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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[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
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COMMISSION FILE NUMBER: 000-22201
EMERALD FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
OHIO 34-1842953
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14092 PEARL ROAD
STRONGSVILLE, OHIO 44136
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(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
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Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, WITHOUT PAR VALUE
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Title of Class
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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
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TABLE OF CONTENTS
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PART I PAGE
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Item 1. Business 2
Item 2. Properties 35
Item 3. Legal Proceedings 36
Item 4. Submission of matters to a Vote of Shareholders 36
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 37
Item 6. Selected Financial Data 37
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 37
Item 8. Financial Statements and Supplementary Data 37
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 37
PART III
Item 10. Directors and Executive Officers of the Registrant 37
Item 11. Executive Compensation 38
Item 12. Security Ownership of Certain Beneficial Owners and Management 38
Item 13. Certain Relationships and Related Transactions 38
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 39
Signatures 41
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When used in this Form 10-K or future filings by the Company with the Securities
and Exchange Commission, in the Company's press releases or other public or
stockholder communications, or in oral statements made with the approval of an
authorized executive officer, the words or phrases "would be", "estimate", "will
allow", "intends to", "will likely result", "are expected to", "will continue",
"is anticipated", "project", or similar expressions are intended to identify
"forward looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995.
The Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and to advise
readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities and competitive and regulatory
factors, could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected.
The Company does not undertake, and specifically disclaims any obligation, to
update any forward looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements.
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PART I
ITEM 1. BUSINESS
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BUSINESS
GENERAL
Emerald Financial Corp. (Emerald or Company), is an Ohio corporation organized
in 1996 for the purpose of becoming a holding company and owning all the
outstanding common stock of The Strongsville Savings Bank (Strongsville Savings
or Bank). Emerald is a unitary thrift holding company which, under current laws,
has very few restrictions on permissible types of business activities. Emerald
became the holding company of Strongsville Savings 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 and its subsidiary on a consolidated basis.
Founded in 1961, Strongsville Savings is an Ohio-chartered, federally insured
savings association whose business activities are concentrated in the greater
Cleveland, Ohio area. The Bank offers a wide range of consumer-oriented lending
and deposit products and services and is active in the origination of loans to
developers and builders of residential real estate within its market area. In
conducting the Bank's lending operations, management maintains strict
underwriting criteria and closely monitors the Bank's loan portfolio.
The Bank conducts its business through its home office in Strongsville and its
Community Financial Centers in Berea, Brecksville, Broadview Heights, North
Royalton, Parma Heights, and Westlake (Cuyahoga County); Brunswick, Hinckley and
Medina Township (Medina County); and Avon, Columbia Station, North Ridgeville,
and Wellington (Lorain County).
The Bank's headquarters office is located at 14092 Pearl Road, Strongsville,
Ohio 44136, and the Bank's telephone number at that address is (216) 238-7311.
The Bank began operations in 1961 as an Ohio-chartered stock savings and loan
association and changed its name from The Strongsville Savings and Loan
Association to The Strongsville Savings Bank in 1984. Substantially all of the
Bank's business activities are focused in Cuyahoga, Medina, Lorain, and Summit
Counties. The Bank conducts its lending and deposit-gathering activities through
its headquarters in Strongsville, Cuyahoga County, Ohio, and through its network
of area Community Financial Centers in the suburbs to the south and west of
Cleveland, Ohio.
In the 1980's the Bank's strategy was concentrated on building a well-balanced
branch network in the suburbs to the south and west of Cleveland. In view of
these objectives, the Bank established or acquired offices in Berea, Hinckley,
North Ridgeville, North Royalton, Parma Heights, Wellington and Westlake. This
strategy provided the Bank with a stable, low-cost, consumer-oriented deposit
base in the many established communities of its market area. The Bank's research
and close relationships with area real estate professionals suggested that
several of these communities would become residential growth areas. During the
late 1980's and early 1990's, Strongsville, Westlake, Brecksville, Hinckley,
North Ridgeville and North Royalton emerged as growth areas. Management expects
these communities to be among the major growth areas in Cuyahoga and the
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contiguous counties throughout the 1990's. According to data provided by the
Building Industry Association of Cleveland and Suburban Counties, the cities
with the greatest number of 1996 single family dwelling starts include
Strongsville, North Royalton, Westlake, Broadview Hieghts, Brunswick, Medina,
Avon and North Ridgeville. In 1995 and 1996, the Bank opened offices in
Broadview Heights, Columbia Station, Avon and Brunswick, all current or
anticipated future expanding markets for residential growth. Management will
prudently continue to consider opportunities for expansion of its branch network
in growing residential areas of greater Cleveland.
The Bank is very active in the origination of loans to developers and builders
of residential housing in its market area, including loans to (i) acquire lots
and land for residential subdivision, (ii) to develop raw land by financing the
cost of improvements such as streets, sewers and utilities, and (iii) to
construct houses on such improved property. In 1996 expansion of the Bank's
franchise with new Community Financial Centers in Broadview Heights, Columbia
Station, Avon and Brunswick are expected to provide the Bank with a stable
source of real estate construction and mortgage loan originations throughout the
1990's and beyond.
The Bank offers a wide range of consumer-oriented lending and deposit products
and services to the residents in its market area. The Bank currently is a
leading residential real estate construction lender in Cuyahoga, Medina and
Lorain Counties. Central to the Bank's operating philosophy is the development
and maintenance of strong personal relationships with local realtors, builders,
developers, public officials and other real estate-related professionals.
The Bank is a community-oriented financial institution serving its market area
with a wide selection of residential loans and retail financial services,
emphasizing customer service. The Bank's services include consumer and
commercial checking accounts, rental of safe-deposit boxes and savings accounts
and savings certificates, residential and commercial real estate loans, home
equity lines of credit, and secured and unsecured consumer loans. It provides
these services through a branch network comprised of full-service banking
offices, eleven proprietary ATMs, access to a network of metropolitan, regional
and national ATMs, and electronic fund transfer services. The Bank has
historically concentrated its business activities in the Northeastern Ohio area,
comprised of Cuyahoga, Lorain, Medina, and Summit Counties.
The Bank's business consists primarily of attracting deposits from the general
public and originating and investing in loans secured by first mortgage liens on
residential and other real estate primarily in Northeastern Ohio. The Bank, as a
matter of policy, does not accept brokered funds. The Bank also invests in
certain government obligations and other investments permitted by federal law
and regulations. The principal source of funds for the Bank's lending activities
are increases in deposit accounts, principal and interest payments of loans and
proceeds from the sale of loans. The Bank's principal source of earnings is
interest income from loans and other interest-earning assets. Its principal
expenses are interest paid on deposit accounts and operating expenses.
Management recognizes that the thrift industry is changing rapidly.
Consumer-oriented services historically provided by banks are now being offered
by thrifts. To compete effectively in this environment, the Bank's goal is to
provide its customers with a consumer-oriented institution where a wide range of
financial needs can be met, including a full range of deposit services such as
ATM
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services, NOW checking accounts, IRA and Keogh investment accounts and
certificates of deposit with terms ranging from seven days to ten years. The
Bank's consumer-oriented products also include mortgage loan, construction
loans, home equity lines of credit, various consumer loan products to finance
automobiles, home improvements, education and VISA(R) and MasterCard(R) credit
cards.
LENDING ACTIVITIES
GENERAL. The Bank's primary lending activity is originating conventional first
mortgage loans for the purchase of residential real property. Conventional loans
are loans which are not insured by the Federal Housing Administration or
partially guaranteed by the Veterans Administration. Within this category, the
largest portion of the Bank's loans are made to home buyers on the security of
single-family dwellings. At December 31, 1996, the Bank's net loans receivable
totaled $425.9 million, representing approximately 75.0% of its total assets. At
that date, 76.3% of total mortgage loans consisted of loans secured by first
mortgage liens on residential properties.
In order to manage interest rate risk in the loan portfolio, the Bank has
implemented a number of measures designed to provide more frequent interest rate
adjustments on interest-earning assets so more interest-earning assets would
respond to increases in interest rates on basis similar to that of
interest-bearing liabilities. These measures were designed to reduce adverse
effects on net interest income during periods of rising interest rates. These
measures include: (i) origination of permanent mortgage loans with adjustable
interest rates on residential properties and other real estate, (ii) origination
of residential construction and development loans with adjustable interest
rates, (iii) origination of nonresidential construction loans with adjustable
interest rates and (iv) purchases of loans with adjustable interest rates which
meet the Bank's underwriting standards. At December 31, 1996, approximately
$191.7 million (41.9% of total mortgage loans) were comprised of loans described
above.
1-TO-4 FAMILY RESIDENTIAL REAL ESTATE LENDING. The cornerstone of the Bank's
lending program has been the origination of permanent loans, secured by
mortgages on owner-occupied, 1-to-4 family residences. At December 31, 1996,
$302.1 million, or 68.0%, of the Bank's mortgage loans consisted of permanent
loans on 1-to-4 family residences. Substantially all of these loans were secured
by properties located in the Bank's primary market area.
The Bank originates a variety of different types of residential loans including
conventional 15- and 30- year fixed-rate loans, one- and three-year ARM's and,
to a lesser extent, 10- and 20-year fixed rate loans. During recent years, in
order to meet consumer demand and maximize the yield on its residential loan
portfolio, the Bank has originated primarily 15- and 30-year fixed rate loans,
which quality for sale to the Federal Home Loan Mortgage Corporation ("Freddie
Mac"). The Bank's fixed-rate residential loans are underwritten and documented
to permit their sale to Freddie Mac and the Bank sells certain qualifying
residential loans to Freddie Mac. Loans sold to Freddie Mac are on a nonrecourse
basis. The Bank also originates ARM's, although, in order to maintain its
interest rate spread, the Bank generally does not offer initial interest rates
on ARM's as low as those available from some of its competitors.
The Bank's current 1-to-4 family permanent residential ARM's are fully
amortizing loans with contractual maturities of up to 30 years. The Bank's ARM
products carry interest rates which are
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reset to a stated margin over an index based on the one- or three-year U.S.
Treasury Constant Maturities Index. Increases or decreases in the interest rate
of the Bank's ARM loans based on the one- or three-year U.S. Constant Maturities
index are generally limited to 2% at any adjustment period and a maximum of 5%
or 6% over the life of the loan, depending on whether the loan resets at one- or
three-year intervals, respectively. The Bank's ARM's are not convertible into
fixed-rate loans, do not contain prepayment penalties and do not produce
negative amortization. The Bank's ARM's are assumable, providing the assuming
borrower meets the same underwriting criteria as a borrower on a newly
originated loan. At December 31, 1996 the total balance of 1-to-4- family
permanent residential ARM's was $61.9 million, or 20.5% of the Bank's 1-to-4
family permanent mortgage loan portfolio.
The Bank evaluates both the borrower's ability to make principal and interest
payments and the value of the property that will secure the loan. The Bank
originates residential mortgage loans with loan-to-value ratios of up to 95%. On
any mortgage loan exceeding an 80% loan-to-value ratio at the time of
origination, however, the Bank requires private mortgage insurance in an amount
intended to reduce the Bank's exposure to 80% of the appraised value of the
underlying collateral. Property securing real estate loans made by the Bank is
generally appraised by independent fee appraisers selected by the Bank and
subject to review by the management and Board of Directors of the Bank. The Bank
requires evidence of marketable title and lien position on all loans secured by
real property and requires fire and extended coverage casualty insurance in
amounts at least equal to the principal amount of the loan or the value of
improvements on the property, depending on the type of loan. The Bank may also
require flood insurance to protect the property securing its interest.
The Bank's fixed-rate residential mortgage loans customarily include
"due-on-sale" clauses, which are provisions giving the Bank the right to declare
a loan immediately due and payable in the event the borrower sells or otherwise
disposes of the real property subject to the mortgage and the loan is not
repaid. The Bank enforces due-on-sale clauses on fixed-rate mortgage loans to
the extent permitted under applicable laws.
Residential mortgage loan originations come from a number of sources, including
solicitations by the Bank, referrals by builders and real estate brokers,
existing borrowers and depositors and walk-in customers. Loan applications are
accepted at all of the Bank's offices.
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING. In order to enhance the yield
on and decrease the average term to maturity of its assets, the Bank originates
permanent loans secured by multi-family and commercial real estate. At December
31, 1996, $47.9 million, or 10.8% of the Bank's mortgage loan portfolio
consisted of permanent loans on multi-family and commercial real estate. The
Bank's management began originating commercial real estate loans as an
accommodation to long-time customers. Recently the Bank has considered expanding
its marketing of commercial real estate loans because it has gained the
experience to manage such loans and because the rates earned on commercial loans
are higher than the rates on conventional mortgage loans. None of the Bank's
multi-family and commercial real estate loans were designated as nonperforming
assets at December 31, 1996.
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The Bank's permanent multi-family and commercial real estate loan portfolio
includes loans secured by small apartment buildings, strip shopping centers,
small office buildings, churches and other business properties, generally
located within the Bank's primary market area.
Permanent multi-family and commercial real estate loans generally have terms of
15 years or less; the maximum term available is 25 years. These loans typically
do not have balloon features. Interest rates on permanent loans generally adjust
(subject, in some cases, to specified interest rate caps) based on the Bank's
prime interest rate or at one- or three-year intervals to specified spreads over
the related U.S. Treasury Constant Maturities Index. Multi-family loans and
commercial real estate loans are generally written in amounts up to 80% and 75%,
respectively, of the appraised value of the property or sale price, whichever is
less.
Appraisals on properties securing multi-family and commercial real estate
property loans originated by the Bank are performed by independent fee
appraisers designated by the Bank at the time the loan application is made. All
appraisals on multi-family and commercial real estate loans are reviewed by the
Bank's management. The Bank's underwriting procedures generally require
verification of the borrower's credit history, income, financial statements,
banking relationships, references and income projections of the property. The
Bank generally requires the submission of annual financial statements to the
Bank for the life of the loan. Typically, the Bank requires the owners,
principal shareholders or general partners of business, corporate or partnership
borrowers to be personally liable for multi-family and commercial real estate.
Multi-family and commercial real estate loans generally present a higher level
of risk than loans secured by 1-to-4 family residences. This greater risk is due
to several factors, including 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 these type loans. Furthermore, the repayment of loans secured by
multi-family and commercial real estate is typically dependent upon the
successful operation of the related real estate project. If the cash flow from
the project is reduced (for example, if leases are not obtained or renewed), the
borrower's ability to repay the loan may be impaired.
CONSTRUCTION AND DEVELOPMENT LENDING. The Bank makes construction loans to
individuals for the construction of their residences as well as to the builders
and developers for the construction of 1-to-4 family residences and the
acquisition and development of 1-to-4 family lots in the Bank's primary market
area.
Construction loans to individuals for their residences are structured to be
converted to permanent loans at the end of the construction phase, which
typically lasts six months. These construction loans have rates and terms
similar to any 1-to-4 family loan then offered by the Bank, except that during
the construction phase, the borrower pays interest only. Residential
construction loans are generally underwritten pursuant to the same guidelines
used for originating permanent residential loans. At December 31, 1996, the Bank
had $14.5 million in construction loans to individuals for construction of their
personal residences.
Construction loans to builders of 1-to-4 family residences require the monthly
payment of interest and typically have terms of up to 12 months, with the
maximum possible term being 24 months. These loans may provide for the payment
of interest and loan fees from loan proceeds and carry
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interest rates which adjust primarily with changes in the Bank's prime
interest rate. Loan commitment and origination fees are usually charged. At
December 31, 1996, the Bank had $22.0 million of construction loans to builders
of 1-to-4 family residences.
The Bank also makes loans to developers for the purpose of acquiring unimproved
land and developing such land into improved sublots for residential development.
The Bank only makes such residential land acquisition and development loans if
the Bank has received assurances from local planning commissions that the land
will be considered developable and zoned residential. These loans typically have
maturity terms from one to three years (with the maximum term being five years)
and primarily carry interest rates which adjust to maintain a specified spread
over the prime rate and, to a lesser extent, adjust (subject, in some cases, to
interest rate caps) at one, two or three-year intervals to specified spreads
over the related U.S. Treasury Constant Maturities Index. Loan commitment and
origination fees, in the form of points, are usually charged. These loans
generally provide for the payment of loan fees from loan proceeds. The principal
is typically paid down as improved lots are sold. At December 31, 1996, The Bank
had $54.7 million of residential development loans.
Construction and development loans are obtained principally through
solicitations of the Bank and through continued business from builders and
developers who have previously borrowed from the Bank as well as referrals of
builders and developers. The application process includes a submission to the
Bank of accurate plans, specifications, and costs of the project to be
constructed or developed, as well as both personal and corporate tax returns,
both personal and corporate financial statements and environmental underwriting
analysis. These items are used as the basis to determine the appraised value of
the subject property and the debt-servicing ability of the borrower. Loans are
based on the lesser of current appraised value or the cost of construction (land
plus building).
Acquisition and development loans to finance the cost of acquiring unimproved
property for future residential subdivision and improving such property are
generally made up to a maximum loan-to-value ratio of 75% based upon an
independent appraisal. Construction loans to finance the costs of building
residential houses are generally made up to a maximum loan-to-value ratio of 80%
based upon an independent appraisal. Construction and development loans to
borrowers other than owner occupants also involve many of the same risks
discussed above regarding multi-family and commercial real estate loans and tend
to be more sensitive to general economic conditions than many other types of
loans.
At December 31, 1996, the Bank had four construction and development loan
borrowers having aggregate loans in an amount greater than $6.4 million (15% of
then tangible capital) which totaled $36.2 million. All construction and
development loans were in compliance with applicable lending limits. The OTS
made special loans-to-one-borrower lending authorities available to the Bank on
January 2, 1990 which permit the Bank to lend up to 30% of tangible capital to
one borrower for the development of residential housing. The special
loans-to-one-borrower lending authority granted to the Bank is renewable
annually and was most recently renewed in October 1996. For a discussion of the
regulatory requirements incident to the Bank's usage of the special lending
authorities, see "REGULATION Federal Regulation - Loans to One Borrower and
Aggregate Loan Limits". The Bank expects the 15% limit on loans to one borrower
to represent no significant impediment to its lending function as its tangible
capital continues to grow.
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As of December 31, 1996, the Bank had nineteen borrowers having aggregate loans
for residential acquisition, development and construction purposes exceeding $1
million. No such loans were nonperforming as of that date.
Construction loans involve greater underwriting and default risks than loans
secured by mortgages on existing properties. These loans can involve large loan
balances concentrated in single borrower or a group of borrowers in the same
industry. Loan funds are advanced upon the security of the project under
construction, which is more difficult to value prior to the completion of
construction. Should a default occur which results in foreclosure, the Bank
could be adversely affected in that it would have to take control of the project
and attempt either to arrange for completion of construction or to dispose of
the unfinished project.
The Bank's underwriting criteria are designed to evaluate and minimize the risk
of each construction loan. A wide variety of factors are carefully considered
before originating a construction loan, including the availability of permanent
financing or a takeout commitment to the borrower (which may be provided by the
Bank at market rates); the reputation of the borrower and the contractor;
independent valuations and reviews of cost estimates; preconstruction sale
information and cash flow projections of the borrower. At the time of the Bank's
origination of a construction loan to a builder, the builder often has a signed
contract with a purchaser for the sale of the to-be-constructed house, which, by
assuring the builder of a repayment source, reduces the Bank's underwriting
risks on the construction loan. To reduce the risks inherent in construction
lending, the Bank limits the number of properties which can be constructed on a
"speculative" or unsold basis by a builder at any one time to two houses and
requires the borrower or its principals personally to guarantee repayment of the
loan. Moreover, the Bank controls certain of the risks associated with
construction lending by requiring builders to submit itemized bills to the Bank,
whereupon the Bank disburses the builder's loan funds directly to the contractor
and subcontractors, rather than to the builder.
CONSUMER LOANS. Ohio and federal laws and regulations permit an Ohio-chartered,
federally insured savings association such as the Bank to make secured and
unsecured consumer loans, and home improvement loans.
The Bank offers automobile loans, home equity lines of credit, home improvement,
and other secured and unsecured personal loans. These loans generally have fixed
interest rates and terms of five years or less, with the exception of home
equity lines of credit and home improvement loans. Home equity lines of credit
have adjustable rates based on the Bank's prime interest rate and typically have
terms of ten years. Home improvement loans have fixed interest rates and have
terms no longer than fifteen years. These rates are generally higher than the
rates offered on mortgage loans. The Bank also offers VISA(R) and MasterCard(R)
credit cards to its customers as an agent for an Ohio-based commercial bank.
During 1996, the Bank originated approximately $4.0 million of consumer loans
and approximately $4.5 million in 1995. The Bank's consumer loan portfolio
totaled $9.1 million at December 31, 1996.
The underwriting standards employed by the Bank for consumer loans include a
determination of the applicant's payment history on other debts and ability to
meet existing obligations and payments on the proposed loan. Although credit
worthiness of the applicant is of primary consideration, the underwriting
process also includes a comparison of the value of the security, if any, in
relation to
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the proposed loan amount. While consumer loans generally involve a higher
level of credit risk than 1-to-4 family residential loans, consumer loans are
typically made at higher interest rates and for shorter terms or at adjustable
rates, thus increasing the interest rate sensitivity of the Bank's loan
portfolio.
LOAN PORTFOLIO COMPOSITION. Table I sets forth the composition of the Bank's
loan portfolio, in dollar amounts and in percentages for the last five fiscal
years, along with a reconciliation to loans receivable, net.
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Table I December 31,
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1996 1995 1994 1993 1992
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Amount % Amount % Amount % Amount % Amount %
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(Dollars In Thousands)
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Real estate mortgage loans
Permanent first mortgage
One-to-four family
Held for portfolio $301,284 70.75% $220,490 65.55% $194,629 69.06% $114,848 47.38% $134,586 62.05%
Held for sale 806 0.19% 5,396 1.60% 0 0.00% 49,957 20.61% 4,389 2.02%
Multi-family 1,049 0.25% 1,183 0.35% 1,294 0.46% 1,101 0.46% 1,481 0.68%
Commercial real estate 46,883 11.01% 42,098 12.52% 38,109 13.52% 39,856 16.44% 37,261 17.18%
Land 195 0.04% 358 0.11% 427 0.15% 638 0.26% 837 0.39%
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Subtotal 350,217 82.24% 269,525 80.13% 234,459 83.19% 206,400 85.15% 178,554 82.32%
Construction first mortgage
Residential acquisition
& development 54,670 12.84% 48,538 14.43% 29,107 10.33% 23,984 9.90% 23,822 10.98%
One-to-four family 37,048 6.70% 26,960 8.02% 29,818 10.58% 21,032 8.68% 19,929 9.19%
Multi-family 240 0.05% 2,660 0.79% 1,400 0.50% 3,041 1.25% 2,590 1.19%
Commercial real estate 2,376 0.56% 4,233 1.26% 3,163 1.12% 2,442 1.01% 2,573 1.19%
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Subtotal 94,335 22.15% 82,391 24.50% 63,488 22.53% 50,499 20.84% 48,914 22.55%
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Total mortgage loans 444,552 104.39% 351,916 104.63% 297,947 105.72% 256,899 105.99% 227,468 104.87%
Other loans
Commercial 4,250 1.00% 3,955 1.18% 1,584 0.56% 1,938 0.80% 1,517 0.70%
Consumer 9,117 2.14% 8,895 2.64% 7,390 2.62% 4,527 1.87% 4,703 2.17%
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Subtotal 13,367 3.14% 12,850 3.82% 8,974 3.18% 6,465 2.67% 6,220 2.87%
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Total loans 457,919 107.53% 364,766 108.45% 306,921 108.90% 263,364 108.66% 233,688 107.74%
Less
Undisbursed loans in process 26,676 6.27% 23,639 7.03% 20,134 7.14% 16,333 6.74% 12,393 5.71%
Allowance for loan losses 1,423 0.33% 1,168 0.35% 948 0.34% 840 0.35% 717 0.33%
Deferred yield adjustments 3,965 0.93% 3,608 1.07% 3,996 1.42% 3,796 1.57% 3,688 1.70%
- --------------------------------------------------------------------------------------------------------------------------------
Subtotal 32,064 7.53% 28,415 8.45% 25,078 8.90% 20,969 8.66% 16,798 7.74%
- --------------------------------------------------------------------------------------------------------------------------------
Total loans receivable, net $425,855 100.00% $336,351 100.00% $281,843 100.00% $242,395 100.00% $216,890 100.00%
================================================================================================================================
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 11
Table II sets forth the amount of the Bank's real estate loan portfolio having
fixed rates and the amount having adjustable rates. These loans are presented
before any deductions for loans-in-process, allowance for loan losses and
deferred yield items.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Table II December 31,
---------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
Amount % Amount % Amount % Amount % Amount %
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ADJUSTABLE RATE LOANS
One-to-four family $87,794 19.75% $72,644 20.64% $60,754 20.39% $52,699 20.52% $58,152 25.56%
Multi-family 1,289 0.29% 3,843 1.09% 2,694 0.91% 4,142 1.61% 3,944 1.73%
Commercial real estate 44,261 9.96% 41,123 11.69% 37,482 12.58% 39,106 15.22% 36,023 15.84%
Land & development 54,865 12.34% 48,896 13.90% 29,534 9.91% 23,382 9.10% 24,659 10.84%
- -----------------------------------------------------------------------------------------------------------------------------------
Total adjustable rate loans 188,209 42.34% 166,506 47.32% 130,464 43.79% 119,329 46.45% 122,778 53.97%
FIXED RATE LOANS
One-to-four family
Held for portfolio 250,539 56.36% 174,806 49.67% 163,693 54.94% 83,181 32.38% 96,363 42.36%
Held for sale 806 0.18% 5,396 1.53% 0 0.00% 49,957 19.45% 4,389 1.93%
Multi-family 0 0.00% 0 0.00% 0 0.00% 0 0.00% 126 0.06%
Commercial real estate 4,998 1.12% 5,208 1.48% 3,790 1.27% 3,192 1.24% 3,812 1.68%
Land & development 0 0.00% 0 0.00% 0 0.00% 1,240 0.48% 0 0.00%
- -----------------------------------------------------------------------------------------------------------------------------------
Total fixed rate loans 256,343 57.66% 185,410 52.68% 167,483 56.21% 137,570 53.55% 104,690 46.03%
- -----------------------------------------------------------------------------------------------------------------------------------
Total mortgage loans $444,552 100.00% $351,916 100.00% $297,947 100.00% $256,899 100.00% $227,468 100.00%
===================================================================================================================================
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Table III shows the contractual maturities of the Bank's loan portfolio at
December 31, 1996. The table does not include prepayments and scheduled
principal repayments.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Table III
Outstanding 1 Year or 10 to 15 After 15
12/31/96 Less 1 to 3 Years 3 to 5 years 5 to 10 years Years Years
- -----------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Permanent Loans:
Residential $302,090 $4 $156 $1,135 $30,098 $116,772 $153,925
Commercial 47,932 14 1,210 1,279 12,940 22,878 9,611
Construction 39,665 15,305 8,734 0 80 5,818 9,728
Land & development 54,865 8,457 45,354 955 99 0 0
Other 13,367 3,828 1,590 3,605 3,074 1,270 0
- -----------------------------------------------------------------------------------------------------------
Total $457,919 $27,608 $57,044 $6,974 $46,291 $146,738 $173,264
============================================================================================================
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Table IV shows the contractual maturities of the Bank's loan portfolio by fixed-
and adjustable-rate loans. It does not reflect actual repayments because of loan
refinancings, principal payments and enforcement of due-on-sale clauses, which
give the Bank the right to declare a conventional loan immediately due and
payable in the event, among other things, that the borrower sells the real
estate subject to the mortgage.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Table IV
Outstanding 1 Year or 10 to 15 After 15
12/31/96 Less 1 to 3 Years 3 to 5 years 5 to 10 years Years Years
- -----------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed interest rate $264,245 $66 $1,624 $3,921 $33,179 $118,321 $107,134
Adjustable interest 193,674 27,542 55,420 3,053 13,112 28,417 66,130
- -----------------------------------------------------------------------------------------------------------
Total $457,919 $27,608 $57,044 $6,974 $46,291 $146,738 $173,264
===========================================================================================================
- -----------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 12
PURCHASE AND SALE OF LOANS. Management believes that purchases of loans and loan
participations can be desirable and evaluates potential purchases as
opportunities arise and the Bank's needs dictate. Such purchases can enable the
Bank to take advantage of favorable lending opportunities, diversify its
portfolio and limit origination expenses. For loan purchases, the Bank uses the
same criteria for investment as if it had originated the loans using its own
underwriting standards. At December 31, 1996 approximately $1.3 million of the
Bank's residential loan portfolio and $3.6 million of the Bank's multi-family
and non-residential real estate loan portfolios were serviced by other
institutions.
When loans or loan participations are sold by the Bank, The Bank retains the
responsibility for servicing the loans. The Bank receives a fee for servicing
these loans. The amount of mortgage loans the Bank serviced for others amounted
to approximately $192.6 million at December 31, 1996. The contractual right to
service mortgage loans has an economic value that, in accordance with generally
accepted accounting principles, was not fully recognized in the Bank's financial
statements prior to 1995. The Bank adopted Statement of Financial Accounting
Standards (SFAS) No. 122, 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 value reflects the future income stream
of the servicing fees, the availability of the cash balances associated with
escrow funds collected monthly for real estate taxes and insurance, and the
ability of the servicer to cross-sell other products and services. The actual
value of a servicing portfolio is dependent upon such factors as the age and
maturity of the loans in the portfolio, the average dollar balance of the loans,
the location of the collateral property, the average amount of escrow funds
held, the interest rates and delinquency experience on the loans, the types of
loans and other factors.
Table V shows total loan origination, purchase, sale and repayment for the
periods indicated:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Table V Year Ended December 31,
------------------------------------------------------------------
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Conventional mortgage loans:
Loan originations (1):
One-to-four family $154,482 $ 85,892 $ 63,085 $123,132 $114,611
Construction 50,468 43,661 50,151 40,554 34,179
Commercial and multi-family 7,508 5,182 2,519 7,439 6,788
Land and development 41,001 43,250 30,693 16,429 19,627
- -----------------------------------------------------------------------------------------------
Total mortgage loan
originations 253,459 177,985 146,448 187,554 175,205
Consumer loans 4,003 4,528 4,970 2,790 3,451
Commercial loans 3,212 4,348 770 1,324 1,369
- -----------------------------------------------------------------------------------------------
Total loan originations 260,674 186,861 152,188 191,668 180,025
Loans and participations
Purchased 2,250 700 0 0 1,047
Sold 54,692 43,374 21,677 59,321 64,942
Loan repayments & refinances 110,693 86,342 86,954 102,671 75,678
- -----------------------------------------------------------------------------------------------
Net loan activities $ 97,539 $ 57,845 $ 43,557 $ 29,676 $ 40,452
================================================================================================
(1) Loans originated include undisbursed portions of loans-in-process
- -----------------------------------------------------------------------------------------------
</TABLE>
CHANGES IN LENDING ACTIVITIES. Loan originations in 1996 reached an all-time
high of $260.7 million, an increase of $73.8 million over 1995 originations of
$186.9 million. Mortgage refinances
11
<PAGE> 13
were $63.3 million in 1996, $28.5 million in 1995 and $27.5 million in
1994. Loan originations (excluding mortgage refinancing) increased to $197.4
million in 1996 from $158.4 million in 1995 and from $124.7 million in 1994.
INCOME FROM LENDING ACTIVITIES. The Bank earns interest and fee income from its
lending activities. The Bank earns income from fees for originating loans and
for making commitments to originate loans and purchase loans and loan
participations. Certain of these fees net of origination costs are amortized
over the life of the respective loan. The Bank also receives loan fees related
to existing loans, which include prepayment charges, late charges, assumption
fees and servicing fees. Income from loan origination and commitment fees and
discounts varies with the volume and type of loans and commitments made and
purchased and with competitive and economic conditions.
NONPERFORMING LOANS
GENERAL. Late payment fees are assessed by the Bank if a payment is not received
by the 15th day following its due date. Any borrower whose payment was not
received by this time is mailed a past due notice. If the loan is still
delinquent after a second past due notice is mailed, a loan department employee
will attempt to contact the customer to resolve any problem that might exist.
When an advanced stage of delinquency approaches (generally 90 days past due)
and if repayment cannot be expected within a reasonable amount of time or a
repayment agreement has not been entered into, the Bank will contact an attorney
to request that the required 30-day prior notice of foreclosure proceedings be
prepared and delivered to the borrower so that, if necessary, foreclosure
proceedings may be initiated shortly after the loan is 90 days delinquent. This
procedure has historically aided in achieving a low level of nonperforming loans
and, as of December 31, 1996 only $1,699,000 or 0.40% of the Bank's total loan
portfolio was nonperforming. As of December 31, 1996 the Bank's level of
nonperforming assets to total assets was 0.30%.
On December 31, 1996 the Bank held no real estate and other repossessed
collateral acquired as a result of foreclosure, voluntary deed, or other means.
When the Bank has such real estate, it is classified as "real estate owned"
(REO) until it is sold. When property is so acquired, it is recorded at the
lower of cost (the unpaid principal balance at the date of acquisition plus
foreclosure and other related costs) or fair value. For collateral-dependent
loans, the fair value is determined by obtaining an appraisal from an
independent fee appraiser. For loans which are not collateral dependent, the
fair value is determined based on the present value of expected cash flows. Any
reduction to record the property at its fair value is charged to expense.
Generally, unless the property is 1-to-4 family and well collateralized,
interest accrual ceases after 90 days of delinquency, but not later than the
date of acquisition. Costs incurred to maintain REO property are charged to
expense. The Bank has not had to foreclose on an acquisition and development
loan in the last 5 years.
If a credit card account becomes 10 days delinquent, a notice is sent to the
account holder demanding that the payment be made so that the card is current.
Another notice is sent to the cardholder if the account becomes 20 days
delinquent. If payment is not received within 30 days, authorization requests
are denied, a message appears on the cardholder's account statement and a
follow-up telephone call is made. These telephone collection efforts and
statement messages continue until the account is deemed uncollectible, usually
between 120 to 150 days delinquent at
12
<PAGE> 14
which time it is turned over to a collection agency for intensive
collection efforts and legal action if appropriate.
Not categorized as nonperforming loans are certain potential problem loans that
management believes are adequately secured and for which no material loss is
expected, but as to which certain circumstances may cause the borrowers to be
unable to comply with the present loan repayment terms at some future date. At
December 31, 1996 there were approximately $1.1 million of such potential
problem loans.
13
<PAGE> 15
Table VI below sets forth information regarding delinquent loans. It is the
Bank's policy that past-due conventional loans be reviewed monthly to determine
whether any due but uncollected portion thereof should be classified as
uncollectible.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Table VI Year Ended December 31,
---------------------------------------------------
1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
NON-ACCRUING LOANS
One-to-four family permanent $ 600 $ 52 $ 53 $113 $ 27
One-to-four family construction - - - - -
Multi-family & commercial
real estate - - - - -
Development & land - - - - -
Commercial non-real estate - 70 - - -
Consumer and other 5 24 40 3 2
- --------------------------------------------------------------------------------------------------
Total 605 146 93 116 29
ACCRUING LOANS DELINQUENT 90 DAYS OR MORE:
One-to-four family permanent 682 1,906 684 149 255
One-to-four family construction 412 - - - -
Multi-family & commercial
real estate - - - - -
Development & land - - - - -
Commercial non-real estate - - 12 - -
Consumer and other - - - 1 -
- --------------------------------------------------------------------------------------------------
Total 1,094 1,906 696 150 255
Restructured loans - - - - -
- --------------------------------------------------------------------------------------------------
Total nonperforming loans 1,699 2,052 789 266 284
IN SUBSTANCE FORECLOSURE - - - - 149
- --------------------------------------------------------------------------------------------------
TOTAL NONPERFORMING ASSETS $1,699 $2,052 $789 $266 $433
- --------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES $1,423 $1,168 $948 $840 $717
================================================================================================
NONPERFORMING LOANS TO
TOTAL LOANS-NET 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%
ALLOWANCE FOR LOAN LOSSES TO
ENDING LOAN BALANCES 0.33% 0.35% 0.34% 0.35% 0.33%
ALLOWANCE FOR LOAN LOSSES TO
NONPERFORMING LOANS 83.76% 56.91% 120.11% 315.80% 252.06%
- --------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 16
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>
Years 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>
ALLOWANCE FOR LOAN LOSSES. The amount of the allowance for loan losses is based
on management's analysis of risks inherent in the various segments of the loan
portfolio, management's assessment of known or potential problem credits which
have come to management's attention during the ongoing analysis of credit
quality, historical loss experience, current economic conditions and other
factors. If actual circumstances and losses differ substantially from
management's assumptions and estimates, such allowance for loan losses may not
be sufficient to absorb all future losses, and net earnings could be adversely
affected. Loan loss estimates are reviewed periodically, and adjustments, if
any, are reported in earnings in the period in which they become known. In
addition, the Bank maintains a portion of the allowance to cover potential
losses inherent in the portfolio which have not been specifically identified.
Although management believes that it uses the best information available to make
such determinations and that the allowance for loan losses was adequate at
December 31, 1996, future adjustments to reserves may be necessary, and net
income could be affected, if circumstances and/or economic conditions differ
substantially from the assumptions used in making the initial determinations. A
downturn in the Northeastern Ohio real estate market could result in the Bank
experiencing increased levels of nonperforming assets and charge-offs, increased
provisions for loan losses and reductions in income. Additionally, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the recognition of additions to the allowance based on their judgment of
information available to them at the time of their examination.
Substantially all the delinquent loans are well collateralized residential real
estate loans. Accruing loans delinquent 90 days or more included seven
residential mortgage loans and three residential construction loans totaling
$1,094,000 at December 31, 1996. The appraised values of the residences securing
these loans was deemed sufficient to cover the outstanding debt. The Bank's
collection procedures generally begin within 30 days of delinquency and,
combined with the Bank's underwriting standards, have minimized delinquencies in
the loan portfolio.
15
<PAGE> 17
Table VII presents the allocation of the allowances for loan losses by the Bank
to the related outstanding loan balances at each of the dates indicated.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Table VII December 31,
-----------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------ ------------------ --------------- ---------------- ------------------
Amount % Amount % Amount % Amount % Amount %
- ----------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans $1,264 85.62% $1,000 85.62% $818 86.29% $744 88.57% $656 91.49%
Consumer and commercial
loans (non-mortgage) 159 14.38% 168 14.38% 130 13.71% 96 11.43% 53 7.39%
Non-allocated - - - - - - - - 8 1.12%
- ----------------------------------------------------------------------------------------------------------------------------
Total $1,423 100.00% $1,168 100.00% $948 100.00% $840 100.00% $717 100.00%
============================================================================================================================
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Table VIII presents information concerning activity in the Bank's allowance for
loan losses during the periods indicated.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Table VIII Year Ended December 31,
----------------------------------------------------
1996 1995 1994 1993 1992
(Dollars in Thousands)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance at beginning of period $ 1,168 $ 948 $840 $717 $ 570
Provision charged to expense 305 238 92 77 296
Charge-Offs:
One-to-four family permanent - - - - 56
One-to-four family construction - - - - -
Multi-family & commercial
real estate - - - - -
Development & land - - - - 20
Commercial non-real estate 10 - - - 61
Consumer 50 21 13 6 31
- -----------------------------------------------------------------------------------------
Total charge-offs 60 21 13 6 168
Recoveries:
One-to-four family permanent - - - 28 17
One-to-four family construction - - - - -
Multi-family & commercial
real estate - - - - -
Development & land - - - 20 -
Commercial non-real estate - - 25 - -
Consumer 10 3 4 4 2
- -----------------------------------------------------------------------------------------
Total recoveries 10 3 29 52 19
- -----------------------------------------------------------------------------------------
Net recoveries (charge-offs) (50) (18) 16 46 (149)
- -----------------------------------------------------------------------------------------
Allowance at end of period $ 1,423 $ 1,168 $948 $840 $ 717
=========================================================================================
Net charge-offs (-recoveries)
during period to average loans
outstanding during the period 0.01% 0.01% -0.01% -0.02% 0.07%
=========================================================================================
- -----------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 18
CLASSIFIED ASSETS. The OTS regulations on classification of assets require
savings associations to classify their own assets and to establish appropriate
general and specific allowances for losses, subject to OTS review. These
regulations are designed to encourage management to evaluate assets on a
case-by-case basis and to discourage automatic classifications. Assets
classified as substandard or doubtful must be evaluated by management to
determine a reasonable general loss reserve which is included in total capital
for purposes of the association's risk-based capital requirement, but which is
not included in core capital or tangible capital or in capital under generally
accepted accounting principles. Assets classified as loss must either be written
off or reserved for by a specific allowance which is not included in capital for
purposes of any of the regulatory capital requirements.
INVESTMENTS
Investment securities primarily satisfy the Bank's liquidity needs and provide a
return on residual funds after lending activities. Investments may be in bonds
and mortgage-backed securities, provided that they are all of qualified bank
investment grade pursuant to the Bank's written investment policy. The Bank does
not make any investments in securities which are rated less than investment
grade by a nationally recognized statistical rating organization. A goal of the
Bank's investment policy is to contain interest rate risk wherever possible.
All securities-related activity is reported to the Executive Committee of the
Board. General changes in investment strategy are required to be reviewed and
approved by the Board. The Bank's Chief Executive Officer and Chief Financial
Officer are authorized to purchase and sell securities on behalf of the Bank in
accordance with the Bank's stated investment policy.
Table IX sets forth the carrying value of the Bank's investment portfolio at the
dates indicated and includes investments available for sale.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Table IX Year Ended December 31,
-------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Short-term investments
Interest-earning deposits $ 4,406 $11,935 $ 8,295
- --------------------------------------------------------------------------------
Investment securities
Held-to-maturity
- ----------------
Corporate bonds 26,829 44,233 59,103
U.S. government and
agency obligations 19,301 1,200 14,723
Other 1,554 3,921 1,889
- --------------------------------------------------------------------------------
47,684 49,354 75,715
Available for sale
- ------------------
Corporate bonds 5,113 999 3,985
U.S. government and
agency obligations 16,883 25,596 0
- --------------------------------------------------------------------------------
21,996 26,595 3,985
- --------------------------------------------------------------------------------
Total $74,086 $87,884 $87,995
================================================================================
- --------------------------------------------------------------------------------
</TABLE>
There were no investment securities in the Bank's portfolio which had an
aggregate carrying value in excess of ten percent of the Bank's shareholders'
equity as of December 31, 1996.
17
<PAGE> 19
Table X sets forth the carrying value of the Bank's mortgage-backed
securities portfolio at the dates indicated:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Table X Year Ended December 31,
-----------------------
1996 1995 1994
- --------------------------------------------------------------------------------
(In Thousands)
MORTGAGE-BACKED SECURITIES
Held to maturity
- ----------------
<S> <C> <C> <C>
Federal National Mortgage Corporation $ 7,472 $ 6,652 $12,227
Federal Home Loan Mortgage Corporation 7,593 7,913 9,817
Government National Mortgage Corporation 6,109 7,194 3,271
Other 11,362 15,497 11,959
- --------------------------------------------------------------------------------
32,536 37,256 37,274
Available for sale
- ------------------
Federal National Mortgage Corporation 5,236 7,136 -
Federal Home Loan Mortgage Corporation 14,408 7,613 -
- --------------------------------------------------------------------------------
19,644 14,749 -
- --------------------------------------------------------------------------------
Total $52,180 $52,005 $37,274
================================================================================
- --------------------------------------------------------------------------------
</TABLE>
Table XI sets forth the amount of the Bank's mortgage-backed securities
portfolio having fixed rates and the amount having adjustable rates at the dates
indicated:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Table XI December 31,
------------------------------------------------------
1996 1995 1994
---------------- ----------------- ----------------
Amount % Amount % Amount %
- --------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed interest rates $13,943 46% $24,027 46% $12,957 35%
Adjustable rates 38,237 54% 27,978 54% 24,317 65%
- --------------------------------------------------------------------------------
Total $52,180 100% $52,005 100% $37,274 100%
================================================================================
- --------------------------------------------------------------------------------
</TABLE>
The following table reflects the contractual maturities and repricing of the
Bank's mortgage-backed securities and investment portfolios at the dates
indicated. Expected maturities of the mortgage-backed securities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Table XII Weighted Average
Remaining Term in
months
-----------------
Outstanding 2002- 2007 and To To
12/31/96 1997 1998-99 2000-2001 2006 Thereafter Repricing Maturity
- --------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities $52,180 $ - $ 4,405 $ - $ 2,984 $44,791 51 271
Interest earning deposits 4,406 4,406 - - - - 1 1
Corporate bonds 31,942 25,048 6,894 - - - 8 8
U.S. Government and agency -
obligations 36,184 20,198 6,700 6,270 3,016 - 18 18
Other 1,554 816 305 433 - - 23 23
- --------------------------------------------------------------------------------------------------------------------
Total $126,266 $50,466 $18,304 $6,703 $ 6,000 $44,791 $ 29 $119
====================================================================================================================
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 20
SOURCES OF FUNDS
DEPOSIT ACCOUNTS. Savings deposits are a major source of the Bank's funds. the
Bank offers a number of alternatives for depositors designed to attract both
short-term and long-term savings, including regular and money market savings
accounts, NOW accounts, and a variety of fixed-maturity, fixed-rate certificates
with maturities ranging from seven days to 120 months. The Bank also provides
travelers checks, cashier's checks, money orders, U.S. Savings Bonds, ATM
services and IRA and Keogh accounts.
Table XIII shows the distribution of the Bank's deposits by type at the dates
indicated, along with the amount of time deposits by interest rate category.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Table XIII
December 31,
-----------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
1996 1995 1994
Type of account and Average Cost ------ Average Cost ------ Average Cost ------
Interest rate 12/31/96 Amount % 12/31/95 Amount % 12/31/94 Amount %
- ------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook accounts 2.90% $46,034 9.33% 2.88% $47,423 10.96% 2.52% $30,347 8.36%
NOW acounts 2.02% 29,661 6.01% 2.02% 26,025 6.02% 2.27% 23,196 6.39%
Commercial accounts 0.00% 11,535 2.34% 0.00% 11,728 2.71% 0.00% 10,159 2.80%
Money market accounts 2.53% 17,882 3.62% 2.53% 23,014 5.32% 2.53% 37,134 10.23%
- ------------------------------------------------------------------------------------------------------------------------------
Subtotal 2.27% 105,112 21.30% 2.29% 108,190 25.01% 2.21% 100,836 27.78%
CERTIFICATES OF DEPOSIT
4.50% and less 2.54% 1,849 0.37% 3.03% 4,454 1.03% 3.79% 42,796 11.79%
4.51% to 5.50% 5.34% 116,857 23.68% 5.27% 77,802 17.99% 5.24% 114,659 31.58%
5.51% to 6.50% 6.03% 187,013 37.90% 6.03% 120,175 27.78% 6.20% 48,555 13.37%
6.51% to 7.50% 7.32% 73,823 14.96% 7.22% 108,282 25.03% 7.16% 36,259 9.99%
7.51% and greater 8.85% 8,817 1.79% 9.01% 13,660 3.16% 9.01% 19,945 5.49%
- ------------------------------------------------------------------------------------------------------------------------------
Subtotal 6.11% 388,359 78.70% 6.33% 324,373 74.99% 5.73% 262,214 72.22%
- ------------------------------------------------------------------------------------------------------------------------------
Total 5.29% $493,471 100.00% 5.32% $432,563 100.00% 4.76% $363,050 100.00%
==============================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table presents, by various interest rate categories, certain
information concerning maturities of the Bank's certificates of deposit as of
December 31, 1996.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Table XIV Maturing in:
Balances at One to two Two to three After three
12/31/96 One Year years years years
- ------------------------------------------------------------------------------------
(In Thousands)
CERTIFICATES OF DEPOSIT
<C> <C> <C> <C> <C> <C>
4.50% and less $ 1,849 $ 1,849 $ 0 $ 0 $ 0
4.51% to 5.50% 116,857 109,947 5,093 636 1,181
5.51% to 6.50% 187,013 139,801 22,917 6,337 17,958
6.51% to 7.50% 73,823 18,994 5,442 16,169 33,218
7.51% and higher 8,817 1,324 882 4,310 2,301
- ------------------------------------------------------------------------------------
Total $388,359 $271,915 $34,334 $27,452 $54,658
====================================================================================
- ------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 21
The following table sets forth the amount of the Bank's certificates of deposit
that are $100,000 or greater by time remaining until maturity as of December 31,
1996.
<TABLE>
<CAPTION>
Maturity Period
- ---------------
(In Thousands)
<S> <C>
Three months or less $ 16,756
Over three through six months 14,866
Over six through twelve months 25,149
Over twelve months 21,841
- -------------------------------------------------------------------------------
Total $ 78,612
===============================================================================
</TABLE>
CHECKING ACCOUNT SERVICES. The Bank offers commercial and NOW accounts and
interest-bearing money market accounts in order to attract funds. At December
31, 1996, the Bank's commercial checking accounts totaled $11.5 million; NOW
accounts totaled $29.7 million and money market accounts totaled $17.9 million.
BORROWINGS. Deposits, payments of loan principal and interest, and proceeds from
the sale of loans are the primary source of funds for a thrift's lending
activities and other general business purposes. The Bank can also obtain funds
through loans (advances) from the FHLB of Cincinnati. Advances from the FHLB may
be on a secured or unsecured basis depending upon a number of factors, including
the purpose for which the funds are being borrowed and existing advances
outstanding. See "REGULATION - Federal Regulation - Federal Home Loan Banks." At
December 31, 1996, the Bank had $25.2 million in advances outstanding from FHLB
of Cincinnati. The Bank has no arrangements to borrow funds from commercial
banks nor does the Bank solicit brokered deposits.
COMPETITION
The principal competitors of the Bank within its market area are other thrifts
and commercial banks. In recent years, however, competition has also come from
mortgage banking companies, insurance companies, securities firms and other
non-FDIC-insured financial institutions. The Bank faces competition from the
significant market influence of one large local thrift that offers long-term,
fixed-rate residential mortgage loans. Additionally, consolidation of the
financial institutions industry in the Midwest in recent years has increased the
level of competition. In addition, disparities with respect to the deposit
assessments for banks and savings associations may have an adverse effect upon
the Bank. See "Federal Regulation-Deposit Insurance Assessments."
The Bank competes against larger institutions for deposits principally by
offering a variety of banking services, attractive rates and strategically
located banking facilities. The Bank has strong ties with the local community,
particularly with residential builders and developers, and seeks to provide high
quality personal banking services to professionals, small businesses, and
individuals, emphasizing quick and flexible responses to consumer preferences
and market demands.
According to the SNL Branch Migration Data Source, as of June 30, 1996 (the most
recent date for which data is available), the Bank's market share of deposits
(including commercial banks, thrifts and credit unions) in the various cities
where the Bank maintains offices was as follows:
20
<PAGE> 22
<TABLE>
<CAPTION>
CITY MARKET SHARE MARKET POSITION
- ---- ------------ ---------------
Cuyahoga County
- ---------------
<S> <C> <C>
Berea 9.66% 6 out of 7
Brecksville 10.48 4 out of 7
Broadview Heights 20.24 2 out of 4
North Royalton 15.93 4 our of 8
Parma Heights 16.82 3 out of 7
Strongsville 23.38 1 out of 14
Westlake 8.56 3 out of 16
Lorain County
- -------------
Avon (opened March 1996) 10.99 4 out of 5
Columbia Station 27.78 2 out of 2
North Ridgeville 13.02 4 out of 8
Wellington 49.85 1 out of 3
Medina County
- -------------
Brunswick (opened May 1996) 0.81 9 out of 9
Hinckley 46.70 1 out of 3
Medina Township 4.61 9 out of 15
</TABLE>
PERSONNEL
As of December 31, 1996 the Bank employed 135 full time-equivalent employees.
None of the Bank's employees are represented by any collective bargaining group,
and management considers its relations with employees to be satisfactory.
INCENTIVE COMPENSATION
For each of the 1996 and 1995 fiscal years, the Board established an incentive
program for mortgage loan officers. The incentive lending program provided
financial remuneration to loan officers for generating mortgage and other loan
originations. The Board also established an incentive program for 1997 which
includes Office managers as well as mortgage loan officers. Mr. Perciak does not
participate in the incentive programs above.
COMPENSATION PURSUANT TO PLAN
INSURANCE PLANS. The Bank's full-time officers and employees are provided with
hospitalization, major medical, medical, prescription, long-term disability, and
term life insurance under group plans which are available generally and on the
same basis to all full-time employees with the majority of the contribution paid
by the Bank. Additionally, full-time officers and employees are provided with
major dental benefits through a group plan sponsored by the Bank, with officers
and employees paying for most of the cost of such coverage.
PROFIT-SHARING PLAN. The Bank has a trusteed profit-sharing retirement plan (the
"Profit-Sharing Plan") covering substantially all salaried employees. Under the
terms of the Profit-Sharing Plan, the Bank's annual contribution is
discretionary and the Bank may terminate the Profit-Sharing Plan at any time.
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<PAGE> 23
The Profit-Sharing Plan is a tax-qualified employee benefit plan under Section
401(a) of the Internal Revenue Code of 1986, as amended (the "Code"). The
purpose of the Profit-Sharing Plan is to provide a qualified retirement program
for eligible employees of the Bank. A fund has been created as part of the
Profit-Sharing Plan to receive contributions made to the Profit-Sharing plan by
the Bank and the plan's participants, and to invest and disburse the fund's
assets for the benefit of the plan's participants and beneficiaries.
Employees of the Bank are eligible to participate in the Profit Sharing Plan on
the first day of January following the employees completion of one year of
service for the Bank. Bank contributions are allocated to each participant in
accordance to his or her compensation as a percentage of the compensation of all
participants. Employees are vested over a six-year period with respect to
employer contributions, with 20% of the account balance becoming vested each
year after two years. Employees are always 100% vested in their own
contributions made to the Profit-Sharing Plan. Other than rollover from other
qualified plans, ordinarily there are no employee contributions to the
Profit-Sharing Plan. Participants or their beneficiaries receive a distribution
of benefits from their Profit-Sharing Plan accounts upon reaching early or
normal retirement age, death or disability.
The administrators of the Profit-Sharing Plan are Messrs. Perciak and Ziegler.
They direct the investment objectives of the Profit-Sharing Plan. A
Cleveland-based commercial bank, the Custodian of the Profit-Sharing Plan, is
responsible for holding the assets comprising the fund. Participants accrue
benefits only to the extent of the fund's assets.
401(K) PLAN. In January 1990, the Bank adopted a qualified, tax-exempt
profit-sharing plan with a cash or deferred feature qualifying under Section
401(k) of the Code (the "401(k) Plan"). All employees age 20 1/2 or older are
eligible to participate at the next plan entrance date provided they have
completed six months of service. Participants are permitted to make salary
reduction contributions to the 401(k) Plan in amounts equal to up to 15% of
their salary. The participant's salary reduction contribution is matched by Bank
contributions in an amount equal to 60% of the participant's contributions up to
specified limits. If the employee contributes more than 5 % of his salary, the
Bank will make no matching contributions on the amount over 5%.
Employees direct the investment options of their salary reduction contributions
to their accounts. Prior to January 1, 1995, employees also directed the
investment options of the Bank's matching contributions to their accounts.
During 1996 the Bank's matching contribution was invested in the common stock of
the Company. During 1997 the plan will offer Company stock as an investment
option for the employee salary reduction contributions and for employer matching
contributions. Salary reduction contributions by employees and the earnings
thereon are fully vested immediately. The Bank's employer contributions and
earnings thereon under the 401(k) Plan are vested over a six-year period, with
20% of the account balance becoming vested each year after two years of service.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. Effective January 1, 1995, the Bank
adopted a nonqualified, unfunded Supplemental Executive Retirement Plan (SERP)
that provides certain officers, classified as Vice President or above,
retirement benefits. The SERP provides for payments in the event of retirement,
disability, death or a change in control of the Bank. The plan
22
<PAGE> 24
was designed to build and retain a competent management team. Under the
plan, each executive has been given retirement benefits intended to provide
reasonable assurance that such executive will remain with the Bank. If the
executive's employment is terminated for cause or the executive voluntarily
resigns other than as a constructive termination (other than for "good reason")
following a change in control, the Bank is released from all payment obligations
to such executive.
SUBSIDIARY
The Bank has one subsidiary, Dennis Financial Corporation, formed in 1970 as a
wholly owned subsidiary of the Bank. The subsidiary is inactive. At March 7,
1997, the Bank had a book investment in the subsidiary of $6,000 (comprised of
its equity investment in stock and retained earnings of the subsidiary). The
Bank does not anticipate continuing the subsidiary's activities in the future.
23
<PAGE> 25
REGULATION
SET FORTH BELOW IS A BRIEF SUMMARY OF CERTAIN STATUTES AND REGULATIONS
AFFECTING EMERALD AND STRONGSVILLE SAVINGS. THE FOLLOWING SUMMARY, LIKE
THE DISCUSSION OF STATUTES AND REGULATIONS CONTAINED ELSEWHERE HEREIN,
DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO APPLICABLE STATUTES AND REGULATIONS.
Emerald is a thrift holding company and, as such, is subject to regulation by
the OTS. The Bank is an Ohio chartered savings and loan association and is a
member of the Federal Home Loan Bank System. The Banks deposits are insured by
the FDIC through the Savings Association Insurance Fund (SAIF). The lending
activities of Strongsville Savings must comply with various state and federal
regulatory requirements. The OTS, the Ohio Division of Financial Institutions
and the FDIC periodically examine the Bank for compliance with various
regulatory requirements. The Bank must file reports with the OTS describing its
activities and financial condition. This supervision and regulation is intended
principally for the protection of depositors.
Savings and Loan Holding Companies. Savings and loan holding companies are
required by the Home Owners' Loan Act ("HOLA") to register with the OTS. Savings
and loan holding companies that own one and only one savings institution are
commonly referred to as "unitary savings and loan holding companies." In marked
contrast to other forms of savings and loan holding companies and bank holding
companies, there are generally no restrictions under HOLA on the activities of a
unitary savings and loan holding company. Emerald is considered a unitary
savings and loan holding company.
Nevertheless, if the Director of the OTS determines that there is reasonable
cause to believe that the continuation by any savings and loan holding company
(including a unitary savings and loan holding company) of an activity
constitutes a serious risk to the financial safety, soundness or stability of
its subsidiary savings institution, Section 10(p) of HOLA authorizes the
Director to impose restrictions such as (i) limiting payment of dividends by the
savings institution; (ii) limiting transactions between the savings institution
and its affiliates; and (iii) limiting any activities of the savings institution
that might create a serious risk that the liabilities of the holding company and
its affiliates may be imposed on the savings institution.
If Emerald were to acquire control of another savings institution (other than
through merger or other business combination with Strongsville Savings), Emerald
would become a multiple savings and loan holding company, losing its status as a
unitary institution and becoming subject to activities restrictions as a result.
In very general terms, no multiple savings and loan holding company or
subsidiary thereof that is not a savings institution may commence or continue
any business activity other than: (i) furnishing or performing management
services for a subsidiary savings institution; (ii) conducting an insurance
agency or escrow business; (iii) holding, managing, or liquidating assets owned
by or acquired from a subsidiary savings institution; (iv) holding or managing
properties used or occupied by a subsidiary savings institution; (v) acting as
trustee under deeds of trust; (vi) activities authorized by regulation as of
March 5, 1987 to be engaged in by multiple savings and loan holding
24
<PAGE> 26
companies; or (vii) activities authorized by the Board of Governors of the
Federal Reserve System as permissible for bank holding companies, unless the
Director of the OTS by regulation prohibits or limits such activities for
savings and loan holding companies. Activities described in clause (vii) also
must be approved in advance by the Director of the OTS.
Moreover, if the savings institution subsidiary of a unitary holding company
fails to satisfy the qualified thrift lender test discussed hereinafter, then
the unitary holding company becomes subject to the activities restrictions
applicable under HOLA to multiple savings and loan holding companies. Unless the
savings institution requalifies under the qualified thrift lender test within
one year, the holding company must register as a bank holding company. The
activities restrictions applicable to bank holding companies under the Bank
Holding Company Act of 1956 are generally more confining than the activities
restrictions applicable under HOLA to multiple savings and loan holding
companies.
Lastly, Congress is considering legislation that would limit unitary savings and
loan holding companies to the same activities as other financial institution
holding companies and permit certain bank holding companies to engage in
commercial activities and expanded securities and insurance activities. Emerald
cannot predict whether or in what form these legislative initiatives will become
law. See "- Recent Legislative Developments."
Qualified Thrift Lender. All savings institutions are required to satisfy a
qualified thrift lender test ("QTL Test") set forth in Section 10(m) of HOLA and
regulations of the OTS in order to avoid certain restrictions on their
operations. A savings institution that does not meet the QTL test set forth in
HOLA and in OTS implementing regulations must either convert to a bank charter
or comply with the following restrictions on its operations: (i) the institution
may not engage in any new activity or make any new investment, directly or
indirectly, unless such activity or investment is permissible for a national
bank; (ii) the branching powers of the institution become restricted to those of
a national bank; (iii) the institution becomes ineligible to obtain any new
advances from its Federal Home Loan Bank; and (iv) payment of dividends by the
institution becomes subject to the rules regarding payment of dividends by a
national bank. Upon the expiration of three years from the date the savings
institution ceased to be a qualified thrift lender, the institution must cease
any activity and dispose of any investment not permissible for a national bank
and immediately repay any outstanding Federal Home Loan Bank advances (subject
to safety and soundness considerations).
Under the QTL test that existed prior to amendment of HOLA Section 10(m) on
September 30, 1996 and that continues to be effective, 65% of an institution's
portfolio assets must consist of certain housing and consumer-related assets on
a monthly average basis in nine out of every 12 months. This QTL Test remains
effective after September 30, 1996, but it is no longer the exclusive QTL Test.
Assets that qualify without limit for inclusion as part of the 65% requirement
include loans made to purchase, refinance, construct, improve or repair
residential housing and manufactured housing; home equity loans; mortgage-backed
securities (where the mortgages are secured by domestic residential housing or
manufactured housing); shares of stock in a Federal Home Loan Bank; and loans
for educational purposes, loans to small businesses and loans made through
credit cards or credit card accounts. Other assets also qualify for purposes of
the QTL Test, subject to limitations. At December 31, 1996, the qualified thrift
investments of Strongsville Savings were approximately 88.19% of its portfolio
assets.
25
<PAGE> 27
With the enactment on September 30, 1996 of the Economic Growth and Regulatory
Paperwork Reduction Act of 1996 (the "Regulatory Paperwork Reduction Act"),
including the Deposit Insurance Funds Act of 1996 set forth in Subtitle G
thereof (the "Deposit Insurance Funds Act"), Congress created an alternative QTL
Test, pursuant to which a savings association may also be treated as a qualified
thrift lender if the association qualifies as a "domestic building and loan
association" under the Internal Revenue Code of 1986, as amended (the "Code").
That is, at least 60% of the institution's assets (on a tax basis) must consist
of specified assets (generally loans secured by residential real estate or
deposits, educational loans, cash and certain governmental obligations).
Related to the QTL Test is a requirement that a thrift institution may not
invest more than a certain percentage of its assets in such things as
commercial, corporate, business, agricultural, education and consumer loans. The
Regulatory Paperwork Reduction Act increased thrift institutions' authority to
invest in loans of these types.
Transactions with Insiders and Affiliates. Transactions between a savings
institution and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of a savings institution is any company or
entity that controls, is controlled by or is under common control with the
savings institution. In a holding company context, the parent holding company of
a savings institution (such as Emerald) and any companies that are controlled by
the parent holding company are affiliates of the savings institution. In
general, Sections 23A and 23B (i) limit the extent to which a savings
institution or its subsidiaries may engage in "covered transactions" with any
one affiliate to an amount equal to 10% of such institution's capital stock and
surplus, with an aggregate limit on all such transactions with all affiliates of
20% of such capital stock and surplus, and (ii) require that all such
transactions be on terms substantially the same, or at least as favorable, to
the institution or subsidiary as those provided to a non-affiliate. The term
"covered transaction" includes the making of loans, purchase of assets, issuance
of a guarantee and similar other types of transactions. In addition to the
restrictions imposed by Sections 23A and 23B, no savings institution may (i)
loan or otherwise extend credit to an affiliate, except for any affiliate
engaging only in those activities that are permissible for bank holding
companies, or (ii) purchase or invest in any stocks, bonds, debentures, notes or
similar obligations of any affiliate, except for affiliates that are
subsidiaries of the savings institution.
In addition, Sections 22(h) and (g) of the Federal Reserve Act impose
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, an executive officer or
to a holder of more than 10% of a savings institution's stock, as well as loans
to certain affiliated interests, may not (together with all other outstanding
loans to such person and affiliated interests) exceed the institution's
loans-to-one-borrower limit (generally equal to 15% of the institution's
unimpaired capital and surplus). Section 22(h) also requires that loans to
directors, executive officers and principal stockholders be made on terms
substantially the same as offered in comparable transactions to other persons
and also requires prior board approval for certain loans. In addition, the
aggregate amount of extensions of credit by a savings institution to all
insiders cannot exceed the institution's unimpaired capital and surplus.
Furthermore, Section 22(g) places additional restrictions on loans to executive
officers. At December 31, 1996, Strongsville Savings was in compliance with
these restrictions.
Restrictions on Acquisitions. Without prior approval of the Director of the OTS,
savings and loan holding companies generally are prohibited from acquiring (i)
control of any other savings institution or savings and loan holding company or
substantially all the assets thereof or (ii) more than 5% of the
26
<PAGE> 28
voting shares of a savings institution or holding company thereof that is
not a subsidiary. Without the prior approval of the Director of the OTS, no
director or officer of a savings and loan holding company or person owning or
controlling by proxy or otherwise more than 25% of such company's stock, may
acquire control of any savings institution, other than a subsidiary savings
institution, or of any other savings and loan holding company.
The Director of the OTS may approve an acquisition resulting in the formation of
a multiple savings and loan holding company controlling savings institutions in
more than one state if and only if (i) the multiple savings and loan holding
company involved controls a savings institution that operated a home or branch
office located in the state of the institution to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act ("FDIA"); or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by the state-chartered institutions or savings and loan holding
companies located in the state where the acquiring entity is located (or by a
holding company that controls such state-chartered savings institutions).
Capital Requirements. Regulatory capital standards for savings institutions
consist of three components: a core capital requirement, a tangible capital
requirement and a risk-based capital requirement. All three components are
required to be no less stringent than the corresponding requirements applicable
to national banks.
All savings institutions must have core capital of at least 3.00% of adjusted
total assets. The Bank's core capital equals shareholders' equity adjusted for
net unrealized gains and losses on securities available for sale less goodwill.
Strongsville Saving's core capital ratio was 7.49% at December 31, 1996.
Savings institutions have a statutory requirement to maintain tangible capital
of at least 1.5% of adjusted total assets. For purposes of this requirement, the
Bank's tangible capital is equal to its core capital. At December 31, 1996,
Strongsville Savings' tangible capital ratio was 7.49%.
The risk-based capital standard adopted by the OTS currently requires savings
institutions to maintain a minimum ratio of total capital (core capital plus
supplementary capital) to risk-weighted assets of 8.00%. At the end of 1996, the
Bank's supplementary capital consisted of general valuation allowances.
Supplementary capital may be used to satisfy the risk-based requirement only up
to an amount equal to core capital. In determining the amount of risk-weighted
assets, all assets, including certain off-balance sheet items, are multiplied by
a risk weight based on the risks which OTS deems inherent in the type of assets.
Strongsville Savings' risk-based capital ratio was 12.93% at December 31, 1996.
In August 1995, the OTS and other federal banking agencies published a final
rule modifying their existing risk-based capital standards to provide for
consideration of interest rate risk when assessing capital adequacy of a bank.
Under the final rule, the OTS must explicitly include a bank's exposure to
declines in the economic value of its capital due to changes in interest rates
as a factor in evaluating a bank's capital adequacy. In addition, in August
1995, the OTS and the other federal banking agencies published a joint policy
statement for public comment that describes the process the banking agencies
will use to measure and assess the exposure of a bank's net economic value to
changes in interest rates.
27
<PAGE> 29
Under the policy statement, the OTS will consider results of supervisory
and internal interest rate risk models as one factor in evaluating capital
adequacy. The OTS intends, at a future date, to incorporate explicit minimum
requirements for interest rate risk in its risk-based capital standards through
the use of a model developed from the policy statement, a future proposed rule
and the public comments received therefrom.
In addition, the federal banking agencies recently adopted a revision to their
uniform financial institution rating system ("UFIRS") for the purpose of
incorporating a risk sensitivity component. UFIRS is a supervisory rating system
used by the OTS and other banking agencies to evaluate the soundness of
depository institutions on a uniform basis. The federal banking agencies have
implemented UFIRS through a so-called "CAMEL" rating system, which is applied in
connection with routine bank and thrift examinations. CAMEL is an acronym that
stands for Capital Adequacy, Asset Quality, Management, Earnings and Liquidity.
Routine bank and thrift examinations are undertaken in order to analyze each of
these factors for each institution examined, and the institution is assigned
component scores for each factor and an aggregate score, or rating, based on
analysis of all of such factors. Effective February 26, 1997, the OTS and other
federal banking agencies have added a sixth component, Sensitivity to Market
Risk. Accordingly, future examinations of all depository institutions will take
account of Sensitivity to Market Risk, meaning principally assessment of market
risks to which each institution is subject and management's ability to manage
market risks. For many thrift institutions, market risk is represented almost
exclusively by interest rate risk, but for larger institutions with complex
operations, such as foreign exchange, commodities and trading operations, market
risk can encompass other types of risk as well.
A savings institution that is not in capital compliance is subject automatically
to the following: (i) new directors and senior executive officers and employment
contracts for senior executive officers must be approved by the OTS in advance;
(ii) the savings institution may not accept or renew any brokered deposits;
(iii) the savings institution is subject to higher OTS assessments as a
capital-deficient institution; and (iv) the savings institution may not make any
capital distributions without prior written approval.
Any savings institution that fails any of the capital requirements is subject to
possible enforcement actions by the OTS or the FDIC. Enforcement actions could
include a capital directive, a cease-and-desist order, civil money penalties,
the establishment of restrictions on the institution's operations, termination
of federal deposit insurance and the appointment of a conservator or receiver.
The OTS' capital regulation provides that such actions, through enforcement
proceedings or otherwise, could require one or more of a variety of corrective
actions.
See Note 12 of the "Notes to Consolidated Financial Statements" for a discussion
of the Bank's capital calculation and its compliance with various minimum
regulatory capital requirements at December 31, 1996.
Prompt Corrective Action. The Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA") added to the FDIA a new Section 38, providing that each
federal banking agency must implement a system of prompt corrective action for
institutions that it regulates. The federal banking agencies, including the OTS,
adopted substantially similar regulations to implement Section 38 of the FDIA,
effective as of December 19, 1992.
28
<PAGE> 30
Under the prompt corrective action regulations, an institution is deemed to be
(i) "well capitalized" if it has total risk-based capital of 10% or more, has a
Tier 1 risk-based capital ratio of 6% or more, has a Tier 1 leverage capital
ratio of 5% or more and is not subject to any order or final capital directive
to meet and maintain a specific capital level for any capital measure, (ii)
"adequately capitalized" if it has a total risk-based capital ratio of 8% or
more, a Tier 1 risk-based capital ratio of 4% or more and a Tier 1 leverage
capital ratio of 4% or more (3% under certain circumstances) and does not meet
the definition of "well capitalized," (iii) "undercapitalized" if it has a total
risk-based capital ratio that is less than 8%, a Tier 1 risk-based capital ratio
that is less than 4% or a Tier 1 leverage capital ratio that is less than 4% (3%
under certain circumstances), (iv) "significantly undercapitalized" if it has a
total risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital
ratio that is less than 3% or a Tier 1 leverage capital ratio that is less than
3%, and (v) "critically undercapitalized" if it has a ratio of tangible equity
to total assets that is equal to or less than 2%. Section 38 of the FDIA and the
regulations promulgated thereunder also specify circumstances under which a
federal banking agency may reclassify a well-capitalized institution as
adequately capitalized and may require an adequately capitalized institution or
an undercapitalized institution to comply with supervisory actions as if such
institution were in the next lower category (except that the FDIC may not
reclassify a significantly undercapitalized institution as critically
undercapitalized).
Within 45 days after an institution receives notice that it is undercapitalized,
significantly undercapitalized or critically undercapitalized, the institution
must file with the appropriate federal banking agency a written capital
restoration plan meeting regulatory requirements. The federal banking agency
must provide the institution with written notice of approval or disapproval
within 60 days after receiving a capital restoration plan.
An institution that is required to submit a capital restoration plan must
concurrently submit a performance guarantee by each company that controls the
institution. The guarantee would be limited to the lesser of (i) an amount equal
to 5% of the institution's total assets at the time the institution was notified
or deemed to have notice that it was undercapitalized or (ii) the amount
necessary to restore the relevant capital measures of the institution to the
levels required for the institution to be classified as adequately capitalized.
The guarantee would expire after the federal banking agency notifies the
institution that it has remained adequately capitalized for each of four
consecutive calendar quarters. An institution that fails to submit a written
capital restoration plan in a timely fashion, including any required performance
guarantee(s), or fails in any material respect to implement a capital
restoration plan, would become subject to the restrictions in Section 38 of the
FDIA that are applicable to significantly undercapitalized institutions.
Immediately upon becoming undercapitalized, an institution becomes subject to
the provisions of Section 38 of the FDIA (i) restricting payment of capital
distributions and management fees, (ii) requiring that the appropriate federal
banking agency monitor the condition of the institution and its efforts to
restore its capital, (iii) requiring submission of a capital restoration plan,
(iv) restricting the growth of the institution's assets and (v) requiring prior
approval of certain expansion proposals. The appropriate federal banking agency
for an undercapitalized institution also may take any number of discretionary
supervisory actions if the agency determines that any of these actions is
necessary to resolve the problems of the institution at the least possible
long-term cost to the deposit insurance fund. Discretionary supervisory actions
include requiring the institution to raise additional capital; restricting
transactions with affiliates; restricting interest rates paid by the institution
on deposits; requiring replacement of senior executive officers and directors;
restricting the activities of the
29
<PAGE> 31
institution and its affiliates; requiring divestiture of the institution or
the sale of the institution to a willing purchaser; and any other supervisory
action that the agency deems appropriate. These and other supervisory actions
may be taken with respect to significantly undercapitalized and critically
undercapitalized institutions.
At December 31, 1996, Strongsville Savings' Tier 1 risk-based capital ratio was
12.51% and, as previously discussed, its risk-based and core capital ratios were
12.93% and 7.49%, respectively. As a result, Strongsville Savings was deemed to
be a "well capitalized" institution for purposes of the above regulations at the
end of 1996 and as such was not subject to the foregoing restrictions.
Capital Distributions Regulation. The OTS regulation on capital distributions
imposes limits on all capital distributions by savings institutions. Since this
regulation applies to the Bank, it will affect the Bank's ability to pay
dividends to its parent, Emerald, which in turn pays dividends to its
shareholders. The regulation establishes a three-tiered system of regulation,
with the greatest flexibility being afforded to well-capitalized institutions.
An institution that has regulatory capital which is at least equal to its fully
phased-in capital requirement, and has not been notified that is "is in need of
more than normal supervision," is a Tier 1 institution. Strongsville Savings was
a Tier 1 institution at the end of 1996. A Tier 1 institution is permitted to
make capital distributions during a calendar year up to the greater of (i) 100%
of its net income to date during the calendar year plus the amount that would
reduce by one-half its surplus capital ratio at the beginning of the calendar
year, or (ii) 75% of its net income over the most recent four-quarter period. In
December 1994, the OTS proposed revisions to its capital distribution
regulations to conform with the capital adequacy classification adopted under
FDICIA. Under the proposal, savings associations generally would be authorized
to make capital distributions so long as they are not deemed in troubled
condition and would remain classified as at least adequately capitalized
following a proposed distribution. Savings associations held by savings and loan
holding companies would still be required to submit prior written notification
to the OTS.
Deposit Insurance. The Bank's deposits are insured up to $100,000 by the FDIC
through the SAIF and backed by the full faith and credit of the United States
Government. The Bank is charged an annual premium for this insurance. The rate
assessed is based on the capital adequacy and supervisory rating of the
institution and is assigned by the FDIC.
The FDIC is authorized to establish separate annual assessment rates for deposit
insurance for members of the Bank Insurance Fund ("BIF") and the SAIF. The FDIC
may increase assessment rates for either fund if necessary to restore the fund's
ratio of reserves to insured deposits to its target level within a reasonable
time.
The FDIC has established a risk-based assessment system for both SAIF and BIF
members. Under this system, during the first three quarters of 1996, SAIF
assessments ranged from 0.23% to 0.31% of insured deposits of an institution and
BIF assessments ranged from 0.00% to 0.27%, based on the risk the institution
poses to its deposit insurance fund. 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 SAIF in a section entitled the Deposit
Insurance Funds Act of 1996. The Act included a provision whereby all insured
depository institutions were charged a one-time special assessment based upon
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
30
<PAGE> 32
deposits. Deposit insuance rate for the Bank are expected to drop to 6.48 basis
points of assessable deposits in 1997 from 23 basis points in most of 1996.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines after a hearing that the institution has
engaged or is engaging in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations, or has violated any applicable law,
regulation, order or any condition imposed by an agreement with the FDIC. The
FDIC may also suspend deposit insurance temporarily during the hearing process
for the permanent termination of insurance, if the institution has no tangible
capital. If insurance of accounts is terminated, the accounts at the institution
at the time of the termination, less subsequent withdrawals, would continue to
be insured for a period of six months to two years, as determined by the FDIC.
There are no pending proceedings to terminate the deposit insurance of
Strongsville Savings.
Classification of Assets. Federal regulations require savings institutions to
review their assets on a regular basis and to classify them as "substandard,"
"doubtful" or "loss," if warranted. General valuation allowances for loan losses
are required to be established, as needed, for assets classified as substandard
or doubtful. If an asset is classified as a loss, the institution must either
establish a specific valuation allowance equal to the amount classified as a
loss or charge off such amount. The institution's OTS Regional Director has the
authority to approve, disapprove or modify any asset classification, or the
amounts established as allowances for loan losses. Management believes that
following these procedures results in a level of valuation allowances that is
consistent with generally accepted accounting principles.
Loans to One Borrower and Aggregate Loan Limits. The aggregate amount of loans
which a savings association can make to one borrower is limited to an amount
equal to 15% of the thrift's unimpaired capital and unimpaired surplus. Because
unimpaired capital and surplus is generally synonymous with tangible capital,
loan limits are hereafter referred to in terms of tangible capital. A savings
association may loan to one borrower an additional amount not to exceed 10% of
the association's tangible capital if the additional amount is fully secured by
certain forms of "readily marketable collateral." Real estate-secured loans are
not considered "readily marketable collateral."
Savings associations are also authorized to make loans to one borrower, by order
of the Director of the OTS, in an amount not to exceed the lesser of $30 million
or 30% of tangible capital to develop residential housing, provided (i) the
purchase price of each single-family dwelling in the development does not exceed
$500,000, (ii) the savings association is in compliance with the fully phased-in
capital standards of FIRREA, (iii) the loans comply with applicable
loan-to-value requirements and (iv) the aggregate amount of loans made under
this authority does not exceed 150% of tangible capital. The Bank applied for
permission to use the lending authority described above to service the loan
demands of its largest residential builders and on January 2, 1990, became the
first thrift in the nation to receive the approval of the Director of the OTS.
Pursuant to subsequent applications, the Bank has since annually received
permission from the OTS to use the aforementioned lending authority. For a
discussion of the Bank's usage of this special lending authority and the revised
loans-to-one-borrower regulations of the OTS described below, see " - Lending
Activities - Construction and Development Lending."
31
<PAGE> 33
Consumer Laws, Fair Lending and Community Reinvestment Act. Federally chartered
savings associations are subject to regulatory oversight by the OTS under
various consumer protection and fair lending laws. These laws govern, among
other things, truth-in-lending disclosure, equal credit opportunity, fair credit
reporting and community reinvestment. Failure to abide by federal laws and
regulations governing community reinvestment could limit the ability of an
association to open a new branch or engage in a merger transaction. The OTS has
recently revised regulations governing community reinvestment to evaluate actual
lending and investment within an association's designated service area, with
particular emphasis on low-to-moderate income areas and borrowers. These new
regulations also evaluate an association's service to low and moderate-income
areas in terms of branch locations. The Bank does not anticipate a significant
impact on its operations as a result of these revised regulations.
Federal Home Loan Bank System. The Federal Home Loan Banks, currently twelve in
number, are under the regulatory oversight of the Federal Housing Financing
Board. Each Federal Home Loan Bank ("FHLB") provides credit to members in the
form of advances. Strongsville Savings is a member of the FHLB of Cincinnati and
must maintain an investment in the capital stock of that FHLB in an amount at
least equal to 1% of the aggregate outstanding principal amount of Strongsville
Savings's residential mortgage loans, home purchase contracts and similar
obligations at the beginning of each year. Strongsville Savings is in compliance
with this requirement with an investment in FHLB of Cincinnati stock of $2.8
million at December 31, 1996.
Each FHLB is required to establish standards of community investment or service
that its members must maintain for continued access to long-term advances from
the FHLBs. The standards take into account a member's performance under the
Community Reinvestment Act and its record of lending to first-time home buyers.
Long-term advances by a FHLB may be made solely for the purpose of providing
funds for residential housing finance.
Federal Reserve System. The Federal Reserve Board requires all depository
institutions to maintain reserves against their transaction accounts (primarily
NOW and Super NOW checking accounts). The reserve requirement for transaction
accounts is 3% of transaction accounts up to $49.3 million, and $1,479,000 plus
10% of transaction accounts in excess of $49.3 million. Because required
reserves are generally maintained in the form of vault cash or in a
noninterest-bearing account (or a pass-through account) at a Federal Reserve
Bank, the effect of this reserve requirement is to reduce an institution's
earning assets.
Recent Legislative Developments. With enactment in late 1994 of the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate
Branching Act"), Strongsville Savings may face additional competition from
financial institutions headquartered outside of the State of Ohio. When it
becomes fully effective on June 1, 1997, the Interstate Branching Act will allow
banks and their holding companies headquartered outside of Ohio to enter
Strongsville Savings' market through acquisition, merger or de novo branching.
On September 30, 1996, President Clinton signed into law the Regulatory
Paperwork Reduction Act, including the Deposit Insurance Funds Act in Subtitle G
thereof. This legislation eliminated the premium differential between
SAIF-insured institutions and BIF-insured institutions by recapitalizing the
SAIF's reserves to the required ratio, principally through a one-time special
assessment at the end of 1996. The new legislation also provides for the merger
of the BIF and the SAIF effective January
32
<PAGE> 34
1, 1999, with merger of the separate deposit insurance funds being
contingent on prior elimination of the thrift charter.
State Regulation. As an Ohio-chartered savings institution, Strongsville Savings
is subject to regulation and supervision by the Ohio Division of Financial
Institutions (the "Division") as well. Strongsville Savings is subject to
examination at least once within every 18-month period by the Division. The
lending and investment authority of Strongsville Savings is prescribed by Ohio
laws and regulations, as well as applicable federal laws and regulations, and
Strongsville Savings is prohibited from engaging in any activities not permitted
by such laws and regulations.
Strongsville Savings is required by Ohio law and regulations to comply with
certain reserve and net worth requirements. Currently, Ohio-chartered savings
institutions are required to establish and maintain a reserve for the absorption
of bad debts and other losses in an amount at least equal to 3% of the
institutions's savings account balance. For purposes of complying with this
reserve requirement, such savings institutions are able to include the amount of
any permanent stock issued and outstanding, contributed surplus, undivided
profits, specific loss or valuation reserves and any other nonwithdrawable
accounts. In addition, Ohio-chartered savings institutions that are rated a
"composite one" (the highest rating under the UFIRS system, discussed above) are
required to establish and maintain a ratio of net worth to total assets of not
less than 3%. All other Ohio-chartered savings institutions are required to have
a ratio of net worth to total assets of not less than 4%. Net worth consists of
common stockholders' equity, noncumulative perpetual preferred stock (including
any related surplus), minority interests in the equity capital accounts of
consolidated subsidiaries and subordinated debentures (in varying amounts and
percentages). At December 31, 1996, Strongsville Savings was in compliance with
applicable reserve and net worth requirements.
In addition, Ohio law restricts the ability of Ohio-chartered savings
institutions to invest in, among other things, (i) commercial real estate loans
(including commercial construction real estate loans) up to 20% of total assets;
(ii) land acquisition and development loans up to 2% of total assets; (iii)
consumer loans, commercial paper and corporate debt securities up to 20% of
total assets; (iv) commercial business loans up to 10% of total assets; and (v)
capital stock, obligations and other securities of service corporations up to
15% of total assets. Ohio law also sets forth the maximum loan-to-value ratios
with respect to various types of loans.
The investment authority of Ohio-chartered savings institutions is broader in
many respects than that of federally chartered savings institutions. However,
since the enactment of FIRREA, state-chartered savings institutions, such as
Strongsville Savings, are generally prohibited from acquiring or retaining any
equity investment, other than certain investments in service corporations, of a
type or in an amount that is not permitted for a federally chartered savings and
loan association. This prohibition applies to equity investments in real estate,
investments in equity securities and any other investment or transaction that is
in substance an equity investment, even if the transaction is nominally a loan
or other permissible transaction. At December 31, 1996, Strongsville Savings had
no investments subject to the foregoing prohibition.
Furthermore, a state-chartered savings institution may not engage as principal
in any activity not permitted for federal institutions unless the FDIC has
determined that such activity would pose no significant risk to the affected
deposit insurance fund and the institution is in compliance with the capital
standards prescribed under FIRREA. When certain activities are permissible for a
federal
33
<PAGE> 35
institution, the state institution may engage in the activity in a higher
amount if the FDIC has not determined that such activity would pose a
significant risk of loss to the affected deposit insurance fund and the
association meets its capital requirements. This increased investment authority
does not apply to investments in nonresidential real estate loans. At December
31, 1996, Strongsville Savings had no investments that were affected by the
foregoing limitations.
Under Ohio law, an out-of-state savings institution or holding company may
charter or otherwise acquire an Ohio-chartered savings institution or holding
company if the Division determines that the laws of such other state permit an
Ohio-chartered savings institution or holding company to charter or otherwise
acquire an in-state savings institution or holding company on terms that are, on
the whole, substantially no more restrictive than Ohio law. Any such acquisition
would require the out-of-state entity to apply to the Division and receive
Division approval.
FEDERAL AND STATE TAXATION
Federal Taxation. Strongsville Savings is subject to the provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), which subject
corporations to an income tax generally calculated at 34% of taxable income. The
Bank and its subsidiary file a consolidated federal income tax return.
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 amounts to be recaptured have
been accrued for under SFAS No. 109, Accounting for Income Taxes. The recapture
amount of $3.3 million will result in tax payments of approximately $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.
Audits of tax returns have been completed by the Internal Revenue Service with
respect to tax returns through 1993 for the Bank.
See Note 1 and Note 8 of the "Notes to Consolidated Financial Statements" for
further information concerning the financial statement reporting of federal
income taxes of the Bank.
State Taxation. Strongsville Savings is subject to the Ohio franchise tax on
financial institutions of 1.5% of its net worth plus certain reserve amounts.
Total net worth for this purpose is reduced by certain exempt assets.
34
<PAGE> 36
ITEM 2. PROPERTIES
- -------------------
The Bank owns its headquarters building in Strongsville, Ohio. The following
table indicates the location of each branch office, whether the same is owned or
leased and, if leased, the expiration date of the lease.
<TABLE>
<CAPTION>
Lease
Location Owned/Leased Expiration Date
-------- ------------ ---------------
<S> <C> <C>
Strongsville Main Office Owned
14092 Pearl Road
Strongsville, Ohio 44136
Branches
Hinckley Office Owned
1585 Center Road
Hinckley, Ohio 44233
Berea Plaza Office Leased 2000
404 West Bagley Road
Berea, Ohio 44017
Avon Office Leased 2005
36839 Detroit Road
Avon, Ohio 44011
Medina Township Office Leased 2004
3455 Medina Road
Medina Township, Ohio 44256
North Royalton Office Leased 1999
13901 Ridge Road
North Royalton, Ohio 44133
Wellington Office Owned
161 East Herrick Avenue
Wellington, Ohio 44090
Southland Office Owned
6809 West 130th Street
Parma Heights, Ohio 44130
Westlake Office Owned
25151 Detroit Avenue
Westlake, Ohio 44145
North Ridgeville Office Leased 2004
32800 Center Ridge Road
North Ridgeville, Ohio 44039
</TABLE>
35
<PAGE> 37
<TABLE>
<S> <C> <C>
Brecksville Office Leased 2010
8801 Brecksville Road
Brecksville, Ohio 44141
Broadview Heights Office Leased 2005
7976 Broadview Road
Broadview Heights, Ohio 44147
Brunswick Office Leased 2006
1136 Pearl Road
Brunswick, Ohio 44212
Columbia Station Owned
26700 Royalton Road
Columbia Station, Ohio 44020
</TABLE>
The Bank owns and operates eleven ATMs at various Community Financial Centers
and is a member of the following ATM networks: MAC (formerly Green Machine in
Ohio), Money Station and Plus System, all of which are ATM networks with members
nationwide.
At December 31, 1996, the net book value of the Bank's investment in
premises and equipment totaled $3.9 million.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
The Bank and its subsidiary are involved as plaintiff or defendant in various
legal proceedings incident to their business. In the opinion of management,
these proceedings are not, either individually or in the aggregate, material to
the Bank and its subsidiary.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
At a Special Meeting of Shareholders held on November 19, 1996, the holders of
the Company's Common Stock approved a proposal to adopt a holding company
structure for The Strongsville Savings Bank. Under this proposal, Strongsville
Savings would become a wholly owned subsidiary of a new holding company, Emerald
Financial Corp., formed for this purpose.
According to the certified list of shareholders which was presented at the
Special Meeting, there were 2,530,800 votes entitled to be cast at the Special
Meeting, of which 1,936,125.25 were represented at the Special Meeting in person
or by proxy. At the Special Meeting, 1,851,707.524 shares of Common Stock were
voted in favor of, 14,136.157 shares were voted against, 39,753.569 shares
abstained from voting, and 30,528.000 shares were not voted on, such proposal.
No other matters were acted upon at the Special Meeting.
36
<PAGE> 38
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------------------------------------------------------------------------------
The information contained under the caption "Market Information" in the
Company's Annual Report to Shareholders for the Fiscal Year Ended December 31,
1996 (the "Annual Report"), page 2, is incorporated herein by reference,
together with Note 1 of the Notes to Consolidated Financial Statements in the
Annual Report. For additional information concerning restrictions on the payment
of dividends see "Item 1. Business - Regulation - Capital Distribution
Regulation."
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
The information under the caption "Selected Financial Information" in the Annual
Report, page 6, is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
The information under the caption "Management's Discussion and Analysis" in the
Annual Report, pages 7 through 18, is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The consolidated financial statements of the Bank that are contained in the
Annual Report, which statements are listed under Item 14 hereof, are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
Not Applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -----------------------------------------------------------
Information concerning executive officers of the Bank who are not also directors
is contained in "Item 1. Business Other - Executive Officers of the Company Who
Are Not Directors." The information concerning directors of the Company,
including certain executive officers, contained under the caption "Proposal I -
Election of Directors" in the Company's definitive proxy statement for the
Company's 1997 Annual Meeting of Shareholders, which will be filed not later
than 120 days after the close of the Bank's 1996 fiscal year (the "Proxy
Statement"), is incorporated herein by reference.
37
<PAGE> 39
Presented below is certain information regarding the executive officers of
the Company who are not directors.
Cynthia W. Gannon (age 39), Vice President and Treasurer - Ms. Gannon
was elected Vice President in April 1994 and has served as the Bank's Treasurer
since January 30, 1992. She served as the Bank's Controller from 1988 through
January 1992 and is a certified public accountant.
Paula M. Dewey (age 52), Vice President - Ms. Dewey has been employed
by the Bank since 1978 and has been Secretary for the Bank since January 1991.
She was elected Vice President responsible for construction lending in January
1992; she has been in charge of construction lending since 1987 and served as
Assistant Vice President from 1987 until January 1992. Since January 1992 Mrs.
Dewey has also served as Secretary of Dennis Financial Corporation.
ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------
The information contained under the caption "Proposal I - Election of Directors
- - Executive Compensation" in the Proxy Statement is incorporated herein by
reference. Under no circumstance shall any item of this Part III of the
Company's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1996
be deemed to incorporate by reference the information in the Proxy Statement
under the caption "Proposal I - Election of Directors Compensation Committee
Report" or "Proposal I - Election of Directors - Performance Graph," anything to
the contrary herein notwithstanding.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
Information required by this item is incorporated herein by reference to the
caption "Proposal I - Election of Directors" and "Voting Securities and
Principal Holders Thereof" in the Proxy Statement. Management knows of no
arrangement which may at a subsequent date result in a change in control of the
Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
The information required by this item is incorporated herein by reference to the
caption "Transactions with Certain Related Persons" in the Proxy Statement.
38
<PAGE> 40
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
(a) 1. Independent Auditors' Report (incorporated by reference to the
AnnualReport)
Consolidated Financial Statements (incorporated by reference
to the Annual Report)
(a) Consolidated Statements of Financial Condition as of
December 31, 1996 and 1995
(b) Consolidated Statements of Income for Each of the Three
Years in the Period Ended December 31, 1996
(c) Consolidated Statements of Cash Flows for Each of the
Three Years in the Period Ended December 31, 1996
(d) Consolidated Statements of Shareholders' Equity for Each
of the Three Years in the Period Ended December 31, 1996
(e) Notes to Consolidated Financial Statements
2. All schedules have been omitted as the required information is
either inapplicable or included in the Notes to the
Consolidated Financial Statements.
3. Exhibits and Index to Exhibits
39
<PAGE> 41
The following exhibits are either attached to or incorporated by reference in
this Annual Report on Form 10-K:
<TABLE>
<CAPTION>
Exhibit
Number Description Attachment Number
------ ----------- -----------------
<S> <C> <C>
(3)(i) Articles of Incorporation, as amended *
(3)(ii) Code of Regulations *
(10)(a) Letter Amendment to Employment Agreement
(Thomas P. Perciak) **
(10)(b) Letter Amendment to Employment Agreement
(John F. Ziegler) **
(10)(c) The Strongsville Savings Bank 1994 Long-Term
Incentive Plan **
(10)(d) Severance Agreement (Dean R. Anaya) **
(10)(e) Severance Agreement (Paula M. Dewey) **
(10)(f) Severance Agreement (Cynthia W. Gannon) **
(10)(g) Severance Agreement (William J. Harr, Jr.) **
(10)(h) Executive Supplemental Benefit Agreement
(Thomas P. Perciak) **
(10)(i) Executive Supplemental Benefit Agreement
(John F. Ziegler) **
(10)(j) Executive Supplemental Benefit Agreement
(Dean R. Anaya) **
(10)(k) Executive Supplemental Benefit Agreement
(Paula M. Dewey) **
(10)(l) Executive Supplemental Benefit Agreement
(Cynthia W. Gannon) **
(10)(m) Executive Supplemental Benefit Agreement
(William J. Harr, Jr.) **
(10)(n) Executive Supplemental Benefit Agreement
(Deborah A. Perciak) **
(13) Annual Report 13
(21) Subsidiary 21
(27) Financial data schedule 27
- --------------------------------------
</TABLE>
* Incorporated by reference to Exhibits 3(i)and 3(ii) of
Registrant's Registration Statement on Form 8-A, filed March
6, 1997.
** Incorporated by reference Exhibit 99(i) of Registrant's
Registration Statement on Form 8-A, filed March 6, 1997.
(b) During the last quarter of the fiscal year ended December 31, 1996, the
Bank did not file any Current Reports on Form 8-K.
(c) All required exhibits are filed as attached or incorporated by
reference.
(d) No financial statement schedules are required to be filed.
40
<PAGE> 42
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: March 27, 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 March 27, 1997
- ------------------------------------------------
Thomas P. Perciak
Director, President and Chief Executive Officer
(principal executive officer)
/s/ JOHN F. ZIEGLER March 27, 1997
- ------------------------------------------------
John F. Ziegler
Director, Executive Vice President
and Chief Financial Officer
(principal accounting and financial officer)
/s/ MIKE KALINICH March 27, 1997
- ------------------------------------------------
Mike Kalinich
Director, Chairman of the Board
/s/ KENNETH J. PIECHOWSI March 27, 1997
- ------------------------------------------------
Kenneth J. Piechowski
Director
/s/ JOAN M. DZURILLA March 27, 1997
- ------------------------------------------------
Joan M. Dzurilla
Director
41
<PAGE> 43
/s/ WILLIAM A. FRAUNFELDER, JR. March 27, 1997
- --------------------------------------------
William A. Fraunfelder, Jr.
Director
/s/ GLENN W. GOIST March 27, 1997
- --------------------------------------------
Glenn W. Goist, DDS
Director
/s/ JOHN J. PLUCINSKY March 27, 1997
- --------------------------------------------
John J. Plucinsky, MD
Director
/s/ GEORGE BOHNERT March 27, 1997
- --------------------------------------------
George Bohnert, Jr., CPA
Director
42
<PAGE> 44
EMERALD FINANCIAL CORP.
INDEX TO EXHIBITS TO FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996
Exhibit Description
------------------------------------------------------------
(13) Annual Report to Shareholders
(21) Subsidiary
(27) Financial Data Schedule
23
<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> 1
EXHIBIT 21
SUBSIDIARY OF
EMERALD FINANCIAL CORP.
The Strongsville Savings Bank
14092 Pearl Road
Strongsville, Ohio 44136
Federal ID number 34-0875093
Incorporated in Ohio
Registrant owns 100% of outstanding stockholders' equity
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> $3,146
<INT-BEARING-DEPOSITS> 4,406
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 41,640
<INVESTMENTS-CARRYING> 80,220
<INVESTMENTS-MARKET> 80,600
<LOANS> 425,855
<ALLOWANCE> 1,423
<TOTAL-ASSETS> 567,490
<DEPOSITS> 493,471
<SHORT-TERM> 1,040
<LIABILITIES-OTHER> 5,627
<LONG-TERM> 24,194
<COMMON> 9,831
0
0
<OTHER-SE> 33,327
<TOTAL-LIABILITIES-AND-EQUITY> 567,490
<INTEREST-LOAN> 32,442
<INTEREST-INVEST> 6,946
<INTEREST-OTHER> 470
<INTEREST-TOTAL> 39,858
<INTEREST-DEPOSIT> 23,516
<INTEREST-EXPENSE> 24,494
<INTEREST-INCOME-NET> 15,364
<LOAN-LOSSES> 305
<SECURITIES-GAINS> 83
<EXPENSE-OTHER> 12,005
<INCOME-PRETAX> 5,489
<INCOME-PRE-EXTRAORDINARY> 3,548
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,548
<EPS-PRIMARY> $1.40
<EPS-DILUTED> $1.40
<YIELD-ACTUAL> 3.00
<LOANS-NON> 605
<LOANS-PAST> 1,094
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,058
<ALLOWANCE-OPEN> 1,168
<CHARGE-OFFS> 60
<RECOVERIES> 10
<ALLOWANCE-CLOSE> 1,423
<ALLOWANCE-DOMESTIC> 1,423
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
