------------------------
TOTAL $37,256 $ 589 $ 26 $37,819
============================================================================================
</TABLE>
29
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amortized cost and fair values of mortgage-backed securities available
for sale are summarized below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
DECEMBER 31, 1996
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
===================================================================================================
(In Thousands)
<S> <C> <C> <C> <C>
MORTGAGE POOL SECURITIES
Federal Home Loan Mortgage
Corporation participation certificates $ 1,649 $ -- $ 7 $ 1,642
- ---------------------------------------------------------------------------------------------------
1,649 -- 7 1,642
- ---------------------------------------------------------------------------------------------------
REAL ESTATE MORTGAGE INVESTMENT TRUSTS
& COLLATERALIZED MORTGAGE OBLIGATIONS
Federal Home Loan Mortgage
Corporation participation certificates 12,821 7 62 12,766
Federal National Mortgage Association 5,252 10 26 5,236
- ---------------------------------------------------------------------------------------------------
18,073 17 88 18,002
- ---------------------------------------------------------------------------------------------------
Total $19,722 $ 17 $ 95 $19,644
===================================================================================================
<CAPTION>
- ---------------------------------------------------------------------------------------------------
DECEMBER 31, 1995
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
===================================================================================================
(In Thousands)
<S> <C> <C> <C> <C>
MORTGAGE POOL SECURITIES
Federal Home Loan Mortgage
Corporation participation certificates $ 3,292 $ 35 $ 10 $ 3,317
Federal National Mortgage Association 3,723 144 -- 3,867
- ---------------------------------------------------------------------------------------------------
7,015 179 10 7,184
- ---------------------------------------------------------------------------------------------------
REAL ESTATE MORTGAGE INVESTMENT TRUSTS
& COLLATERALIZED MORTGAGE OBLIGATIONS
Federal Home Loan Mortgage
Corporation participation certificates 4,236 73 13 4,296
Federal National Mortgage Association 3,248 37 16 3,269
- ---------------------------------------------------------------------------------------------------
7,484 110 29 7,565
- ---------------------------------------------------------------------------------------------------
Total $14,499 $ 289 $ 39 $14,749
===================================================================================================
</TABLE>
There were no sales of mortgage-backed securities held-to-maturity in 1996, 1995
or 1994. Sales of mortgage-backed securities available for sale resulted in
gross realized gains of $83,000 in 1996. There were no sales of mortgage-backed
securities available for sale in 1995 or 1994.
The Bank's portfolio of privately issued mortgage-backed securities are backed
by mortgages on residential and multi-family properties. These securities are of
investment grade.
30
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. LOANS
The primary goal of the Bank's lending activities is to provide residential
real estate mortgage loans to homeowners in its lending area. The Bank's
fourteen Community Financial Centers are located in Strongsville, Hinckley,
Berea, North Royalton, Medina Township, Wellington, Parma Heights,
Westlake, North Ridgeville, Brecksville, Broadview Heights, Columbia
Station, Avon and Brunswick.
The composition of the overall loan portfolio is as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
DECEMBER 31
1996 1995
===================================================================
<S> <C> <C>
REAL ESTATE MORTGAGE LOANS
PERMANENT FIRST MORTGAGE LOANS
One-to-four family $301,284 $220,490
Multi-family 1,049 1,183
Commercial 46,883 42,098
Land 195 358
CONSTRUCTION FIRST MORTGAGE LOANS
Acquisition and development (residential) 54,670 48,538
One-to-four family 37,049 26,960
Multi-family 240 2,660
Commercial 2,376 4,233
- -------------------------------------------------------------------
Total mortgage loans 443,746 346,520
OTHER LOANS
Commercial 4,250 3,955
Consumer installment 9,117 8,895
- -------------------------------------------------------------------
Total loans 457,113 359,370
LESS
Undisbursed portion of
loans in process 26,676 23,639
Deferred loan fees and discounts 3,954 3,546
Allowance for loan losses 1,423 1,168
- -------------------------------------------------------------------
TOTAL LOANS HELD FOR INVESTMENT -- NET $425,060 $331,017
===================================================================
REAL ESTATE MORTGAGE LOANS
HELD FOR SALE $ 806 $ 5,396
Less deferred loan fees 11 62
- -------------------------------------------------------------------
TOTAL LOANS HELD FOR SALE -- NET $ 795 $ 5,334
===================================================================
</TABLE>
Adjustable-rate mortgage and other loans represent $193,674,000 and
$171,322,000 of the loans included in the table above at December 31, 1996
and 1995, respectively. The Bank had commitments to lend $34,800,000 at
December 31, 1996; $17,457,000 of these commitments were for
adjustable-rate loans. The Bank had commitments to lend $26,353,000 at
December 31, 1995; $7,279,000 of these commitments were for adjustable-rate
loans. Adjustable-rate loans generally reprice with the prime rate or the
one or three year constant maturity treasury rate.
The Bank sells loans to the secondary market in conjunction with certain
loan programs, to provide funding and as a tool for managing interest rate
risk. Loans are sold to the secondary market without recourse and with
servicing retained. The Bank was servicing loans for investors totaling
$192,578,000 and $159,482,000 at December 31, 1996 and 1995, respectively.
Custodial escrow balances maintained in connection with loans serviced for
investors were $2,057,000 and $1,866,000 at December 31, 1996 and 1995,
respectively.
Residential acquisition and development loans are extended to local
builders and developers with whom the Bank has generally had long-standing
business relationships. These loans are secured by land zoned for
residential development located in the Bank's market area.
Under federal regulations, real estate loans to one borrower cannot exceed
15% of unimpaired capital and surplus without a waiver of this requirement
from the Office of Thrift Supervision. The Bank obtained such a waiver
which increases the limit on loans to one borrower for residential real
estate to 30% of unimpaired capital and surplus.
31
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Bank's commercial real estate loan portfolio includes permanent and
construction loans. Because commercial real estate loans are dependent on income
production or future development for repayment, management believes these loans
present somewhat greater risk of default than conventional mortgage loans. The
Bank's commercial real estate loan portfolio consists of loans collateralized by
property located in the Bank's primary lending area. The Bank's aggregate
commercial real estate loans may not exceed 400% of its core capital. The Bank
could lend an additional $120,609,000 before reaching the $169,868,000 limit.
The following table summarizes the Bank's commercial real estate and commercial
construction loan portfolios by type of collateral.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
DECEMBER 31
1996 1995
AMOUNT % AMOUNT %
====================================================================================
<S> <C> <C> <C> <C>
PERMANENT
Industrial/warehouse $ 5,883 11.94% $ 8,055 17.39%
Retail 11,436 23.22 11,811 25.49
Office buildings 6,693 13.59 7,144 15.42
Churches 1,748 3.55 1,320 2.85
Other 21,123 42.88 13,768 29.72
- ------------------------------------------------------------------------------------
$46,883 95.18 42,098 90.87
- ------------------------------------------------------------------------------------
CONSTRUCTION
Office buildings 365 0.74 915 1.97
Churches 400 0.81 1,500 3.24
Other 1,611 3.27 1,818 3.92
- ------------------------------------------------------------------------------------
2,376 4.82 4,233 9.13
- ------------------------------------------------------------------------------------
TOTAL $49,259 100.00% $ 46,331 100.00%
====================================================================================
</TABLE>
Activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
1996 1995 1994
====================================================================================
(In Thousands)
<S> <C> <C> <C>
Balance, beginning of year $ 1,168 $ 948 $ 840
Provision charged to expense 305 238 92
Loans charged off (60) (21) (13)
Recoveries 10 3 29
- ------------------------------------------------------------------------------------
BALANCE, END OF YEAR $ 1,423 $ 1,168 $ 948
====================================================================================
</TABLE>
Nonaccrual loans totaled $604,000 and $146,000 at December 31, 1996 and 1995,
respectively. Interest income that would have been recorded under the original
terms of all nonaccrual loans during each period and the interest income
actually recognized for each period are summarized below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
1996 1995 1994
====================================================================================
(In Thousands)
<S> <C> <C> <C>
Interest income that would have
been recorded $ 101 $ 49 $ 25
Interest income recognized 9 37 12
- ------------------------------------------------------------------------------------
Interest income foregone $ 92 $ 12 $ 13
====================================================================================
</TABLE>
The Bank is not committed to lend additional funds to debtors whose loans have
been placed on nonaccrual. There were no loans considered impaired at December
31, 1996 or 1995, or during the years then ended.
32
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. BANK PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
DECEMBER 31
1996 1995
===============================================================================================
(In Thousands)
<S> <C> <C>
Land $ 612 $ 672
Buildings and improvements 3,051 3,355
Furniture, fixtures and equipment 3,361 3,117
- -----------------------------------------------------------------------------------------------
7,024 7,144
Less accumulated depreciation
and amortization 3,085 2,810
- -----------------------------------------------------------------------------------------------
TOTAL $ 3,939 $ 4,334
===============================================================================================
</TABLE>
During 1996, the Bank sold certain real estate, a portion of which is being
leased back. The sale resulted in a pre-tax gain of $298,000. Depreciation and
amortization expense related to Bank premises and equipment was $682,000 in
1996, $678,000 in 1995 and $591,000 in 1994.
The Bank has entered into a number of noncancelable operating leases with
respect to office space. Rental expense for all leases was $251,000 in 1996,
$178,000 in 1995 and $110,000 in 1994.
The following is a schedule of future minimum annual lease commitments as of
December 31, 1996:
<TABLE>
<CAPTION>
===============================================================================================
(In Thousands)
<S> <C>
1997 $ 284
1998 284
1999 274
2000 239
2001 232
Thereafter 1,055
- -----------------------------------------------------------------------------------------------
TOTAL PAYMENTS $ 2,368
===============================================================================================
</TABLE>
6. DEPOSITS
Deposits by interest rate are summarized as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
DECEMBER 31
1996 1995
- ------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
TYPE OF ACCOUNT COST AMOUNT % COST AMOUNT %
======================================================================================================
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts 2.90% $ 46,034 9.33% 2.88% $ 47,423 10.96%
NOW accounts 2.02 29,661 6.01 2.02 26,025 6.02
Commercial accounts
(non-interest bearing) -- 11,535 2.34 -- 11,728 2.71
Money Market deposit accounts 2.53 17,882 3.62 2.53 23,014 5.32
- ------------------------------------------------------------------------------------------------------
Subtotal 2.27 105,112 21.30 2.29 108,190 25.01
- ------------------------------------------------------------------------------------------------------
Certificate of Deposit accounts:
4.50% and less 2.54 1,849 0.37 3.03 4,454 1.03
4.51% to 5.50% 5.34 116,857 23.68 5.27 77,802 17.99
5.51% to 6.50% 6.03 187,013 37.90 6.03 120,175 27.78
6.51% to 7.50% 7.32 73,823 14.96 7.22 108,282 25.03
7.51% and greater 8.85 8,817 1.79 9.01 13,660 3.16
- ------------------------------------------------------------------------------------------------------
Subtotal 6.11 388,359 78.70 6.33 324,373 74.99
- ------------------------------------------------------------------------------------------------------
TOTAL 5.29% $ 493,471 100.00% 5.32% $ 432,563 100.00%
======================================================================================================
</TABLE>
33
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Included in the preceding table, at December 31, 1996, the Bank had $78,612,000
in certificates of deposit with balances of $100,000 or more. The Bank does not
enter into brokered deposit arrangements and had no brokered deposits at
December 31, 1996 or 1995.
The summary of certificates of deposit by maturity follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
DECEMBER 31, 1996
==================================================================================================
(In Thousands)
<S> <C>
Within 6 months $ 67,050
6 months to 12 months 86,311
12 months to 30 months 99,135
Over 30 months 135,863
- --------------------------------------------------------------------------------------------------
TOTAL $ 388,359
==================================================================================================
</TABLE>
The following is a summary of interest expense on deposits:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
1996 1995 1994
==================================================================================================
(In Thousands)
<S> <C> <C> <C>
Passbook accounts $ 1,328 $ 1,132 $ 768
NOW accounts 505 442 412
Money market deposit accounts 499 673 991
Certificate of deposit accounts 21,184 18,181 11,591
- --------------------------------------------------------------------------------------------------
TOTAL $ 23,516 $ 20,428 $ 13,762
==================================================================================================
</TABLE>
7. ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank (FHLB) consist of $21.0 million with a
weighted average variable rate of 5.57% and $4.2 million with a weighted average
fixed rate of 6.96% at December 31, 1996.
Although individual loans are not specifically pledged, the FHLB requires that
the Bank have mortgage loans which are, among other things, clear of pledges,
liens and encumbrances and equal to at least 150% of the advances from the FHLB.
The stock of the FHLB owned by the Bank is also pledged as collateral for these
borrowings.
Scheduled payments on FHLB advances at December 31,1996 are as follows:
<TABLE>
<CAPTION>
==================================================================================================
(In Thousands)
<S> <C>
1997 $ 1,040
1998 1,043
1999 3,139
2000 18,549
2001 1,463
- --------------------------------------------------------------------------------------------------
TOTAL PAYMENTS $ 25,234
==================================================================================================
</TABLE>
34
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. FEDERAL INCOME TAXES
The Bank and its wholly owned subsidiary file a consolidated federal income tax
return.
A summary of the provision for federal income taxes is as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
1996 1995 1994
=========================================================================================================================
(In Thousands)
<S> <C> <C> <C>
Current $ 1,790 $ 1,942 $ 1,139
Deferred 151 597 1,192
- -------------------------------------------------------------------------------------------------------------------------
TOTAL $ 1,941 $ 2,539 $ 2,331
=========================================================================================================================
</TABLE>
A reconciliation between the statutory income tax rate and the effective
consolidated income tax rate is as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
DECEMBER 31
1996 1995 1994
AMOUNT % AMOUNT % AMOUNT %
=========================================================================================================================
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory rate $ 1,836 34.0% $ 2,467 34.0% $ 2,292 34.0%
Other 105 1.9 72 1.0 39 0.5
- -------------------------------------------------------------------------------------------------------------------------
EFFECTIVE INCOME TAX
PROVISION $ 1,941 35.9% $ 2,539 35.0% $ 2,331 34.5%
=========================================================================================================================
</TABLE>
The tax effects of significant items comprising the Bank's net deferred tax
liability are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
DECEMBER 31
1996 1995
=========================================================================================================================
(In Thousands)
<S> <C> <C>
Loan loss allowances $ 646 $ 732
FHLB stock dividends 407 344
Deferred loan origination fees 344 213
Depreciation and amortization 137 141
Mortgage servicing rights 148 85
Mark-to-market accounting (48) 83
Other (50) (15)
- -------------------------------------------------------------------------------------------------------------------------
TOTAL $ 1,584 $ 1,583
=========================================================================================================================
</TABLE>
The Bank's tax bad-debt deduction prior to 1996 was determined under Section 593
of the Internal Revenue Code, and was the greater of the amounts using the
percentage-of-taxable-income accounting method or the specific charge-off
accounting method. During 1996, legislation was passed that repealed Section 593
of the Internal Revenue Code, thereby eliminating the
percentage-of-taxable-income accounting method after 1995. The excess reserves
between 1988 and 1995 are required to be recaptured into taxable income over a
six year period beginning in 1996. This recapture may be delayed for a one or
two-year period subject to meeting certain residential loan requirements.
Management estimates that recapture of this amount will begin in 1998 because
they expect to meet the residential loan tests required for deferral. The
recapture has no effect on the Bank's statement of operations because taxes were
provided in prior years in accordance with SFAS No. 109, Accounting for Income
Taxes. The recapture amount of $3.3 million will result in payments of $1.1
million. The Pre-1988 reserve provisions are subject only to recapture
requirements in the case of certain excess distributions to, and redemptions of
shareholders or if the Bank no longer qualifies as a "bank." Tax bad debt
deductions accumulated prior to 1988 by the Bank are approximately $2.4 million.
No deferred income taxes have been provided on these bad debt deductions and no
recapture of these amounts is anticipated.
35
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. LONG TERM INCENTIVE PLAN
Options have been granted under The Strongsville Savings Bank 1994
Long-Term Incentive Plan (Plan) to key employees and directors of the Bank.
Options awarded under the plan are vested one year after the date granted.
At December 31, 1996, there were 209,000 options outstanding with an
average option price of $18.44. The expiration dates of the stock options
outstanding at December 31, 1996 are January 11, 1999 for 4,000 options
granted at $18.25, January 11, 2004 for 166,000 options granted at $18.25
and October 18, 2004 for 39,000 options granted at $19.25. At December 31,
1996, 209,000 options were exercisable and 41,000 shares were available for
granting additional options.
10. EMPLOYEE BENEFIT PLANS
The Bank has a profit-sharing retirement plan covering substantially all
employees. The Bank's contribution to the plan is discretionary and is
determined annually by the Board of Directors. Contributions were $139,000
in 1996, $173,000 in 1995 and $148,000 in 1994.
The Bank also has a qualified, tax-exempt profit-sharing plan with a cash
or deferred feature qualifying under Section 401(k) of the Internal Revenue
Code. The Bank provides matching contributions of up to 3% of qualifying
employees' annual eligible compensation. Contributions were $79,000 in
1996, $68,000 in 1995 and $59,000 in 1994.
The Bank also has a nonqualified, unfunded Supplemental Executive
Retirement Plan (SERP) that provides certain officers with retirement
benefits. Pension costs of $100,000 and $116,000 were charged to
noninterest expense in 1996 and 1995, respectively.
11. SAVINGS ASSOCIATION INSURANCE FUND ASSESSMENT
On September 30, 1996, the President signed into law an omnibus
appropriations act for fiscal year 1997 that included, among other things,
the recapitalization of the Savings Association Insurance Fund (SAIF) in a
section entitled the Deposit Insurance Funds Act of 1996. The Act included
a provision where all insured depository institutions would be charged a
one-time special assessment on their SAIF assessable deposits as of March
31, 1995. The Bank recorded a pre-tax charge of $2,481,000, which
represented 65.7 basis points of the March 31, 1995 assessable deposits.
This charge was recorded upon enactment on September 30, 1996, and later
paid on November 29, 1996.
12. REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements. The regulations
require the Bank to meet specific capital adequacy guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital classification is also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
tables below) of tangible, core and total risk-based capital. Prompt
corrective action regulations require specific supervisory actions as
capital levels decrease. To be considered adequately capitalized under the
regulatory framework for prompt corrective action, the Bank must maintain
minimum Tier 1 leverage, Tier 1 risk-based and total risk-based capital
ratios as set forth in the following tables.
36
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1996
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
- ----------------------------------------------------------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
============================================================================================================================
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk-weighted assets) $43,885 12.93% $27,139 8.0% $33,924 10.0%
Tier 1 capital (to risk-weighted assets) 42,467 12.51 N/A N/A 20,354 6.0
Tier 1 capital (to adjusted tangible assets) 42,467 7.49 17,006 3.0 28,344 5.0
Tangible capital (to tangible assets) 42,467 7.49 8,503 1.5 N/A N/A
============================================================================================================================
<CAPTION>
AS OF DECEMBER 31, 1995
============================================================================================================================
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk-weighted assets) $41,126 13.51% $24,355 8.0% $30,444 10.0%
Tier 1 capital (to risk-weighted assets) 39,975 13.13 N/A N/A 18,266 6.0
Tier 1 capital (to adjusted tangible assets) 39,975 8.14 14,729 3.0 24,549 5.0
Tangible capital (to tangible assets) 39,975 8.14 7,365 1.5 N/A N/A
============================================================================================================================
</TABLE>
As of December 31, 1996, the most recent notification from the Office of
Thrift Supervision categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well capitalized, the Bank must maintain minimum total risked-based, Tier 1
risk-based and Tier 1 leverage ratios as set forth in the preceding tables.
There are no conditions or events since that notification that have changed
the Bank's category.
Management believes, as of December 31, 1996, that the Bank meets all
capital requirements to which it is subject. Events beyond management's
control, such as fluctuations in interest rates or a downturn in the
economy in areas in which the Bank's loans and securities are concentrated,
could adversely affect future earnings and, consequently, the Bank's
ability to meet its future capital requirements.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of financial instruments were based on various assumptions
and estimates as of a point in time. They represent liquidation values and
could differ significantly from amounts that may be realized in a current
market exchange. The fair values indicated below should not be construed as
the underlying value of the Bank.
The following table presents the estimates of fair value of financial
instruments, except for investment and mortgage-backed securities which are
disclosed in Notes 2 and 3:
<TABLE>
<CAPTION>
============================================================================================================================
DECEMBER 31, 1996 DECEMBER 31, 1995
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
============================================================================================================================
(In Thousands)
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 7,552 $ 7,552 $ 15,509 $ 15,509
Loans held for sale 795 805 5,334 5,397
Loans 425,060 420,412 331,017 334,889
Accrued interest receivable 3,238 3,238 3,299 3,299
Federal Home Loan
Bank stock 2,831 2,831 2,407 2,407
LIABILITIES
Deposits 493,471 494,358 432,563 435,711
Advances from Federal Home
Loan Bank 25,234 25,196 13,333 13,232
Advance payments by borrowers for
taxes and insurance 1,502 1,502 1,222 1,222
Accrued interest payable 586 586 425 425
============================================================================================================================
</TABLE>
37
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
CASH AND CASH EQUIVALENTS, ACCRUED INTEREST RECEIVABLE, ADVANCE PAYMENTS BY
BORROWERS FOR TAXES AND INSURANCE AND ACCRUED INTEREST PAYABLE.
The carrying amount is a reasonable estimate of fair value.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
Fair values are based on quoted market prices, dealer quotes and prices obtained
from independent pricing services.
LOANS HELD FOR INVESTMENT
Fair values are estimated by discounting the future cash flows using the current
rates for loans of similar credit risk and maturities.
LOANS HELD FOR SALE
Fair values are based on actual sales prices for loans subject to sales
commitments. Fair values of loans not subject to sales commitments are based on
the market price of loans with similar characteristics.
FEDERAL HOME LOAN BANK STOCK
Fair value is estimated to be the carrying value which is par. All transactions
in the capital stock of the Federal Home Loan Bank of Cincinnati are executed at
par.
DEPOSITS
Fair value of demand deposit accounts is the amount payable on demand at the
reporting date. The fair value of fixed-maturity certificates of deposit is
estimated using rates currently offered for deposits of similar remaining
maturities.
ADVANCES FROM THE FEDERAL HOME LOAN BANK
Fair value is estimated by discounting the future cash flows at the rate
currently available on borrowings with similar characteristics.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The fair value of off-balance sheet financial instruments, including commitments
to originate loans, is considered to be equivalent to the value of the current
fees charged to enter into such commitments. At December 31, 1996 and 1995 those
fees were approximately $379,000 and $476,000, respectively.
38
<PAGE> 34
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
The Strongsville Savings Bank and Subsidiary
We have audited the accompanying consolidated statements of financial condition
of The Strongsville Savings Bank and Subsidiary as of December 31, 1996 and
1995, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of The Strongsville Savings Bank and Subsidiary
as of December 31, 1996 and 1995, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1995 the
Bank changed its method of accounting for mortgage servicing rights to adopt
Statement of Financial Accounting Standards No. 122, Accounting for Mortgage
Servicing Rights.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Cleveland, Ohio
January 25, 1997
39
