<PAGE> 1
================================================================================
SCHEDULE 14A
(RULE 14a)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] CONFIDENTIAL, FOR USE OF THE COMMISSION
ONLY (AS PERMITTED BY RULE 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
</TABLE>
EMERALD FINANCIAL CORP.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies: ....N/A
(2) Aggregate number of securities to which transaction applies: .......N/A
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined): .........N/A
(4) Proposed maximum aggregate value of transaction: ...................N/A
(5) Total fee paid: ....................................................N/A
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: ............................................N/A
(2) Form, Schedule or Registration Statement No.: ......................N/A
(3) Filing Party: ......................................................N/A
(4) Date Filed: ........................................................N/A
================================================================================
<PAGE> 2
MARCH 20, 1998
DEAR SHAREHOLDER:
You are cordially invited to attend the 1998 Annual Meeting of
Shareholders of Emerald Financial Corp. ("Emerald") to be held at
10:30 a.m. on Thursday, April 16, 1998 at Quality Catering Party
Center located at 9200 Pearl Road, Strongsville, Ohio. The attached
Notice of Annual Meeting of Shareholders and Proxy Statement discuss
the business to be conducted at the Meeting. In addition to the
specific matters to be acted upon, the Meeting will include
management's report to you on the 1997 financial and operating
performance of Emerald and its subsidiary, The Strongsville Savings
Bank.
Your vote is very important, regardless of the number of shares
you own. PLEASE READ THE ENCLOSED PROXY STATEMENT AND THEN COMPLETE,
SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT IN THE ACCOMPANYING
POSTAGE-PAID RETURN ENVELOPE AS PROMPTLY AS POSSIBLE so that your
shares can be voted at the Meeting in accordance with your
instructions. This will not prevent you from voting in person, but
will assure that your vote is counted if you are unable to attend
the Meeting. Thank you for your consideration of this matter and
please vote today.
A copy of the Annual Report for the year ended December 31,
1997 is enclosed.
Very truly yours,
EMERALD FINANCIAL CORP.
/s/ Thomas P. Perciak
Thomas P. Perciak
President and Chief Executive
Officer
<PAGE> 3
EMERALD FINANCIAL CORP.
14092 PEARL ROAD
STRONGSVILLE, OHIO 44136
(440) 238-7311
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON APRIL 16, 1998
Notice is hereby given that the Annual Meeting of Shareholders (the
"Meeting") of Emerald Financial Corp. ("Emerald" or the "Company") will be held
at 10:30 a.m. on April 16, 1998 at Quality Catering Party Center, 9200 Pearl
Road, Strongsville, Ohio.
A proxy card and a Proxy Statement for the Meeting are enclosed. The
purpose of the Meeting is to consider and act upon:
1. election of three directors for three-year terms expiring in the year
2001;
2. a proposal to amend the Amended and Restated Articles of Incorporation
of the Company in order to increase authorized shares of Common Stock,
without par value, from 10,000,000 to 20,000,000 shares;
3. a proposal to adopt the 1998 Stock Option and Incentive Plan;
4. ratification of the appointment of KPMG Peat Marwick LLP as independent
auditors for the fiscal year ending December 31, 1998; and
5. such other business as may properly come before the Meeting or any
adjournments or postponements thereof.
The Board of Directors is not aware of any other business to come before
the Meeting. Any action may be taken on the foregoing proposals at the Meeting
on the date specified above, or on any date or dates to which the Meeting may be
adjourned or postponed. As used herein, references to the Meeting shall be
deemed to include the Meeting and any adjournments or postponements thereof.
Shareholders of record at the close of business on March 6, 1998 are the
shareholders entitled to receive notice of and to vote at the Meeting.
You are requested to complete and sign the enclosed proxy, which is
solicited on behalf of the Board of Directors, and to return it promptly in the
postage-paid return envelope provided. Please sign your name on the proxy
exactly as indicated thereon.
By Order of the Board of Directors
/s/ PAULA M DEWEY
Paula M. Dewey
Secretary
Strongsville, Ohio
March 20, 1998
IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE THE COMPANY THE EXPENSE OF
FURTHER REQUESTS FOR PROXIES. A SELF-ADDRESSED ENVELOPE IS ENCLOSED FOR YOUR
CONVENIENCE. NO POSTAGE IS REQUIRED IF MAILED WITHIN THE UNITED STATES.
<PAGE> 4
PROXY STATEMENT
EMERALD FINANCIAL CORP.
14092 PEARL ROAD
STRONGSVILLE, OHIO 44136
ANNUAL MEETING OF SHAREHOLDERS
APRIL 16, 1998
INTRODUCTION
This Proxy Statement is furnished in connection with the solicitation of
proxies on behalf of the Board of Directors of Emerald Financial Corp.
("Emerald" or the "Company") to be used at the Annual Meeting of Shareholders of
the Company to be held at 10:30 a.m. on Thursday, April 16, 1998, and at any
adjournments or postponements thereof (the "Meeting"). The Meeting will be held
at Quality Catering Party Center, 9200 Pearl Road, Strongsville, Ohio. The
accompanying Notice of Meeting and this Proxy Statement are first being mailed
to shareholders on or about March 20, 1998.
At the Meeting, shareholders of Emerald will be asked to consider and vote
upon election of three directors for a three-year term; adoption of the 1998
Stock Option and Incentive Plan; amendment of the Company's Amended and Restated
Articles of Incorporation in order to increase authorized shares of common
stock, without par value, from 10,000,000 to 20,000,000 shares; ratification of
the appointment by the Board of Directors of the firm of KPMG Peat Marwick LLP
as independent auditors for the fiscal year ending December 31, 1998; and the
transaction of such other business as may properly come before the Meeting or
any adjournments thereof. The Company is not aware of any other business to come
before the Meeting.
VOTING RIGHTS AND PROXY INFORMATION
All shares of Emerald's common stock, no par value (the "Stock" or "Emerald
Stock"), represented at the Meeting by properly executed proxies received prior
to or at the Meeting, and not revoked, will be voted at the Meeting in
accordance with the instructions thereon. If no instructions are indicated,
properly executed proxies will, unless revoked, be voted for election of the
nominees for directors named herein and for each of the other matters presented
herein.
Proxies solicited hereby may be used at the Meeting only and will not be
used for any other meeting. A proxy given pursuant to this solicitation may be
revoked at any time before it is voted. Proxies may be revoked by (i) attending
the Meeting and voting in person (although attendance at the Meeting will not
constitute revocation of a proxy), (ii) duly executing a subsequent proxy
relating to the same shares and delivering it to the Secretary of the Company at
or before the Meeting, (iii) filing with the Secretary at or before the Meeting
a written notice of revocation. Any written notice revoking a proxy should be
delivered to Paula M. Dewey, Secretary, Emerald Financial Corp., P. O. Box
360515, Strongsville, Ohio 44136-0009.
A copy of the Annual Report to Shareholders for the fiscal year ended
December 31, 1997 accompanies this Proxy Statement. Such Annual Report to
Shareholders is not to be treated as part of the proxy solicitation material or
as having been incorporated herein by reference.
VOTE REQUIRED FOR APPROVAL
A plurality of the votes cast is sufficient to elect directors, meaning
that the nominees receiving the greatest number of votes will be elected as
directors. Approval of the 1998 Stock Option and Incentive Plan requires a
majority of the voting power of Emerald Stock. Approval of amendment of the
Company's Amended and Restated Articles of Incorporation requires two thirds of
the voting power of Emerald Stock. Broker non-votes and abstentions will have no
effect on the election of directors. With respect to the proposals to approve
the 1998 Stock Option and Incentive Plan and to approve amendment of the Amended
and Restated Articles of Incorporation, broker non-votes and abstentions will
have the same effect as votes against those proposals. Proxies marked as
abstaining will be treated as present at the Meeting but will not be counted as
voting in favor of such proposal. Broker non-votes will have no effect on
whether a quorum is present at the Meeting, because
1
<PAGE> 5
the Company's Code of Regulations provides that shareholders present in person
or by proxy at a meeting shall constitute a quorum.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Shareholders of record as of the close of business on March 6, 1998 are
entitled to notice of and to vote at the Meeting. Shareholders are entitled to
one vote for each share held. As of January 31, 1998, there were 5,075,600
shares of Emerald Stock issued and outstanding.
The following table sets forth certain information as to those persons who
were known by management to be beneficial owners of more than five percent of
Emerald Stock outstanding and as to the shares of Emerald Stock beneficially
owned by all executive officers and directors of Emerald as a group. Information
in the table below is as of January 31, 1998.
<TABLE>
<CAPTION>
NAME AND ADDRESS
OF BENEFICIAL OWNER SHARES BENEFICIALLY OWNED PERCENT OF CLASS
------------------- ------------------------- ----------------
<S> <C> <C>
Joan M. Dzurilla 1,246,670(1) 24.54%
14092 Pearl Road
Strongsville, OH 44136
All directors and executive 1,920,621(2) 35.54%
officers as a group (12 persons)
</TABLE>
- ---------------
(1) Mrs. Dzurilla holds 88,070 shares through the Joan M. Dzurilla Charitable
Remainder Trust of which she is the settlor and sole trustee. A charitable
organization is the sole beneficiary of the trust.
(2) This amount includes shares held directly as well as shares held in
retirement accounts, in a fiduciary capacity or by certain family members,
over which shares the respective directors and officers may be deemed to
have sole voting and investment power. Also includes shares owned by all
executive officers, including those executive officers identified in the
summary compensation table. See, "Executive Compensation." Mr. William A.
Harr, Jr., who is identified in that table, beneficially owns directly or
indirectly 44,429 shares, including 43,000 shares that may be acquired upon
exercise of options. Includes an aggregate of 332,000 shares directors and
executive officers have the right to acquire pursuant to options granted
under The Strongsville Savings Bank 1994 Long-Term Incentive Plan. In
connection with the holding company reorganization of The Strongsville
Savings Bank that was completed on March 6, 1997, Emerald assumed the
obligations under the 1994 Long-Term Incentive Plan and adopted the 1994
Long-Term Incentive Plan. Accordingly, options issued under the 1994
Long-Term Incentive Plan to acquire stock of The Strongsville Savings Bank
have become options to acquire a like number of shares of Emerald Stock,
exercisable on the same terms and conditions. Does not include shares as to
which the respective directors and executive officers have disclaimed
beneficial ownership.
ELECTION OF DIRECTORS
(PROPOSAL 1)
The Board of Directors currently consists of nine members. The Board of
Directors is divided into three classes, each of which contains three members.
The directors are elected by the shareholders to serve for three-year terms or
until their successors are elected and qualified.
The following table sets forth certain information, as of December 31,
1997, regarding the composition of the Board of Directors of Emerald, including
term of office and the security ownership of the directors. It is intended that
the proxies solicited on behalf of the Board of Directors (other than proxies in
which the vote is withheld as to the nominees) will be voted at the Meeting FOR
the election of the following nominees. If any nominee is unable to serve, the
shares represented by all valid proxies will be voted for the election of such
substitute as the Board of Directors may recommend. At this time, the Board of
Directors knows of no reason any nominee might be unable to serve if elected.
Except as disclosed herein, there are no arrangements or understandings between
any nominee and any other person pursuant to which such nominee was selected.
2
<PAGE> 6
All of the individuals identified in the table below have been directors of
Emerald since its inception in 1996. The table indicates, among other things,
the period during which they have been directors also of Emerald's subsidiary,
The Strongsville Savings Bank. At the present time, the Boards of Directors of
Emerald and The Strongsville Savings Bank are comprised of the same individuals,
serving identical terms as directors of each company.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE ELECTION OF
EACH OF THE FOLLOWING NOMINEES
<TABLE>
<CAPTION>
DIRECTOR EXPIRATION AMOUNT AND NATURE(1) PERCENT OF (2)
DIRECTOR'S NAME AND POSITION AGE SINCE OF TERM OF BENEFICIAL OWNERSHIP SHARE OWNERSHIP
- ---------------------------- ---- -------- ---------- ----------------------- ---------------
<S> <C> <C> <C> <C> <C>
NOMINEES
William A. Fraunfelder, Jr. 54 1989 2001 20,563(3) (4)
Glenn W. Goist 57 1990 2001 23,075 (4)
John F. Ziegler 45 1987 2001 126,062(5) 2.45%
Executive Vice President and
Chief Financial Officer
CONTINUING DIRECTORS
George P. Bohnert 57 1993 1999 8,700 (4)
Joan M. Dzurilla 71 1985 2000 1,246,670(6) 24.54%
Mike Kalinich, Sr. 67 1967 2000 52,800 1.04%
Chairman of the Board
Thomas P. Perciak 50 1982 2000 221,902(7) 4.28%
President and Chief
Executive Officer
Kenneth J. Piechowski 49 1996 1999 8,400 (4)
John J. Plucinsky 70 1978 1999 109,857 2.16%
</TABLE>
- ---------------
(1) All shares, except as may be noted herein, are owned directly or indirectly
by the named individuals or by their spouses and minor children, over which
shares the named individuals effectively exercise voting and investment
power. Includes shares exercisable under stock option grants pursuant to the
1994 Long-Term Incentive Plan.
(2) The percentage ownership figures are inclusive of shares underlying
unexercised stock options. Each non-executive officer director holds a stock
option to acquire 8,000 shares. Messrs. Perciak and Ziegler hold stock
options to acquire 107,000 and 78,000 shares, respectively, and three other
executive officers hold stock options that in the aggregate permit them to
acquire 91,000 shares.
(3) Not shown are 1,900 shares owned by William A. Fraunfelder's wife, Barbara
Fraunfelder, as to which shares Mr. Fraunfelder disclaims beneficial
ownership.
(4) Less than one percent (1%) of the outstanding Stock.
(5) Of these shares, 8,500 represent shares Mr. Ziegler holds as custodian for
his minor children. Not shown are 8,000 shares Mr. Ziegler owns jointly with
his mother, as to which shares he disclaims beneficial ownership.
(6) Mrs. Dzurilla holds 88,070 shares through the Joan M. Dzurilla Charitable
Remainder Trust of which she is the settlor and sole trustee. A charitable
organization is the sole beneficiary of this trust.
(7) Mr. Perciak holds 113,400 shares through a trust of which he and his wife,
Deborah A. Perciak, a Vice President of The Strongsville Savings Bank, are
co-trustees with shared voting and investment power. Not shown are 18,400
shares held jointly by Mrs. Perciak and her parents, as to which shares Mr.
and Mrs. Perciak disclaim beneficial ownership. Mr. Perciak also disclaims
beneficial ownership of 6,000 shares not shown herein, and held jointly with
his father, Walter J. Perciak, Sr. The shares reported do not include
3
<PAGE> 7
24,000 stock option shares and 620 shares held by Mr. Perciak's spouse, as
to which shares Mr. Perciak disclaims beneficial ownership.
Thomas P. Perciak has been President and Chief Executive Officer of The
Strongsville Savings Bank since January 1985, and President and Chief Executive
Officer of Emerald since its inception in 1996. He has been Managing Officer of
The Strongsville Savings Bank since April 1979. Mr. Perciak is also active in
community organizations and serves on the Board of Trustees of the following
organizations: The Strongsville Chamber of Commerce, Advisory Board of St.
Andrew's Abbey and Southwest Community Health Center Foundation Board. Mr.
Perciak serves as the Chairman of the Southwest Health Center Foundation Board.
John F. Ziegler was first employed by The Strongsville Savings Bank in
1975, became the Treasurer in 1983 and has served as Vice President for the last
ten (10) years. Since January, 1992, Mr. Ziegler has served as Chief Financial
Officer, and he has served as Executive Vice President and Chief Financial
Officer of Emerald since its inception in 1996.
George P. Bohnert, Jr. is a certified public accountant who practiced with
his own firm from 1992 until February 1996. From February 1996 to the present,
Mr. Bohnert has been a partner in Foerster & Bohnert, Ltd. From 1978 until 1992,
Mr. Bohnert was a partner with a regional accounting firm, Hausser & Taylor,
where his practice concentrated on savings and loan association audits.
Joan M. Dzurilla served as Vice President of The Strongsville Savings Bank
from 1989 through February 9, 1994. Prior to that, Mrs. Dzurilla, who is a
registered nurse, was a housewife for over 30 years and raised a family.
William A. Fraunfelder, Jr., a lawyer, has served as a Referee in the
Juvenile Division of the Cuyahoga Court of Common Pleas for 29 years.
Glenn W. Goist, D.D.S. has been a practicing dentist for over 25 years. Dr.
Goist maintains a private dental practice in Berea.
Mike Kalinich, Sr. has been President of the Kalinich Fence Company, Inc.
for over 30 years and is active in numerous community organizations. Mr.
Kalinich has been Chairman of the Board from 1991 through the present. He serves
as a Director of Southwest Community Health Center, Middleburg Heights, Ohio,
and serves as a Trustee Emeritus of the Strongsville Chamber of Commerce.
Kenneth J. Piechowski is Director of the Diaconate of the Diocese of
Cleveland. Mr. Piechowski has been employed full time by the Diocese since 1988.
Prior to joining the Diocese full time, Mr. Piechowski worked for approximately
eighteen years with nationally recognized insurance companies.
John J. Plucinsky, M.D. has been a doctor of internal medicine with a
specialty in hematology and oncology for over 30 years.
COMMITTEES OF THE BOARD OF DIRECTORS AND BOARD ATTENDANCE
The Board of Directors, which is responsible for the overall affairs of the
Company, conducts its business through regular and special meetings and through
meetings and activities of its committees. All committees report their
activities to the Board monthly.
The Board of Directors of Emerald is comprised of the same people who
currently constitute the Board of Directors of The Strongsville Savings Bank.
The holding company reorganization of The Strongsville Savings Bank became
effective on March 6, 1997. Beginning in 1997, the Board of Directors of Emerald
and the Audit Committee of Emerald performs the functions of nominating and
audit committees, respectively. The Wage and Salary Committee of The
Strongsville Savings Bank's Board of Directors acts as compensation committee.
The Board of Directors met thirteen times during the fiscal year ended
December 31, 1997. No director attended fewer than 75% of the aggregate number
of meetings of the Board of Directors (of The Strongsville Savings Bank or
Emerald) held during the last fiscal year and the total number of meetings held
by all committees of the Board of Directors on which he or she served during
such year.
4
<PAGE> 8
The Board of Directors acts as a nominating committee for selecting
nominees for election as directors. Pursuant to the Company's Code of
Regulations, nominations may also be made by shareholders. Shareholder
nominations for directors must be made in writing and delivered to the Secretary
of the Company at least sixty (60) days prior to the Company's annual meeting,
and such written nominations of shareholders must contain certain information as
provided in the Company's Code of Regulations. Any shareholder recommendation
for director-nominee must contain background information concerning the
recommended nominee, including name, age, business and home address,
relationships with person making the recommendation, educational background,
description of nominee's principal occupation and business experience for the
last five years, directorships or trusteeships in public companies, the reasons
the person is being recommended, and a statement that such person would consent
to serve as director. The shareholder's notice of nomination must indicate the
name and address of the shareholder and the number of shares of Stock
beneficially owned by such shareholder on the date of such notice. Although the
Board of Directors will consider nominees recommended by shareholders, the
Company has not actively solicited nominations.
The Audit Committee, which is comprised of Messrs. Bohnert, Goist and
Fraunfelder, with Mr. Bohnert serving as Chairman, recommends the appointment of
the Company's independent public accountants, reviews and approves the audit
plan and fee estimate of the independent public accountants, appraises the
effectiveness of the internal and external audit efforts, evaluates the adequacy
and effectiveness of the Company's accounting policies and financial and
accounting management, supervises the Company's Internal Auditor, and reviews
and approves the annual financial statements. The Audit Committee met four times
during 1997.
The Wage and Salary Committee, which is comprised of Mr. Kalinich as
Chairman and Mr. Perciak and Mrs. Dzurilla, reviews the performance of managers,
employees and officers and recommends appropriate salaries, incentives and
benefits. The Wage and Salary Committee does not determine the compensation and
benefits paid to the senior executive officers. The compensation and benefits of
the senior executive officers are determined by the full Board of Directors,
with the two most senior executive officers excusing themselves from the
deliberations and voting upon their compensation and benefits. The Wage and
Salary Committee met twice during 1997.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1997, the Wage and Salary Committee of The Strongsville Savings
Bank's Board of Directors consisted of Messrs. Kalinich and Perciak and Mrs.
Dzurilla. Mr. Perciak is President and Chief Executive Officer of Emerald. Mr.
Kalinich served as Vice President from 1980 through 1991. Mr. Kalinich's
position of Vice President was an officer position in name only, without
operational authority. It was a tradition of the savings and loan industry of
that era to title senior board members as officers. Mrs. Dzurilla served as Vice
President from 1989 until her resignation on February 9, 1994. Neither Mr.
Kalinich nor Mrs. Dzurilla is an officer of Emerald or The Strongsville Savings
Bank.
DIRECTORS' COMPENSATION
As compensation for services rendered as a director, each director other
than Messrs. Perciak and Ziegler received $600 for attendance at Board of
Directors' meetings held January through April 1997 and $650 for attendance at
Board meetings held subsequent to April 1997. Mr. Kalinich received additional
compensation as Chairman of the Board totaling $20,000 during 1997. Directors
who serve on committees, including the Executive Committee, the Wage and Salary
Committee and the Audit Committee, received fees of $300 for attendance at each
committee meeting during the fiscal year ended December 31, 1997.
The foregoing compensation of directors has been paid to directors for
their service on the Board of Directors of The Strongsville Savings Bank, and
committees thereof. Since the formation of Emerald, none of its executive
officers or directors has received any remuneration from Emerald, except the
directors who serve on Emerald's Option Committee receive fees for attendance at
Option Committee meetings. Because Emerald's business principally consists and
is expected to consist for the foreseeable future of acting as holding company
for The Strongsville Savings Bank, it is expected that no separate compensation
will be paid to officers of Emerald in addition to that paid to them by The
Strongsville Savings Bank. However, Emerald may determine
5
<PAGE> 9
that separate compensation is appropriate in the future. At the present time,
Emerald does not intend to employ any persons other than its present management.
EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid by The
Strongsville Savings Bank for services rendered in all capacities for the fiscal
years ended December 31, 1997, 1996 and 1995 to its three most highly
compensated executive officers, including its chief executive officer, with
total cash compensation in excess of $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
---------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
---------------------------------- ----------------------- -------
($) ($) (#)
OTHER RESTRICTED SECURITIES ($) ($)
NAME AND ($)(1) ($) ANNUAL STOCK UNDERLYING LTIP ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARDS OPTIONS PAYOUTS COMPENSATION
------------------ ---- ------- -------- ------------ ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Thomas P. Perciak 1997 199,200 103,431(2) (3) 0 7,000 0 35,268(4)
President and Chief 1996 191,500 101,274 (3) 0 0 0 12,155
Executive Officer 1995 183,200 100,055 (3) 0 0 0 15,710
John F. Ziegler 1997 130,900 67,967(2) (3) 0 6,000 0 20,450(4)
Executive Vice 1996 125,800 66,529 (3) 0 0 0 15,081
President and Chief 1995 120,300 65,702 (3) 0 0 0 18,473
Financial Officer
William J. Harr, Jr. 1997 88,400 27,524(2) (3) 0 3,000 0 10,112(4)
Vice President 1996 85,000 23,804 (3) 0 0 0 9,461
1995 72,060 29,308 (3) 0 0 0 11,413
</TABLE>
- ---------------
(1) Includes amounts deferred at the election of the named executive officers
pursuant to The Strongsville Savings Bank's 401(k) plan.
(2) The Strongsville Savings Bank gave a 1997 Christmas bonus to each employee,
including the three officers named in the Summary Compensation Table. The
Christmas bonus of each of Messrs. Perciak, Ziegler and Harr was $3,831,
$2,517 and $1,700, respectively. These amounts are included in the bonus
figures in the table. In addition, Mr. Harr earned a bonus of $10,824 in
1997 under The Strongsville Savings Bank's incentive compensation plan for
loan officers, which bonus is also included in his total bonus amount shown
in the table. Mr. Harr was also awarded a year-end merit bonus of $15,000.
The bonus amounts reported are earned in the fiscal year noted even though
such amounts may be payable in subsequent years.
(3) Perquisites and other personal benefits would be included herein only to the
extent that the aggregate perquisites and personal benefits for each named
executive officer exceed the lesser of $50,000 or ten percent (10%) of a
named executive officer's salary and bonus.
(4) Includes (i) the dollar amount of contributions by The Strongsville Savings
Bank to vested and unvested accounts under The Strongsville Savings Bank's
trusteed profit-sharing retirement plan and 401(k) Plan and (ii) the current
dollar value of the benefit realized or realizable by reason of The
Strongsville Savings Bank's payment of the premiums on split-dollar life
insurance policies. The dollar value of such benefit is calculated on an
actuarial basis for the period between payment of the premium by The
Strongsville Savings Bank and the anticipated date of repayment to The
Strongsville Savings Bank of premiums previously paid for the split-dollar
life insurance policies. For Mr. Perciak, $10,148 and $5,700 represent
amounts contributed by The Strongsville Savings Bank during 1997 on his
behalf under the profit-sharing and 401(k) plans, respectively. For Mr.
Ziegler, $10,148 and $5,700 represent amounts contributed by the Bank during
1997 on his behalf under the Bank's profit-sharing and 401(k) plans,
respectively. For Mr. Harr, $6,634 and $3,478 represent amounts contributed
by the Bank during 1997 on his behalf under the Bank's profit-sharing and
401(k) plans, respectively. The current dollar value of the benefit to
Messrs. Perciak and Ziegler of the split-dollar life insurance premiums paid
in 1997 is $19,419.94 and $4,601.51, respectively.
6
<PAGE> 10
STOCK OPTIONS
The following table sets forth information relating to options granted
during fiscal year 1997 to the named executive officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM(1)
- ----------------------------------------------------------------------------- ----------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES EXERCISE OR
GRANTED IN FISCAL BASE PRICE EXPIRATION
NAME (#) YEAR ($ / SHARE)(2) DATE 5% 10%
---- ---------- ---------- -------------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Thomas P. Perciak 7,000 9.46% $14.25 5/30/2007 $62,732 $158,976
John F. Ziegler 6,000 8.11% $14.25 5/30/2007 $53,771 $136,265
William J. Harr 3,000 4.05% $14.25 5/30/2007 $26,885 $ 68,132
</TABLE>
- ---------------
(1) The 5% and 10% assumed rates of appreciation are mandated by the rules of
the Securities and Exchange Commission and are not an estimate or projection
of future prices for Emerald's Stock.
(2) The option exercise price equaled the average of the bid and asked prices of
a share of Emerald's Stock on the date of grant.
The following table sets forth information concerning the number and value
of unexercised stock options held by the named executive officers at December
31, 1997. These options expire ten years from the date of grant and have
exercise prices per share equal to the average of the closing bid and asked
prices of the Stock on the date of grant. The options were granted pursuant to
the 1994 Long-Term Incentive Plan of The Strongsville Savings Bank, which plan
was adopted and assumed by the Company in connection with the March 6, 1997
holding company reorganization of The Strongsville Savings Bank.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
YEAR END (#) FISCAL YEAR END ($)(1)
SHARES ACQUIRED VALUE ----------------------------- ---------------------------
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- ------------ ------------ -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Thomas P. Perciak 0 0 100,000 7,000 $1,087,500 $40,250
John F. Ziegler 0 0 72,000 6.000 $ 783,000 $34,500
William J. Harr, Jr. 0 0 40,000 3,000 $ 435,000 $17,250
</TABLE>
- ---------------
(1) Represents the aggregate market value of stock options to purchase shares of
stock (market price less the exercise price of $9.125 and $14.25 per share),
awarded the named executive officers, based upon the fair market value of
$20.00 per share on December 31, 1997.
PENSION AND RETIREMENT PLAN INFORMATION
Neither Emerald nor The Strongsville Savings Bank has a retirement plan for
officers or employees that would provide defined benefits based upon salary,
years of service or other measures. Instead, The Strongsville Savings Bank has
implemented a profit-sharing plan under which The Strongsville Savings Bank may
make
7
<PAGE> 11
entirely discretionary cash contributions. The Strongsville Savings Bank also
has implemented a 401(k) Plan whereby matching contributions will be made for
each participating officer or employee who elects to defer a portion of his or
her salary pursuant to the 401(k) Plan. The amount of salary that may be
deferred by any individual and the amount (and vesting) of the matching
contributions are subject to certain limitations (matching contributions of up
to 60% of the deferral, subject to maximum matching contribution amount; no
matching contributions for deferral in excess of 5% of salary; incremental
vesting of the matching contribution over a period of six years).
Recognizing the importance of building and retaining a competent management
team, effective January 1, 1995 The Strongsville Savings Bank entered into
Executive Supplemental Benefit Agreements with six of its officers, including
the three executive officers identified in the Summary Compensation Table
(collectively, the "Agreements" and individually as to each covered executive,
the "Agreement"). The Executive Supplemental Benefit Agreements were adopted
following Board review of a comprehensive compensation study presented by KPMG
Peat Marwick LLP as compensation consultants. Similar agreements with three
additional officers were entered into in 1996.
The Executive Supplemental Benefit Agreements provide for payments in the
event of retirement, death, disability or a change in control. Under the terms
of each agreement, different death, disability and postemployment/retirement
benefits are provided to each covered employee. By defining the amounts each
executive will receive upon formal retirement, each executive has been given
what the Board believes to be a reasonable incentive to remain with The
Strongsville Savings Bank until retirement. If, however, the executive's
employment is terminated for cause or the executive voluntarily resigns (other
than for "good reason," as defined below) following a change in control, The
Strongsville Savings Bank would be released from all payment obligations to the
executive.
Messrs. Perciak, Ziegler and Harr's Executive Supplemental Benefit
Agreements provide for payment of an annual benefit upon their retirement.
"Retirement Date" is defined in the Agreements to mean the first day of the
month following the executive officer's 65th birthday on which he or she elects
to retire (or an early retirement date that may be agreed to by the Board of
Directors). Mr. Perciak's Executive Supplemental Benefit Agreement provides for
annual payment for twenty years of $134,693 following retirement (assuming full
vesting). The retirement benefit vests ratably each year, becoming fully vested
at age 65 or, if sooner, (i) upon death or permanent disability or (ii) upon a
change in control of Emerald. Rather than receiving annual payment, Mr. Perciak
may petition the Board of Directors or the appropriate committee thereof for
payment of the entire retirement benefit in one lump sum (discounted to the
present value at that time, using a 6% discount rate). The benefit payable in
the event of a change in control would also be paid in a lump sum, similarly
discounted to present value. Likewise, under the Executive Supplemental Benefit
Agreement Mr. Perciak may petition for full vesting of his benefits if he
chooses to retire before reaching age 65. The annual retirement benefit paid
under Mr. Ziegler's Executive Supplemental Benefit Agreement will be $25,647.
Mr. Harr would be entitled to $23,585 annually for 20 years.
The disability payments provided under the Agreements are as follows for
each of the named executive officers: $65,635 annually in the event of total
disability prior to retirement, until age 65, for Mr. Perciak; $10,239 annually
in the event of total disability prior to retirement, until age 65, for Mr.
Ziegler; and $5,717 annually in the event of total disability prior to
retirement, until age 65, for Mr. Harr. Annual disability benefits payable under
the Agreements would be payable in monthly installments.
Under the Executive Supplemental Benefit Agreements, a payment in respect
of a change in control would be made if the executive officer is involuntarily
terminated (except for cause) or voluntarily terminates his or her employment
for "good reason." In general terms, "good reason" is defined to include a
change in the executive officer's status, title or responsibilities that does
not represent a promotion, a reduction in base salary, certain relocations or a
material reduction in benefits. Following the 1997 holding company
reorganization of The Strongsville Savings Bank, the Executive Supplemental
Benefit Agreements' definition of "change in control" was amended. As amended, a
"change in control" includes the following circumstances:
(i) the acquisition by a person or persons acting in concert of the power
to vote twenty five percent (25%) or more of a class of Emerald's
voting securities, or the acquisition by a person of the power to
direct
8
<PAGE> 12
Emerald's management or policies, if the Board of Directors or the
Office of Thrift Supervision has made a determination that such
acquisition constitutes or will constitute an acquisition of control
for the purposes of the Savings and Loan Holding Company Act or the
Change in Bank Control Act and the regulations thereunder;
(ii) during any period of two (2) consecutive years, individuals who at the
beginning of the two-year period constitute the Board of Directors of
The Strongsville Savings Bank or Emerald cease for any reason to
constitute at least a majority thereof, unless the election of each
director who was not a director at the beginning of the two-year
period has been approved in advance by directors representing at least
two thirds (2/3) of the directors then in office who were directors in
office at the beginning of the period;
(iii) Emerald shall have merged into or consolidated with another
corporation, or merged another corporation into Emerald, on a basis
whereby less than fifty percent (50%) of the total voting power of
the surviving corporation is represented by shares held by former
shareholders of Emerald prior to such merger or consolidation; or
(iv) Emerald shall have sold substantially all of its assets to another
person. The term "person" refers to an individual, corporation,
partnership, trust, association, joint venture, pool, syndicate, sole
proprietorship, unincorporated organization or other entity.
In the event of a change in control in 1998 and involuntary termination
(except for cause) or voluntary termination for good reason within six months
thereafter, the benefit payable to Mr. Perciak would be $259,447, increasing in
amount for a change in control occurring in a subsequent year (from $335,939 in
1999 to $1,782,670 in 2012). For Mr. Ziegler, the benefit payable under similar
circumstances would be $36,699 in the event of a change in control in 1998 and
involuntary termination (except for cause) or voluntary termination for good
reason within six months thereafter, increasing in amount for a change in
control occurring in a subsequent year (from $48,875 in 1999 to $453,788 in
2017). Lastly, for Mr. Harr the benefit payable would be $19,022, increasing in
amount for a change in control occurring in a subsequent year (from $26,498 in
1999 to $625,710 in 2027). Under the Executive Supplemental Benefit Agreements,
the change-in-control benefit payment would be made in one lump sum for each
affected officer.
The Strongsville Savings Bank has obtained life insurance policies whose
benefits, payable to The Strongsville Savings Bank as beneficiary, would be
sufficient to satisfy the obligations of The Strongsville Savings Bank and
Emerald under the Executive Supplemental Benefit Agreements. The Strongsville
Savings Bank is the sole owner of and beneficiary under the life insurance
policies, except that Messrs. Perciak and Ziegler are the owners of the
split-dollar life insurance policies discussed in "--Employment Agreements."
Notwithstanding that benefits payable under the Executive Supplemental Benefit
Agreements will be paid in the future, the estimated present value of future
benefits is being accrued over the period from the effective date of the
agreements until the expected retirement dates of the participants. The
insurance premium expense under the life insurance policies purchased to fund
contractual obligations to Messrs. Perciak, Ziegler and Harr in 1997, and their
approximate cash surrender value to The Strongsville Savings Bank, are an
aggregate of $90,439 and $235,201, respectively. See, "--Employment Agreements"
for a discussion of amendments adopted in 1997 to the employment agreements of
Messrs. Perciak and Ziegler.
BOARD REPORT ON EXECUTIVE COMPENSATION
The full Board determines the executive compensation to be paid to the two
most senior executive officers, Messrs. Perciak and Ziegler. Mr. Perciak and Mr.
Ziegler are excluded from discussion and board deliberation regarding
compensation paid to them as officers.
For other than the senior executive officers, the function of administering
executive compensation policies is currently performed by the Wage and Salary
Committee. In this process, officers are evaluated as to their performance
during the year compared to The Strongsville Savings Bank's performance, thrift
industry compensation surveys and comparable positions at other thrift
institutions. In future years, it is expected that the Wage and Salary Committee
will continue to perform the functions it performs currently. The Strongsville
Savings Bank is, and for the foreseeable future will be, Emerald's sole
operating subsidiary. The members and
9
<PAGE> 13
terms of the members of the Boards of Directors of each of Emerald and The
Strongsville Savings Bank are, and for the foreseeable future will be,
identical.
Because the Board views Messrs. Perciak and Ziegler as having the greatest
impact on corporate performance, the Board members have established a
compensation philosophy of providing base pay and incentive compensation for the
top two executive officers reflective of The Strongsville Savings Bank's
financial performance compared to situated thrifts. For individuals other than
Messrs. Perciak and Ziegler, the Board's Wage and Salary Committee seeks to
establish executive officer base salaries at a level commensurate with corporate
performance, peer group competitors and the individual officers' performance.
The Board and the Wage and Salary Committee continue to review all elements of
executive compensation in order to ensure that the total compensation program,
and each compensation element, meets Emerald's and The Strongsville Savings
Bank's business objectives and philosophy.
As a general rule, it has been the Board of Directors' and the Committee's
policy to take into account tax and financial accounting considerations in
connection with the granting of options or other forms of grants and awards
under The Strongsville Savings Bank 1994 Long-Term Incentive Plan. Assuming
shareholders approve the 1998 Stock Option and Incentive Plan, it will continue
to be the Board of Directors' and the Committee's policy to take into account
tax and financial accounting considerations in connection with the granting of
options and awards. Accordingly, the Board of Directors through its Option
Committee (in the case of stock option grants and other awards to executive
officers) does not expect that grants or awards will be made that would exceed
the limit on deductibility established by the Omnibus Budget Reconciliation Act
of 1993 ("OBRA"). In 1993, OBRA added Section 162(m) to the Internal Revenue
Code, the effect of which is generally to eliminate the deductibility of
compensation over $1 million paid to certain highly compensated executive
officers of publicly held corporations, such as the executive officers
identified in the "Summary Compensation Table." Section 162(m) applies to all
remuneration (both cash and non-cash) that would otherwise be deductible for tax
years beginning on or after January 1, 1994, unless expressly excluded. Although
the Board and Committee reserve the right to make grants and awards under the
1994 Long-Term Incentive Plan and the 1998 Stock Option and Incentive Plan under
circumstances in which the compensation component thereof would not be fully
deductible for federal income tax purposes, it is not currently expected that
they would do so.
COMPENSATION OF CHIEF EXECUTIVE OFFICER
Mr. Perciak received an increase in base salary for 1997 of $7,700, or
approximately 4.0%. This increase in base salary represents a similar percentage
increase as received by employees during 1997. While the Board generally takes
into consideration the overall performance of The Strongsville Savings Bank, the
Board does not use any specific measures or weighting of that performance in
establishing Mr. Perciak's base salary. Mr. Perciak's compensation package is
formalized in an employment agreement. See, "Employment Agreements." Mr. Perciak
and Executive Vice President Ziegler are eligible to receive 50% of base salary
in annual bonus under the terms of their employment contracts. Mr. Perciak
earned incentive compensation in fiscal year 1997 for the maximum amount
possible under his employment contract.
In reviewing Mr. Perciak's performance as President and Chief Executive
Officer and the justification for renewal of his employment contract for an
additional year, the directors favorably considered Mr. Perciak's performance
relative to the following factors: the increase in fee income, the growth in
deposits, loans and profitability attributable to The Strongsville Savings
Bank's corporate performance (return on assets and return on equity), the volume
of residential acquisition and development lending attributable to Mr. Perciak,
the market share performance of The Strongsville Savings Bank and The
Strongsville Savings Bank's compliance with safe and sound banking principles
and Community Reinvestment Act/consumer regulation requirements. At its December
17, 1997 meeting, the Board determined that each of Messrs. Perciak and Ziegler
had met the requirements and standards of the Board for executive officer
performance, and therefore their employment contracts were renewed for one
additional year.
The report of the Board shall not be deemed incorporated by reference by
any general statement incorporating by reference this Proxy Statement into any
filing under the Securities Exchange Act of 1934, except
10
<PAGE> 14
to the extent that Emerald specifically incorporates this information by
reference, and shall not otherwise be deemed filed under such act.
Submitted by the Board of Directors of The Strongsville Savings Bank:
Thomas P. Perciak, John F. Ziegler, George P. Bohnert, Jr., Joan M.
Dzurilla, William A. Fraunfelder, Jr., Glenn W. Goist, Mike Kalinich, Sr.,
Kenneth J. Piechowski and John J. Plucinsky
PERFORMANCE GRAPH
The stock of The Strongsville Savings Bank began trading publicly on
October 5, 1993, having been sold in an initial public offering at the price of
$6.50 per share (adjusted for subsequent stock splits). Effective March 6, 1997,
each share of The Strongsville Savings Bank capital stock was converted into one
share of Emerald Stock, and The Strongsville Savings Bank became a wholly owned
subsidiary of Emerald. Emerald Stock was approved for designation as a Nasdaq
National Market security on March 6, 1997.
The following graph compares the cumulative total shareholder return on
Emerald Stock to the cumulative total return of (i) a broad index of the
National Association of Securities Dealers, Inc. Automated Quotations ("Nasdaq")
System and (ii) the MG Savings and Loan Index, which is comprised of 386
publicly traded savings associations and thrift holding companies. The graph
compares cumulative total shareholder return for the period commencing October
5, 1993 and ending December 31, 1997, assuming that $100 was invested on October
5, 1993 and that all dividends were reinvested.
11
<PAGE> 15
COMPARISON OF THE CUMULATIVE TOTAL RETURN
AMONG EMERALD FINANCIAL CORP.
MG S&L INDEX, AND NASDAQ MARKET INDEX
PERFORMANCE GRAPH
<TABLE>
<CAPTION>
10/5/93 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Emerald Financial $100.00 $134.34 $141.60 $156.87 $185.17 $371.98
NASDAQ $100.00 $100.23 $105.23 $136.50 $169.62 $207.48
MG S&L Peer Group $100.00 $ 97.09 $ 93.00 $147.31 $192.25 $323.24
</TABLE>
This stock performance graph shall not be deemed incorporated by reference
by any general statement incorporating by reference this Proxy Statement into
any filing under the Securities Exchange Act of 1934, except to the extent
Emerald specifically incorporates this information by reference, and shall not
otherwise be deemed filed under such act.
EMPLOYMENT AGREEMENTS
Each of Mr. Perciak and Mr. Ziegler serves pursuant to an employment
agreement with The Strongsville Savings Bank. The employment agreements provide
for three-year terms, renewed and extended at each anniversary date for an
additional year upon a determination and resolution of the Board that the
performance of the executive has met the requirements and standards of the
Board. The effect of the annual renewal and extension is that each contract then
has a new three-year term. Each contract was renewed for an additional year by
Board action on December 17, 1997.
Under the terms of his employment agreement, Mr. Perciak currently receives
a base salary of $219,200 per year, subject to annual adjustment by the Board of
Directors and annual incentive compensation of 2.5% of Emerald's pre-tax profits
(up to 50% of Mr. Perciak's base salary). In the event that (i) Mr. Perciak is
involuntarily terminated (other than for cause) within six months following a
change in control of Emerald or (ii) Mr. Perciak voluntarily terminates his
employment for good reason within six months after a change in control of
Emerald, Mr. Perciak will receive his base salary for the remaining term of the
agreement. For purposes of the change-in-control features of Mr. Perciak's
employment agreement, "change in control" is defined in the same fashion as
"change in control" for purposes of the Executive Supplemental Benefit
Agreements. See, "--Pension and Retirement Plan Information."
12
<PAGE> 16
Until it was amended in July 1997, Mr. Perciak's employment agreement had
provided for an "equity appreciation bonus." Had it become payable to Mr.
Perciak, the equity appreciation bonus would have been an amount equal to ten
percent of the increase in The Strongsville Savings Bank's value, calculated as
the difference between The Strongsville Savings Bank's tangible book value as of
December 31, 1987 and the lesser of (i) the price paid in any acquisition of The
Strongsville Savings Bank or (ii) The Strongsville Savings Bank's tangible book
value as of December 31, 1992 (exclusive of capital raised from a Fall 1990
private stock offering). Ten percent of the increase in The Strongsville Savings
Bank's value between December 31, 1987 and tangible book value as of December
31, 1992 is approximately $1,187,512. Prior to its elimination altogether in
July 1997, the equity appreciation bonus had previously been capped such that
equity appreciation occurring after December 31, 1992 would not have entitled
Mr. Perciak to any share of the subsequent increase in tangible net worth. Mr.
Perciak would have been entitled to the equity appreciation bonus in the event
of a change in control of Emerald even if he had retained his position.
In the years since adoption of the equity appreciation bonus provisions of
the employment agreement, numerous changes had occurred that, in the judgment of
the Board of Directors, could have undermined in whole or in part the original
intention of the equity appreciation bonus: to recognize the valuable
contributions that Mr. Perciak had made over many years of service to The
Strongsville Savings Bank and to create incentives for continued service to The
Strongsville Savings Bank (and Emerald). Changes in tax laws applicable to
employee benefit and executive compensation plans would have imposed
significantly adverse tax consequences on Mr. Perciak and The Strongsville
Savings Bank had the equity appreciation bonus been paid to Mr. Perciak as
required by his employment agreement. Payments under the employment agreement in
the event of a change in control of Emerald could have constituted an excess
parachute payment under the Internal Revenue Code, resulting in the imposition
of an excise tax on Mr. Perciak and denial of the deduction for such excess
amounts to Emerald or The Strongsville Savings Bank.
Additionally, the equity appreciation bonus feature of Mr. Perciak's
employment agreement was created at a time when The Strongsville Savings Bank
was a closely held private company, with little or no trading market for its
stock. In the years since 1988, when the employment agreement was originally
entered into, and 1997, when the equity appreciation bonus provisions of the
employment agreement were eliminated by amendment of the agreement, The
Strongsville Savings Bank had become a publicly traded company, with equity
securities registered under the Securities Exchange Act of 1934 and traded on
the Nasdaq SmallCap market. Additionally, The Strongsville Savings Bank
completed its holding company reorganization on March 6, 1997, becoming a wholly
owned subsidiary of Emerald, and Emerald Stock began trading on the Nasdaq
National Market in 1997. With the passage of time and these intervening events
and circumstances, the Board of Directors concluded that the equity appreciation
bonus provisions of Mr. Perciak's employment agreement needed to be amended or
replaced in their entirety. For these reasons, the equity appreciation bonus was
eliminated in July 1997 by amendment of Mr. Perciak's employment agreement,
following extensive discussions and consideration of a variety of alternative
compensation plans.
As a replacement for the equity appreciation bonus, Mr. Perciak agreed to a
compensation arrangement having two principal features: (1) a split-dollar life
insurance policy on the life of Mr. Perciak and (ii) an additional Executive
Supplemental Benefit Agreement. See, "--Pension and Retirement Plan Information"
above.
Mr. Perciak's Executive Supplemental Benefit Agreement adopted in July 1997
provides for annual payment for twenty years following retirement (assuming full
vesting) based on a July 1997 present value of $645,000 plus earnings or
appreciation thereon. The retirement benefit vests ratably each year, becoming
fully vested at age 65 or, if sooner, (i) upon death or permanent disability or
(ii) upon a change in control of Emerald. Rather than receiving annual payment,
Mr. Perciak may petition the Board of Directors or the appropriate committee
thereof for payment of the entire retirement benefit in one lump sum. The
benefit payable in the event of a change in control would also be paid in a lump
sum. Likewise, under the Executive Supplemental Benefit Agreement adopted in
July 1997 Mr. Perciak may petition for full vesting of his benefits if he
chooses to retire before reaching age 65.
13
<PAGE> 17
The other feature of the compensation plan Mr. Perciak agreed to as a
replacement for the equity appreciation bonus is a split-dollar policy on Mr.
Perciak's life with a net present value of $163,482. Mr. Perciak is the owner of
such policy and he and his successors or assigns are entitled to exercise all
rights thereunder. The policy has been collaterally assigned to The Strongsville
Savings Bank. The purpose of the collateral assignment is to secure repayment to
The Strongsville Savings Bank of premiums paid on the policy, which premiums
will be repaid from proceeds of the policy upon his death or earlier termination
of the policy.
Under the terms of his employment agreement, Mr. Ziegler currently receives
a base salary of $144,000 per year, subject to annual adjustment by the Board of
Directors, and annual incentive compensation of 1% of Emerald's pre-tax profits
(up to 50% of his base salary). Additionally, in the event Mr. Ziegler (i) is
terminated at any time other than for cause, (ii) voluntarily terminates his
employment for good reason within six months after a change in control (defined
in the same manner as in Mr. Perciak's agreement) or (iii) is involuntarily
terminated within six months following a change in control, Mr. Ziegler will
receive his base salary for the remaining term of the agreement.
In connection with the agreement between The Strongsville Savings Bank and
Mr. Perciak to eliminate his equity appreciation bonus and replace it with an
additional Executive Supplemental Benefit Agreement and split-dollar life
insurance policy, a similar arrangement was made for Mr. Ziegler. The Board of
Directors desired to recognize Mr. Ziegler as well for the value of
contributions made over many years of service to The Strongsville Savings Bank.
Mr. Ziegler has become the owner of a split-dollar policy on Mr. Ziegler's life
with a net present value of $71,203 but otherwise having the same terms and
conditions as the split-dollar policy owned by Mr. Perciak. Likewise, the Bank
entered into a second Executive Supplemental Benefit Agreement with Mr. Ziegler.
Mr. Ziegler's Executive Supplemental Benefit Agreement adopted in July 1997
provides for annual payment for twenty years following retirement (assuming full
vesting) based on a July 1997 present value of $307,827 plus earnings or
appreciation thereon. The retirement benefit vests ratably each year, becoming
fully vested at age 65 or, if sooner, (i) upon death or permanent disability or
(ii) upon a change in control of Emerald. Rather than receiving annual payment,
Mr. Ziegler may petition the Board of Directors or the appropriate committee
thereof for payment of the entire retirement benefit in one lump sum. The
benefit payable in the event of a change in control would also be paid in a lump
sum. Likewise, under the Executive Supplemental Benefit Agreement adopted in
July 1997 Mr. Ziegler may petition for full vesting of his benefits if he
chooses to retire before reaching age 65.
The Board of Directors concluded that the aggregate cost of and benefits
payable under the additional Executive Supplemental Benefit Agreements of
Messrs. Perciak and Ziegler and split-dollar life insurance policies are
commensurate with the anticipated costs and benefits under the equity
appreciation bonus that, together, they replaced. In the judgment of the Board
of Directors, the foregoing compensation arrangements are more consistent with
industry standards than the equity appreciation bonus and are in the best
interests of The Strongsville Savings Bank and Emerald.
CHANGE-IN-CONTROL ARRANGEMENTS
Severance Agreements
The Strongsville Savings Bank entered into severance agreements in 1994
with four of its executive officers (including Mr. William J. Harr, Jr., an
executive officer identified in the Summary Compensation Table), other than
Messrs. Perciak and Ziegler. In addition, a similar severance agreement was
entered into in July 1997 with three executive officers, including Ms. Deborah
A. Perciak, Vice President of The Strongsville Savings Bank and spouse of
Emerald's and The Strongsville Savings Bank's President and Chief Executive
Officer. Each severance agreement has a term of one year, renewable each year
for an additional year upon a determination by the Board of Directors that the
executive has met the performance standards and requirements of the Board. Each
severance agreement terminates by its terms once the executive reaches the
retirement age of 65.
Each severance agreement provides that in the event of the involuntary
termination of the executive (other than for cause), or the executive's
voluntary termination for good reason, within six months after a change in
control, the executive would receive a lump sum payment equal to the executive's
annual base salary, plus the continuation of benefits until the earlier of the
executive's employment by another employer or the expiration of
14
<PAGE> 18
twelve months from the executive's date of termination. In the event that the
executive incurs legal fees or expenses in enforcing the severance agreement,
Emerald or The Strongsville Savings Bank would pay all such fees and expenses if
the executive prevails, and an amount up to $25,000 if the executive does not
prevail. Payments to the executives under the severance agreements would not
constitute excess parachute payments under the Internal Revenue Code.
The definition in the severance agreements of "change in control" was
amended in 1997. As amended, a change in control is defined in the same manner
that term is defined for purposes of the Executive Supplemental Benefit
Agreements. See, "--Pension and Retirement Plan Information" above.
Executive Supplemental Benefit Agreements
The Strongsville Savings Bank has also entered into Executive Supplemental
Benefit Agreements with certain of its officers generally corresponding to the
level of Vice President or above, as discussed in "Pension and Retirement Plan
Information." The Executive Supplemental Benefit Agreements provide for payments
to the executive officers in certain events, including involuntary termination
(except for cause) or voluntary termination for good reason (defined in the same
fashion as under the severance agreements) within six months after a change in
control.
AMENDMENT OF THE COMPANY'S
AMENDED AND RESTATED ARTICLES OF INCORPORATION
TO INCREASE AUTHORIZED SHARES OF COMMON STOCK
(PROPOSAL 2)
The second proposal to be acted upon at the Meeting is a proposal to amend
Article Fourth of the Company's Amended and Restated Articles of Incorporation
in order to increase the number of authorized shares of Emerald Stock from
10,000,000 to 20,000,000 shares. As of January 31, 1998, there were
approximately 5,075,600 shares of Emerald Stock issued and outstanding. Assuming
the 1998 Stock Option and Incentive Plan is adopted at the Meeting, 250,000
shares will be reserved for issuance under the 1998 Stock Option and Incentive
Plan. In addition, no shares remain for issuance under the 1994 Long-Term
Incentive Plan.
GENERAL
If the proposed amendment is approved by the shareholders, a total of
20,000,000 shares of Emerald Stock will be authorized for issuance. The purpose
of seeking approval to increase authorized shares is to provide additional
authorized shares of Emerald Stock for possible use in connection with future
financings, investment opportunities, acquisitions, employee benefit or dividend
reinvestment plan distributions, other distributions, such as stock dividends or
stock splits, or for other corporate purposes.
Authorized shares of Emerald Stock that are not issued or reserved for
issuance generally may be issued by the Company without any further action of
the shareholders. The additional authorized shares would enable the Company to
take advantage of market conditions to raise additional equity capital or issue
shares in connection with acquisitions without the delay and expense associated
with the holding of a shareholders' meeting to obtain approval for authorization
of additional shares. Unless required by law, regulatory authorities, or the
rules of any stock exchange on which the Company's securities may then be listed
or the rules of any national securities association on whose system Emerald
Stock may then be traded, no further authorization by vote of shareholders would
be required for any such share issuances.
The availability of authorized but unissued shares will enable the Company
to take advantage of market conditions by issuing stock as conditions warrant,
including issuance of stock as a dividend or in connection with a stock split.
As a general proposition, a stock split or the issuance of new shares as stock
dividends could reduce the per share market price of each outstanding share,
potentially stimulating additional investor interest due to the reduced per
share price.
The availability of authorized but unissued shares will enable the Company
to issue stock in connection with a public or private stock offering.
Shareholders do not have preemptive rights and therefore would not have a
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<PAGE> 19
right of first refusal to purchase any of the additional authorized shares of
Emerald Stock that may be offered and sold hereafter. The Company currently has
no plans to issue additional shares in a private or public stock offering, in
connection with any acquisitions or otherwise.
CERTAIN EFFECTS OF THE PROPOSED AMENDMENT
The increased availability for issuance of shares of Emerald Stock also
could enable the Board of Directors to render more difficult or discourage an
attempt to obtain control of the Company by means of a merger, tender offer or
other change-in-control transaction. For example, the issuance of shares of
Emerald Stock in a public or private sale, merger or similar transaction would
increase the number of outstanding shares, diluting the interest of a party
attempting to obtain control of the Company. Authorized but unissued shares of
Emerald Stock may be used to render more difficult or discourage an attempt to
change control of the Company, even under circumstances in which shareholders
believe such a change in control to be in their best interests. The Company is
not aware of any attempt, whether formal or informal, to acquire a controlling
interest in the Company.
VOTE REQUIRED
Under Ohio General Corporation Law, the affirmative vote of two thirds of a
corporation's shareholders is generally necessary in order to amend the
corporation's articles of incorporation and in order to take certain other
significant corporate actions, unless the corporation's articles of
incorporation provide for a lesser vote requirement. The Company's Amended and
Restated Articles of Incorporation do not provide for a lesser vote requirement.
Accordingly, amendment of Article Fourth of the Company's Amended and Restated
Articles of Incorporation for the purpose of increasing authorized shares of
Common Stock will require the affirmative vote of the holders of a two thirds of
the Company's issued and outstanding shares of Common Stock.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" ADOPTION OF THE
AMENDMENT TO THE COMPANY'S AMENDED AND RESTATED ARTICLES OF INCORPORATION IN
ORDER TO INCREASE AUTHORIZED SHARES.
ADOPTION OF THE 1998 STOCK OPTION AND INCENTIVE PLAN
(PROPOSAL 3)
GENERAL
The 1998 Stock Option and Incentive Plan (the "Plan" or the "Stock Option
Plan") has been adopted by the Board of Directors of the Company, effective upon
approval by shareholders at the Meeting.
A total of 250,000 shares of Emerald Stock will be reserved for issuance
under the Stock Option Plan. In addition, the Stock Option Plan will include any
shares surrendered to the Company in payment of the exercise price of options or
stock appreciation rights issued under the Stock Option Plan. No shares
currently remain reserved for issuance under Emerald's 1994 Long-Term Incentive
Plan. The 1994 Long-Term Incentive Plan will not be affected in any way by
adoption of the 1998 Stock Option and Incentive Plan. Subject to availability of
shares, options may continue to be granted and other awards may continue to be
made under the terms of the 1994 Long-Term Incentive Plan until termination of
the 1994 Long-Term Incentive Plan. By its terms, the 1994 Long-Term Incentive
Plan will terminate in the year 2004 on the tenth anniversary of adoption of the
1994 Long-Term Incentive Plan (but outstanding options granted thereunder may be
exercised after termination of the 1994 Long-Term Incentive Plan, within the
term of such options).
The Board of Directors believes that it is appropriate for the Company to
adopt a flexible and comprehensive stock option and incentive plan. The Plan
will permit the granting of a variety of long-term incentive awards to
directors, officers and employees as a means of enhancing and encouraging the
recruitment and retention of those individuals on whom the continued success of
the Company depends. The Board of Directors has approved the Stock Option Plan
in order to enhance the performance of the Company, to provide the opportunity
for directors, officers and employees to realize capital appreciation in
exchange for their contributions to the Company and The Strongsville Savings
Bank and to more thoroughly align the interests of directors, officers and
employees with the interests of shareholders generally. Because options granted
under the Stock Option Plan will be granted only to
16
<PAGE> 20
persons affiliated with the Company as directors, officers or employees, the
adoption of the Stock Option Plan could make it more difficult for a third party
to acquire control of the Company and therefore could discourage offers for
Emerald Stock that may be viewed by the Company's shareholders to be in their
best interest.
Attached as Appendix A to this Proxy Statement is the complete text of the
Stock Option Plan. The principal features of the Stock Option Plan are
summarized below.
AWARDS UNDER THE PLAN
The Stock Option Plan provides for awards in the form of stock options,
stock appreciation rights ("SARs"), other securities and property and restricted
stock. Each award shall be on such terms and conditions, consistent with the
Stock Option Plan, as the committee administering the Stock Option Plan may
determine.
Any shares subject to an award which expires or is terminated unexercised
will again be available for issuance under the Stock Option Plan or any other
plan of the Company or its subsidiaries. Generally, no award or any right or
interest therein is assignable or transferable except under certain limited
exceptions set forth in the Plan.
The Stock Option Plan will be administered by the Stock Option Committee of
the Board of Directors of the Company. Directors Bohnert, Fraunfelder and Goist
have been appointed as the present members of the Stock Option Committee.
Pursuant to the terms of the Stock Option Plan, any director, officer or
employee of the Company or its affiliates is eligible to participate in the
Stock Option Plan, a group consisting of approximately 135 persons. In granting
awards under the Stock Option Plan, the Stock Option Committee will consider,
among other things, position and years of service, value of the participant's
services to the Company and its subsidiaries and the responsibilities of such
individuals as directors, officers and employees.
STOCK OPTIONS
The term of stock options will not exceed 10 years from the date of grant.
The Committee may grant either "Incentive Stock Options" as defined under
Section 422 of the Code or stock options not intended to qualify as such
("Non-Qualified Stock Options").
In general, stock options will not be exercisable after the expiration of
their terms. Unless otherwise determined by the Committee, in the event that a
participant terminates service to the Company or one of its affiliates for any
reason other than termination for cause, an exercisable stock option will
continue to be exercisable for three months, but in no event after the
expiration date of the option. A stock option will automatically terminate and
will no longer be exercisable as of the date a participant is terminated for
cause.
Stock Options and SARs Generally
The exercise price for the purchase of shares subject to a stock option may
not be less than 100% of the fair market value of the shares covered by the
option on the date of grant. The exercise price may be paid in cash or shares of
common stock or other awards, or a combination thereof. Because Emerald Stock is
traded on the Nasdaq National Market, the Stock Option Plan provides that the
exercise price of options will be determined by reference to the average of bid
and asked prices reported on the Nasdaq National Market. As of January 30, 1998,
the fair market value of Emerald Stock was $23.00 per share.
The Committee will have authority to prescribe the terms and conditions of
Options and SARs, including (i) the exercise price of any Option or SAR,
provided that the exercise price cannot be less than the fair market value of
Emerald Stock on the date of grant of the Option or SAR, (ii) the number of
shares of Emerald Stock subject to, and the expiration date of, any Option or
SAR, provided that the expiration date cannot be more than ten years from the
date of grant, (iii) the manner, time and rate (cumulative or otherwise) of
exercise of such Option or SAR, and (iv) the restrictions, if any, to be placed
upon Options or SARs or upon shares which may be issued upon exercise of an
Option or SAR. No individual may be granted awards under the Plan with respect
to more than 125,000 of the total shares subject to the Plan. No awards will
begin vesting and become exercisable earlier than one year from the date the
Plan is approved by shareholders of the Company.
17
<PAGE> 21
In general, a recipient of an Option or SAR must have maintained continuous
service with the Company or The Strongsville Savings Bank since the date of
grant of the Option or SAR in order to exercise the Option or SAR. Payment of
the exercise price of an Option or SAR can be made either (i) in cash or (ii) by
delivering (A) shares of Emerald Stock already owned that have a fair market
value equal to the exercise price or (B) a combination of cash and Emerald
Stock.
If an individual to whom an Option or SAR was granted ceases to maintain
continuous service for any reason (excluding death or disability and termination
of employment by the Company or The Strongsville Savings Bank for cause), that
individual may exercise the Option or SAR (to the extent that the Option or SAR
is exercisable at that time) at any time within three months after cessation of
service, unless the Committee otherwise provides in the instrument evidencing
the grant of the Option or SAR. If the individual ceases to maintain continuous
service because of death or disability then, unless the Committee otherwise
provides in the instrument evidencing the Option or SAR, all of his or her
Options and SARs become exercisable in full and remain exercisable (i) in the
event of death for a period of one year (but in no event later than ten years
from the date of grant of the Option or SAR) and (ii) in the event of disability
for a period of three months. If the service of an individual is terminated for
cause, all rights under his or her Options or SARs expire immediately upon such
termination.
The 1993 Omnibus Budget Reconciliation Act ("OBRA") became law in August,
1993. Under the new law, publicly held companies may be limited as to income tax
deductions to the extent total remuneration (including stock option exercises)
for certain executive officers exceeds $1 million in any one year. However, OBRA
provides an exception for "performance-based" remuneration, including stock
options. The new law requires that certain actions must be taken by a
compensation committee of two or more outside directors and that the material
terms of such remuneration must be approved by a majority vote of the
shareholders in order for stock options to qualify as "performance-based"
remuneration.
To ensure that stock options are treated as "performance-based"
compensation, Internal Revenue Service regulations issued in December, 1993
require a stock option grant to be made by the company's compensation committee
of two or more outside directors; the plan to include a per-employee limitation
on the number of shares for which options may be granted during a specified
period; and the exercise price of the option to be no less than the fair market
value of the stock on the date of the grant. As designed, the Stock Option Plan
provides that the maximum number of shares of Stock with respect to which an
award may be granted to an individual participant (i) in any one calendar year
is 50,000 and (ii) over the life of the Stock Option Plan is 125,000. The Stock
Option Plan has also been designed to comply with the other OBRA restrictions
noted herein. As such, shareholder approval of the Stock Option Plan should
qualify the Company for deductions of employees' compensation attributable to
stock option exercises by named executive officers in future taxable years.
Incentive Stock Options
An Incentive Stock Option may not be transferred by the holder thereof
except by will or the laws of descent and distribution, and the Incentive Stock
Option will be exercisable during the holder's lifetime only. No Incentive Stock
Option may be granted to any individual who, at the time such Incentive Stock
Option is granted, owns stock possessing more than ten percent of the total
combined voting power of all classes of stock of the Company unless (i) the
exercise price of the Incentive Stock Option is at least 110 percent of the
Stock's fair market value per share at the date of grant and (ii) the Incentive
Stock Option is not exercisable after the expiration of five years from the date
of grant. The aggregate fair market value (determined as of the time any
Incentive Stock Option is granted) of the shares of Stock with respect to which
Incentive Stock Options are exercisable for the first time by a recipient of an
Incentive Stock Option award in any calendar year may not exceed $100,000.
No grants of Incentive Stock Options have been made under the 1998 Stock
Option Plan.
STOCK APPRECIATION RIGHTS
The Stock Option Committee may grant SARs at any time, whether or not the
participant then holds stock options, granting the right to receive the excess
of the market value of the shares represented by the SARs on the
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<PAGE> 22
date exercised over the exercise price. SARs generally will be subject to the
same terms and conditions and exercisable to the same extent as stock options,
as described above. Upon the exercise of a SAR, the participant will receive the
amount due in cash or shares, or a combination of both, as determined by the
Stock Option Committee. SARs may be related to stock options ("tandem SARs"), in
which case the exercise of one will reduce to that extent the number of shares
represented by the other.
No grants of SARs have been made under the 1998 Stock Option Plan.
RESTRICTED STOCK
The Stock Option Committee may grant Restricted Stock, subject to such
restrictions as the Stock Option Committee may impose. The holder of Restricted
Stock may have all of the rights of a shareholder, including the right to
receive dividends and the right to vote the shares. Unless otherwise determined
by the Stock Option Committee, all unvested shares of Restricted Stock are
forfeited upon termination of service of the recipient.
The Stock Option Committee may, in its discretion, accelerate the time at
which any or all restrictions will lapse, or may remove any or all of the
restrictions. Restrictions may lapse separately or in combination at such time
or times, in such installments or otherwise as the Stock Option Committee may
deem appropriate.
No awards of Restricted Stock have been made under the 1998 Stock Option
Plan.
PERFORMANCE AWARDS
The Committee may award Long-Term Performance Awards to participants in the
Stock Option Plan, either in conjunction with or separate from other awards or
grants under the Plan. Long-Term Performance Awards are payable based on the
attainment of performance goals within a period of time (the "performance
period"). The Committee determines the objective standards used to measure the
amount payable pursuant to a Long-Term Performance Award, the length of the
performance period (which must be at least two(2) years), and the extent to
which the participant has earned any amount. Any amount earned under a Long-Term
Performance Award is payable in Stock or cash as determined by the Committee.
A participant who separates from employment with The Strongsville Savings
Bank or Company as a result of death, disability or retirement prior to the end
of a performance period may earn a portion of the amount payable under a
Long-Term Performance award based in part on the participant's performance
during the performance period through separation. A participant who separates
from employment for any other reason is not entitled to any payment under a
Long-Term Performance Award, except as noted below.
No Long-Term Performance Awards have been made under the 1998 Stock Option
Plan.
EFFECT OF MERGER AND OTHER ADJUSTMENTS
Shares as to which awards may be granted under the Stock Option Plan, and
shares then subject to awards, will be adjusted by the Committee in the event of
any merger, consolidation, reorganization, recapitalization, stock dividend,
stock split or other change in the corporate structure of the Company.
In the case of any merger, consolidation or combination of the Company in
which the Company is not the continuing company or its outstanding shares are
converted into or exchanged for different securities, cash or property, or any
combination thereof, any participant to whom a stock option or SAR has been
granted will have the right upon exercise of the option or SAR to an amount
equal to the excess of the market value on the date of exercise of the
consideration receivable in the merger, consolidation or combination with
respect to the shares covered or represented by the stock option or SAR over the
exercise price of the option or SAR multiplied by the number of shares with
respect to which the option or SAR has been exercised.
The restricted period with respect to an award of Restricted Stock will
lapse, and the stock will become fully vested, after a change in control of the
Company. A change in control will be deemed to occur when (i) a person or group
becomes the beneficial owner of shares of the Company representing 25% or more
of the total number of votes which may be cast for the election of the Board of
Directors of the Company, (ii) in connection with any tender or exchange offer
(other than an offer by the Company), merger or other business combination, sale
of
19
<PAGE> 23
assets or contested election, or combination of the foregoing, the persons who
are Directors of the Company cease to be a majority of the Board of Directors,
or (iii) shareholders of the Company approve a transaction pursuant to which the
Company will cease to be an independent company or pursuant to which
substantially all of its assets will be sold.
In addition, unless the Stock Option Committee provides otherwise, in the
event of a tender or exchange offer (other than an offer made by the Company) or
if the event specified in clause (iii) above occurs, all outstanding stock
options and SARs not fully exercisable will become exercisable in full.
AMENDMENT AND TERMINATION
The Board of Directors of the Company may at any time amend, suspend or
terminate the Stock Option Plan or any portion thereof. However, without the
prior approval of the shareholders, the Board of Directors may not adopt any
amendment that (i) increases the aggregate number of shares with respect to
which awards may be made under the Plan (except pursuant to Section 11, which
section provides for adjustments in the event of changes in the Company's
capitalization), (ii) materially increases the benefits accruing to Plan
participants, (iii) materially changes the requirements as to eligibility for
participation in the Plan or (iv) changes the class of persons eligible to
participate in the Plan. In addition, the Board of Directors generally may not
impair the rights of any Plan participant, without his or her consent, in any
award made pursuant to the Plan.
FEDERAL INCOME TAX CONSEQUENCES
Under present federal income tax laws, awards under the Stock Option Plan
will have the following consequences:
(1) The grant of an award, by itself, will generally neither result in the
recognition of taxable income to the participant nor entitle the Company to
a deduction at the time of such grant.
(2) In order to qualify as an "Incentive Stock Option," a stock option awarded
under the Stock Option Plan must meet the conditions contained in Section
422 of the Code, including the requirement that the shares acquired upon the
exercise of the stock option be held for one year after the date of exercise
and two years after the grant of the option (the "ISO Holding Period"). Upon
the disposition of shares of stock acquired pursuant to the exercise of an
Incentive Stock Option which satisfies the requisite ISO Holding Period, the
optionee will recognize capital gain or loss, as the case may be, measured
by the difference between the stock's selling price and the exercise price.
The Company is not entitled to any tax deduction by reason of the grant or
exercise of an Incentive Stock Option, or by reason of a disposition of
stock received upon exercise of an Incentive Stock Option if the ISO Holding
Period is satisfied. Different rules apply if the optionee disposes of the
shares of stock acquired pursuant to the exercise of an Incentive Stock
Option before the expiration of the ISO Holding Period. Option grants for
shares which are exercisable for the first time by an optionee during any
calendar year (under all plans of the Company and any parent corporation or
subsidiary of the Company), which have a fair market value in excess of
$100,000, shall be treated as options which are not Incentive Stock Options,
and will be subject to the same tax treatment as for the grant of
nonqualified stock options, as discussed below.
(3) The exercise of a stock option which is not an Incentive Stock Option will
result in the recognition of ordinary income by the participant on the date
of exercise in an amount equal to the difference between the exercise price
and the fair market value on the date of exercise of the shares acquired
pursuant to the stock option. The Company, in computing its federal income
tax, will generally be entitled to a deduction in an amount equal to the
compensation taxable to the options in the Company's taxable year in which
the amount is included as income to the optionee.
(4) The exercise of an SAR will result in the recognition of ordinary income by
the participant on the date of exercise in an amount of cash, and/or the
fair market value on that date of the shares, acquired pursuant to the
exercise.
(5) Holders of Restricted Stock will recognize ordinary income on the date that
the Restricted Stock is no longer subject to a substantial risk of
forfeiture, in an amount equal to the fair market value of the shares on
that
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<PAGE> 24
date. In certain circumstances, a holder may elect to recognize ordinary
income and determine such fair market value on the date of the grant of the
Restricted Stock. Holders of Restricted Stock will also recognize ordinary
income equal to their dividend or dividend equivalent payments when such
payments are received. Generally, the amount of income recognized by
participants will be a deductible expense for tax purposes for the Company.
(6) The Company will be allowed a deduction at the time, and in the amount of,
any ordinary income recognized by the participant under the various
circumstances described above, provided that the Company meets its federal
withholding tax obligations.
VOTE REQUIRED
A majority of the voting power of Emerald Stock is necessary in order to
adopt the Company's 1998 Stock Option and Incentive Plan.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" ADOPTION OF THE
1998 STOCK OPTION AND INCENTIVE PLAN.
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
(PROPOSAL 4)
The Board of Directors has appointed the firm of KPMG Peat Marwick LLP as
the Company's auditors for the fiscal year ending December 31, 1998, subject to
ratification of such appointment by the shareholders. KPMG Peat Marwick LLP has
acted as Emerald's independent auditors since September 17, 1997. Unless
otherwise indicated, properly executed proxies will be voted in favor of
ratifying the appointment of KPMG Peat Marwick LLP, independent certified public
accountants, to audit the financial records and accounts of the Company for the
fiscal year ending December 31, 1998.
Effective September 17, 1997, the engagement of Deloitte & Touche LLP as
the Company's independent auditors was terminated by the Company. The decision
to change accountants was approved by the Board of Directors upon the
recommendation of the Audit Committee. The audit reports of Deloitte & Touche
LLP on the consolidated financial statements of the Company and subsidiaries as
of and for the years ended December 31, 1996 and 1995 did not contain any
adverse opinion or disclaimer of opinion, nor were they qualified or modified as
to uncertainty, audit scope or accounting principles. In connection with the
audits of the two fiscal years ended December 31, 1996 and the subsequent
interim period through September 17, 1997, there were no disagreements with
Deloitte & Touche LLP on any matter of accounting principle or practices,
financial statement disclosure or auditing scope or procedures, which
disagreements if not resolved to their satisfaction would have caused Deloitte &
Touche LLP to reference to the subject matters of the disagreements in
connection with Deloitte & Touche LLP's opinion. Additionally, there were no
disagreements with Deloitte & Touche LLP regarding any of these matters, either
those resolved to their satisfaction or those not resolved to their
satisfaction. None of the events listed in Item 304(a)(1)(v)(A) through (D) of
the Securities and Exchange Commission's Regulation S-K occurred during the
fiscal years ended December 31, 1995 or 1996 or the subsequent interim period
from January 1, 1997 through September 17, 1997. During the fiscal years ended
December 31, 1995 and 1996 and the subsequent interim period from January 1,
1997 through September 17, 1997, there was no consultation with KPMG Peat
Marwick LLP regarding: (1) application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on the Company's financial statements; or (2) any matter that
was the subject of disagreement (as defined in paragraph 304(a)(1)(iv) of the
Securities and Exchange Commission's Regulation S-K) or a reportable event (as
defined in paragraph 304(a)(1)(v) of Regulation S-K).
Representatives of KPMG Peat Marwick LLP, which has acted as independent
auditors of the Company since September 17, 1997, will be present at the
Meeting. They will be given an opportunity to make a statement if they desire to
do so and will be available to respond to appropriate questions. Ratification of
the appointment of auditors requires the affirmative vote of a majority of the
votes actually cast at the Meeting.
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<PAGE> 25
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE RATIFICATION
OF THE APPOINTMENT OF KPMG PEAT MARWICK LLP AS THE COMPANY'S AUDITORS FOR THE
FISCAL YEAR ENDING DECEMBER 31, 1998
TRANSACTIONS WITH CERTAIN RELATED PERSONS
The Strongsville Savings Bank refers certain title insurance business to
National Land Title Insurance Company ("National Land") and City Title Company
Agency, Inc. ("City Title"). Joseph and Michael Dzurilla, the adult sons of
Director Joan M. Dzurilla, own the stock of NLTI Financial, a holding company
which owns 100% of National Land. City Title is a real estate title insurance
agency wholly owned by National Land. City Title performs title searches, title
examinations and insurability determinations related to title insurance
commitments for mortgage loan transactions insured by National Land. City Title
and National Land are each charging for title business work at a rate consistent
with the standards for that industry.
During 1997, City Title performed services related to loan transactions
such as title insurance and commitments, title examinations, and post-closing
services. Borrowers of The Strongsville Savings Bank paid City Title $198,561.93
during 1997 for services related to the loan transactions.
Some of the directors and officers, as well as firms and companies with
which they are associated, are and have been customers of The Strongsville
Savings Bank, and have engaged in various banking transactions with The
Strongsville Savings Bank in 1997. Loan transactions with these persons were
made in the ordinary course of business on substantially the same terms,
including interest rates and collateral, prevailing at the time for comparable
transactions with others, and did not present more than a normal risk of
collectibility or other unfavorable features.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, as well as persons who own more than 10% of a
registered class of the Company's equity securities, to file with the Securities
and Exchange Commission initial reports of ownership and reports of changes in
ownership of Emerald Stock and other equity securities of the Company. Based
solely on review of the copies of such reports furnished to the Company and
written representations to the Company, to the Company's knowledge all Section
16(a) filing requirements applicable to its executive officers, directors and
greater than 10% beneficial owners were complied with during the fiscal year
ended December 31, 1997.
SHAREHOLDER PROPOSALS
In order to be eligible for inclusion in the Company's proxy materials for
the 1998 Annual Meeting of Shareholders, any shareholder proposal to take action
at such meeting must be received at the Company's executive offices, 14092 Pearl
Road, Strongsville, Ohio 44136, no later than November 20, 1998. Any such
proposal shall be subject to the requirements of the proxy rules adopted under
the Securities Exchange Act of 1934.
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<PAGE> 26
OTHER MATTERS
The Board of Directors is not aware of any business to come before the
Meeting other than the matters discussed in this Proxy Statement. However, if
any other matters should properly come before the Meeting, it is intended that
holders of the proxies will act in accordance with their best judgment. The
Company's Code of Regulations places restrictions on presentation at any
shareholders' meeting of new business that has not been stated in writing and
filed in advance with the secretary of the Company.
The cost of solicitation of proxies will be borne by the Company. The
Company will reimburse brokerage firms and other custodians, nominees and
fiduciaries for reasonable expenses incurred by them in sending proxy materials
to the beneficial owners of Stock. In addition to solicitation by mail,
directors, officers and regular employees of the Company or The Strongsville
Savings Bank may solicit proxies personally or by telephone, without additional
compensation. The Company has engaged the services of Corporate Investor
Communications, Inc. to assist in the solicitation of proxies at an anticipated
cost of $5,500.00.
Strongsville, Ohio
March 20, 1998
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<PAGE> 27
FIVE-YEAR SUMMARY
<TABLE>
<CAPTION>
AT AND FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income..................... $ 44,928 $ 39,858 $ 35,410 $ 27,122 $ 23,646
Interest expense.................... 28,255 24,494 21,342 14,113 11,818
-------- -------- -------- -------- --------
Net interest income............... 16,673 15,364 14,068 13,009 11,828
Provision for loan losses........... 215 305 238 92 77
-------- -------- -------- -------- --------
Net interest income after
provision for loan losses...... 16,458 15,059 13,830 12,917 11,751
Net gain on sale of assets.......... 475 1,091 997 228 1,799
Other noninterest income............ 1,863 1,344 1,055 966 1,063
Amortization of goodwill............ 123 134 143 151 158
Other noninterest expense........... 9,362 9,390 8,483 7,219 5,971
One-time SAIF assessment............ -- 2,481 -- -- --
-------- -------- -------- -------- --------
Income before federal income
taxes.......................... 9,311 5,489 7,256 6,741 8,484
Federal income taxes................ 3,170 1,941 2,539 2,331 2,915
-------- -------- -------- -------- --------
Net income........................ $ 6,141 $ 3,548 $ 4,717 $ 4,410 $ 5,569
======== ======== ======== ======== ========
SUMMARY OF FINANCIAL CONDITION
Total assets........................ $603,965 $567,490 $492,097 $419,258 $332,729
Investment securities............... 45,711 69,680 75,949 79,700 61,909
Total gross loans................... 504,443 457,919 364,766 306,921 263,364
Loans-net........................... 469,280 425,855 336,351 281,843 242,395
Mortgage-backed securities.......... 53,137 52,180 52,005 37,274 12,426
Goodwill............................ 663 786 920 1,062 1,213
Deposits............................ 520,690 493,471 432,563 363,050 294,750
Advances from Federal Home Loan
Bank.............................. 28,138 25,234 13,333 15,583 --
Shareholders' equity................ 48,515 43,158 41,091 37,153 33,578
</TABLE>
24
<PAGE> 28
FIVE-YEAR SUMMARY
<TABLE>
<CAPTION>
AT AND FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
PER SHARE INFORMATION (6)
Net income -- Basic.............. $ 1.21 $ 0.70 $ 0.93 $ 0.87 $ 1.37
Earnings before effect of
one-time SAIF assessment....... -- 1.03 -- -- --
Dividends paid................... 0.24 0.24 0.20 0.16 0.14
Book value....................... 9.56 8.53 8.12 7.34 6.64
Tangible book value (1).......... 9.39 8.37 7.40 7.13 6.40
OTHER STATISTICAL AND OPERATING
DATA
Return on average assets
(ROAA)......................... 1.03% 0.68% 1.03% 1.18% 1.79%
ROAA before effect of one-time
SAIF assessment................ -- 0.99% -- -- --
Return on average equity
(ROAE)......................... 13.45% 8.38% 12.07% 12.47% 22.15%
ROAE before effect of one-time
SAIF assessment................ -- 12.25% -- -- --
Net yield on average
interest-earning assets (2).... 2.87% 3.00% 3.15% 3.58% 3.91%
Interest rate spread during the
year (3)....................... 2.53% 2.62% 2.76% 3.24% 3.64%
Other noninterest expense to
average assets (4)............. 1.55% 1.79% 1.85% 1.93% 1.92%
Dividend payout ratio excluding
one-time SAIF assessment....... 19.79% 22.94% 21.46% 18.08% 10.41%
Total allowance for loan losses
to nonperforming loans......... 75.80% 83.76% 56.91% 120.11% 315.80%
Total allowance for loan losses
to total loans................. 0.35% 0.33% 0.35% 0.34% 0.35%
Nonperforming loans to total
loans.......................... 0.45% 0.40% 0.61% 0.28% 0.11%
Nonperforming assets to total
assets......................... 0.57% 0.30% 0.42% 0.19% 0.08%
Net charge-offs (recoveries) to
average loans (5).............. 0.00% 0.01% 0.01% -0.01% -0.02%
Number of full-service offices... 14 14 12 10 9
Weighted average common shares
outstanding.................... 5,065,156 5,061,600 5,061,600 5,061,600 4,084,132
CAPITAL RATIOS
Equity to assets:
Average for the year........... 7.68% 8.06% 8.52% 9.46% 8.08%
At year end.................... 8.03% 7.61% 8.35% 8.86% 10.09%
Tangible capital (1)............. 7.74% 7.49% 8.14% 8.64% 9.76%
Core capital..................... 7.74% 7.49% 8.14% 8.87% 10.10%
Risk-based capital............... 12.85% 12.93% 13.51% 14.22% 14.99%
</TABLE>
- ---------------
(1) Tangible book value and tangible capital each represent shareholders' equity
less goodwill and net realized gains (losses) on securities available for
sale.
(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 in this ratio.
(5) Net charge-offs during the year to average loans outstanding during the
year.
(6) All share and per-share information has been retroactively adjusted for the
two-for-one stock split on May 15, 1997.
25
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS
Emerald Financial Corp. (Emerald or Company), a unitary thrift holding
company, became The Strongsville Savings Bank's (Strongsville Savings or Bank)
holding company 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.
Strongsville Savings takes great pride in its history of providing friendly
and professional service to its customers. Our commitment to providing customers
with the financial products and services they need and want has brought success
to Strongsville Savings and to our customers. We help our customers achieve
their financial goals by providing a variety of products. The Bank offers a
traditional product line which includes NOW accounts, IRA accounts and a variety
of term deposit, passbook and other deposit vehicles. Many customers have
enjoyed the American dream of home-ownership with mortgage loan financing from
Strongsville Savings. We offer home equity lines of credit, loans for
residential construction and development, commercial property and many other
purposes.
Emerald's franchise is strong with a network of 14 Community Financial
Centers (Offices) throughout Southwestern Cuyahoga County, Lorain County and
Medina County. Our strategy is to position our full service Offices in
communities poised for growth. Our customer service approach has proved
successful as evidenced by our strong growth at each Office. We expect the
tradition to continue through our close attention to the marketplace, to our
customers and to their financial needs.
FINANCIAL CONDITION
The Company's total assets were $604.0 million at December 31, 1997,
representing an increase of $36.5 million or 6.4% over the previous year total
assets of $567.5 million. The Company's 10.2% loan growth was funded by
increases in deposits and by decreases in investments. Emerald's deposits
increased 5.5% during 1997 from $493.5 million to $520.7 million.
26
<PAGE> 30
The composition of Emerald's assets and liabilities at year end 1997 and
1996 are displayed below.
<TABLE>
1997
TOTAL ASSETS
TOTAL LOANS, NET CASH & INVESTMENTS OTHER
<S> <C> <C>
78% 18% 4%
1996
TOTAL ASSETS
TOTAL LOANS, NET CASH & INVESTMENTS OTHER
<S> <C> <C>
75% 23% 2%
TOTAL LIABILITIES &
SHAREHOLDERS' EQUITY
TOTAL DEPOSITS SHAREHOLDERS' EQUITY OTHER
<S> <C> <C>
86% 8% 6%
TOTAL LIABILITIES &
SHAREHOLDERS' EQUITY
TOTAL DEPOSITS SHAREHOLDERS' EQUITY OTHER
<S> <C> <C>
87% 8% 5%
</TABLE>
Shareholders' equity increased $5.3 million, or 12.4% to $48.5 million
during 1997 primarily through the retention of net income of $6.1 million offset
by dividends of $1.2 million.
Emerald's dividend payments have increased over the past five years as
noted below. The Bank paid quarterly dividends totaling 24c per share for 1997,
an increase of 2.1% over the 23.5c per share paid in 1996. The Company's stock
split two-for-one on May 15, 1997. All share and per-share information has been
adjusted to reflect the effect of the stock split.
DIVIDENDS PER SHARE
<TABLE>
<S> <C>
1993 $0.14
1994 $0.16
1995 $0.20
1996 $0.24
1997 $0.24
</TABLE>
27
<PAGE> 31
RESULTS OF OPERATIONS
Emerald strives to produce strong, stable core earnings from operations.
Core earnings consist of net interest income and recurring non-interest income,
reduced by recurring non-interest expenses. The Company's revenue enhancement
and cost reduction measures have contributed to the increase in core earnings
over the three years ended December 31, 1997, as evidenced in the chart below.
Nonrecurring noninterest income excludes gains (losses) on sales of loans and
other assets for all periods presented.
Core earnings before federal income tax for the three years ended December
31, 1997, are noted below. 1996 noninterest expense is before the effect of the
one-time SAIF assessment of $2.5 million on September 30, 1996.
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1997 1996 1995
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Net interest income................................. $16.7 $15.4 $14.0
Less provision for loan losses...................... 0.2 0.3 0.2
----- ----- -----
16.5 15.1 13.8
Noninterest income (recurring)...................... 1.9 1.3 1.1
Noninterest expense (recurring)..................... 9.5 9.5 8.6
----- ----- -----
CORE EARNINGS....................................... $ 8.9 $ 6.9 $ 6.3
===== ===== =====
</TABLE>
Emerald's net interest income has increased steadily over the past three
years, primarily due to growth in the portfolio of interest earning assets. The
Company's franchise has grown from nine Offices in 1993 to fourteen in 1997.
This franchise expansion increased certain noninterest expenses, such as human
resources and occupancy during 1995 and 1996, which have leveled off in 1997.
The Bank anticipated these increases and determined that the benefits of market
presence, market penetration and future earnings growth exceeded the rise in
operating expenses.
NET INTEREST INCOME
Net interest income is the chief component of net income. Net interest
income is the difference between interest income on interest-earning assets and
interest expense on interest-bearing liabilities. Interest bearing liabilities
include deposit accounts and FHLB advances. Net interest income is determined by
changes in the composition of interest-earning assets and interest-bearing
liabilities and fluctuations in the levels of interest rates.
Interest rates in general declined slightly during 1997 and 1996 although
they had been increasing somewhat during 1995. Yields on interest-earning assets
declined 4 basis points during 1997 while costs on interest-bearing liabilities
increased 5 basis points during the year.
INTEREST INCOME
Emerald's primary source of income is interest income from its loan
portfolio and other interest-earning assets. The Company's commitment to
providing residential home loans is evident by its $357.2 million portfolio of
permanent and construction single-family residential mortgage loans. The
Company's interest-earning assets include the residential mortgage loan
portfolio, the residential acquisition and development loan portfolio, the other
loan portfolios and the investment securities and mortgage-backed securities
portfolios.
Emerald's interest income was $44.9 million in 1997, $39.9 million in 1996
and $35.4 million in 1995, representing annual increases of 12.72% and 12.56%
for the years ended December 31, 1997 and 1996, respectively. These increases
are attributable to a combination of the effects of increases in volume and
changes in rate that are set forth in Table 2. Average interest-earning assets
were $580.2 million with an average yield of 7.74% in 1997, $512.2 million with
an average yield of 7.78% in 1996 and $447.2 million with an average yield of
7.92% in 1995. See Table 1 for more details regarding average interest-earning
assets and their yields.
28
<PAGE> 32
INTEREST EXPENSE
Emerald's primary source of funding for interest-earning assets is retail
deposits. Management believes that by providing friendly and professional
service, the Bank has achieved deposit growth during a period characterized by
disintermediation. As financial institutions often struggle to retain retail
deposits, the Bank has been able to increase deposits by 5.5% in 1997 and 14.1%
in 1996. Management has dedicated resources to focus employees' attention on
providing excellent customer service and to understanding the attributes of the
Bank's products. Savings counselors, tellers and other employees are encouraged
to cross-sell the Bank's products and services to current and future customers.
Management believes the Bank has a stable deposit base because the base consists
of retail deposits from the people in the communities we serve.
Emerald's interest expense was $28.3 million in 1997, $24.5 million in 1996
and $21.3 million in 1995. The change in interest expense was primarily a result
of the growth in deposits, principally in certificates of deposit. The average
cost of interest-bearing liabilities increased 5 basis points to 5.21% during
1997 from 5.16% in 1996. Changes in interest rates did not contribute to the
change during 1996 as the average cost of interest-bearing liabilities remained
unchanged at 5.16% during 1996 and 1995. See tables 1 and 2 for more information
regarding average balances, average rates and changes in interest expense
attributable to changes in volume and changes in rates.
Table 1 presents information regarding the average balances of
interest-earning assets and interest-bearing liabilities, the total dollar
amount of interest income from interest-earning assets and their average yields
and the total dollar amount of interest expense on interest-bearing liabilities
and their average rates. The table also presents net interest income, interest
rate spread, net interest margin and the ratio of average interest-earning
assets to average interest-bearing liabilities. Interest rate spread represents
the difference between the weighted average yield on interest-earning assets and
the weighted average cost of interest-bearing liabilities, and net interest
margin represents net interest income as a percent of average interest-earning
assets. Average balance calculations were based on daily and monthly balances.
Assets available for sale are included in the major asset category at amortized
cost.
TABLE 1
AVERAGE BALANCE TABLE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------
1997 1996 1995
---------------------------- ---------------------------- ----------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- ------ -------- -------- ------ -------- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Loans, net (1)....................... $451,820 $36,892 8.17% $394,329 $32,442 8.23% $305,605 $26,424 8.65%
Investment securities................ 56,712 3,441 6.07% 63,189 3,836 6.07% 80,822 4,982 6.16%
Mortgage-backed securities........... 56,708 3,882 6.85% 44,792 3,110 6.94% 45,399 3,192 7.03%
Other interest-earning assets........ 14,991 713 4.76% 9,937 470 4.73% 15,364 812 5.29%
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-earning assets...... 580,231 44,928 7.74% 512,247 39,858 7.78% 447,190 35,410 7.92%
Noninterest-earning assets........... 14,734 12,808 11,787
-------- ------- ------ -------- ------- ------ -------- ------- ------
TOTAL ASSETS....................... $594,965 $525,055 $458,977
======== ======= ====== ======== ======= ====== ======== ======= ======
INTEREST-BEARING LIABILITIES
Deposits (2)......................... $513,950 $26,575 5.17% $457,974 $23,516 5.13% $399,460 $20,428 5.11%
Advances from FHLB................... 28,095 1,680 5.98% 16,303 978 6.00% 14,420 914 6.34%
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-bearing
liabilities...................... 542,045 28,255 5.21% 474,277 24,494 5.16% 413,880 21,342 5.16%
Noninterest-bearing liabilities...... 7,256 8,434 6,013
Shareholders' equity................. 45,664 42,344 39,084
-------- ------- ------ -------- ------- ------ -------- ------- ------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY........................... $594,965 $525,055 $458,977
======== ======= ====== ======== ======= ====== ======== ======= ======
Net interest income.................. $16,673 $15,364 $14,068
Interest-rate spread................. 2.53% 2.62% 2.76%
Net interest margin.................. 2.87% 3.00% 3.15%
Ratio of average interest-earning
assets to average interest-bearing
liabilities........................ 107.04% 108.01% 108.05%
</TABLE>
29
<PAGE> 33
- ---------------
(1) Average balances include non-accrual loans. Interest income includes
deferred loan fee amortization of $1,613,000, $1,650,000 and $1,676,000 for
the years ended December 31, 1997, 1996 and 1995, respectively.
(2) Deposits include noninterest-bearing demand accounts which were $13,740,000,
$11,535,000 and $11,728,000 at December 31, 1997, 1996 and 1995,
respectively.
Table 2 presents certain information regarding changes in interest income
and interest expense of the Company for the years ended December 31, 1997, 1996
and 1995. The table shows the changes in interest income and expense by major
category attributable to changes in the average balance (volume) and changes in
interest rates. The net change not attributable to either rate or volume is
allocated on a pro-rata basis to the change in rate or volume. Assets available
for sale are included in the major asset category at amortized cost.
TABLE 2
RATE/VOLUME TABLE
<TABLE>
<CAPTION>
1997 COMPARED TO 1996 1996 COMPARED TO 1995
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGES IN DUE TO CHANGES IN
------------------------- -----------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ----- ------ ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME ON INTEREST-EARNING
ASSETS
Loans, net.......................... $4,684 $(234) $4,450 $ 7,227 $(1,209) $ 6,018
Investment securities............... (395) -- (395) (1,074) (72) (1,146)
Mortgage-backed securities.......... 812 (40) 772 (42) (40) (82)
Other............................... 240 3 243 (263) (79) (342)
------ ----- ------ ------- ------- -------
Total............................... 5,341 (271) 5,070 5,848 (1,400) 4,448
------ ----- ------ ------- ------- -------
INTEREST EXPENSE ON INTEREST-BEARING
LIABILITIES
Deposits............................ 2,876 183 3,059 3,007 81 3,088
Advances from FHLB.................. 705 (3) 702 110 (46) 64
------ ----- ------ ------- ------- -------
Total............................... 3,581 180 3,761 3,117 35 3,152
------ ----- ------ ------- ------- -------
CHANGE IN NET INTEREST INCOME....... $1,760 $(451) $1,309 $ 2,731 $(1,435) $ 1,296
====== ===== ====== ======= ======= =======
</TABLE>
PROVISIONS FOR LOAN LOSSES
The provision for loan losses represents a charge to income for possible
credit losses on loans. The Bank maintains the level of the allowance for loan
losses at an amount adequate to absorb potential losses inherent in the loan
portfolio. A quarterly review of the adequacy of the allowance for loan losses
considers growth in the loan portfolio, potential losses identified by the
portfolio review process, and the Company's historical loan loss experience. In
addition, management considers economic conditions, including the overall level
of interest rates and the general trend of the national economy, local economy
and housing markets. The allowance is determined in accordance with generally
accepted accounting principles.
The provision for loan losses was $215,000 in 1997, $305,000 in 1996 and
$238,000 in 1995. The provisions for the three years ended December 31, 1997,
reflect generally stable economic conditions in Emerald's market area, as well
as the high credit quality of the Company's loan portfolio. The allowance for
loan losses throughout 1997, 1996 and 1995 was commensurate with management's
estimate of the credit risk in the loan portfolio.
NONINTEREST INCOME
Noninterest income is composed mainly of fees the Bank earns from services
performed for customers and for servicing loans sold to the secondary market.
Loan servicing and other loan related fees were $738,000 in 1997, $623,000 in
1996 and $464,000 in 1995.
30
<PAGE> 34
Gains on the sale of loans to the secondary market and gains on sales of
securities and other assets are included in noninterest income. This is the
component of noninterest income with the greatest level of variation. Gains on
sales of loans experience variations due to the number of loans sold to the
secondary market and to the price offered by the secondary market for such
loans. The Bank sells loans to the secondary market in conjunction with certain
fixed-rate loan programs, to provide funding and as an interest rate risk
management tool. The Bank recorded gains on loan sales of $437,000 in 1997,
$711,000 in 1996 and $964,000 in 1995.
NONINTEREST EXPENSE
Emerald's major subsidiary, Strongsville Savings Bank, has made a
commitment to expand its franchise value by blanketing its market area with easy
access Community Financial Centers. We believe the expansion of the Company's
financial network will benefit current and future customers by being close to
their homes. There are operating costs involved in franchise expansion; however,
we believe the benefits of expanding to provide full coverage to our targeted
market are worth the investment. Our strategy has shown good results as the
deposits at the five Offices added since 1993 stood at $87.3 million at December
31, 1997, and $66.2 million at December 31, 1996. We feel it is important to
note that noninterest expenses, excluding the one-time SAIF assessment in 1996,
did not increase from 1996 to 1997.
As Strongsville Savings grows and expands its franchise and services into
more communities, management has worked hard to control costs. The Company's
ratio of noninterest expense to average assets was 1.55% in 1997, 1.79% in 1996
and 1.85% in 1995. The common industry benchmark for this ratio is 2.00% or
less. According to SNL Securities Thrift Performance as of September 30, 1997,
industry averages were 2.15% for the twelve months ended September 30, 1997, and
2.23% and 2.26% for the years ended December 31, 1996 and 1995, respectively.
Noninterest expense was $9,485,000 in 1997, $9,524,000 in 1996 and
$8,626,000 in 1995. Management is pleased with the slight decline in operating
expenses during 1997. The decline of $39,000 is comprised of the decrease of
$619,000 in deposit insurance premiums offset by expenses incurred in the
process of bringing all item processing operations in-house and by other general
increases.
Congress passed legislation to recapitalize the SAIF fund of the FDIC
during 1996 that required thrift institutions, such as Strongsville Savings, to
pay a one-time assessment to recapitalize the SAIF fund of 65.7(cent) per $100
of deposits as of March 31, 1995. The Bank recognized a charge to earnings of
$2.5 million (pre-tax) as a result. The Company has adjusted 1996 results in the
paragraphs above as if this one-time charge had not been incurred.
FEDERAL INCOME TAXES
The Bank provided for federal income taxes as follows: $3,170,000 in 1997,
$1,941,000 in 1996 and $2,539,000 in 1995. The changes in the level of the
Company's provision for federal income taxes were primarily due to changes in
the level of pre-tax income. The effective tax rates for the periods were 34.0%
in 1997, 35.4% in 1996 and 35.0% in 1995.
LENDING ACTIVITIES
The cornerstone of Strongsville Savings' lending activities is providing
mortgage loans to homeowners. The Bank principally originates conventional first
mortgage loans secured by residential real estate. The Bank's newest loan
product, the Emerald Home Equity Line of Credit (the Emerald Line), enables
customers to utilize the equity in their homes to fund improvements, education
or whatever they choose. The Emerald Line's interest rate is based on the
Company's prime rate. Loans made to home-owners on owner-occupied one-to-four
family residences typically have low credit risk because the borrower occupies
the home. Credit risk management is also enhanced by the historically stable
real estate values in Northeastern Ohio.
Strongsville Savings has developed a niche in the residential construction
loan market. The Bank makes residential land development loans to local builders
and developers with whom strong business relationships have been developed.
These loans are made on land zoned for residential use which will be developed
into residential
31
<PAGE> 35
building lots. In addition, the Bank provides construction loans to builders for
the construction of homes, most of which are pre-sold, and to individuals for
the construction of their homes.
Management considers these development and construction loans as having
somewhat greater credit risk than conventional residential mortgage loans
because there is uncertainty related to the completion of projects within their
time and cost budgets. Strongsville's management constantly monitors these loans
and reviews the progress of each with the borrowers and contractors to manage
and mitigate the risk involved.
Management believes that loans secured by commercial property may present a
higher degree of credit risk than residential loans. The factors that tend to
increase the credit risk of these loans include the concentration of principal
in a limited number of loans and borrowers, the effects of general economic
conditions on income-producing properties and the increased difficulty of
evaluating and monitoring such properties. Furthermore, the repayment of loans
secured by commercial real estate is typically dependent upon the cash flows of
the related business enterprise. The Bank has instituted procedures to monitor
the cash flows of its commercial real estate loan customers.
The following table illustrates the composition of the Company's loan
portfolio:
TABLE 3
LOAN PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
------------------ ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
REAL ESTATE MORTGAGE LOANS:
Permanent first mortgage loans:
1-4 family................... $319,796 69.30% $301,284 70.88% $220,490 66.60%
Multi-family................. 924 0.20% 1,049 0.25% 1,183 0.36%
Commercial real estate....... 52,499 11.38% 46,883 11.03% 42,098 12.72%
Land......................... 553 0.12% 195 0.05% 358 0.11%
-------- ------ -------- ------ -------- ------
Total permanent loans... 373,772 81.00% 349,411 82.21% 264,129 79.79%
-------- ------ -------- ------ -------- ------
Construction first mortgage
loans:
Residential development...... 56,217 12.17% 54,670 12.85% 48,538 14.66%
1-4 family................... 37,413 8.11% 37,049 8.72% 26,960 8.14%
Multi-family................. 1,050 0.23% 240 0.06% 2,660 0.80%
Commercial real estate....... 6,879 1.50% 2,376 0.56% 4,233 1.29%
-------- ------ -------- ------ -------- ------
Total construction
loans................. 101,559 22.01% 94,335 22.19% 82,391 24.89%
-------- ------ -------- ------ -------- ------
Total Mortgage loans.... 475,331 103.01% 443,746 104.40% 346,520 104.68%
-------- ------ -------- ------ -------- ------
OTHER LOANS
Commercial...................... 5,736 1.24% 4,250 1.00% 3,955 1.19%
Consumer........................ 15,460 3.35% 9,117 2.14% 8,895 2.69%
-------- ------ -------- ------ -------- ------
Total other loans....... 21,196 4.59% 13,367 3.14% 12,850 3.88%
-------- ------ -------- ------ -------- ------
Total loans............. 496,527 107.60% 457,113 107.54% 359,370 108.56%
Less:
Loans in process................ 30,015 6.51% 26,676 6.28% 23,639 7.14%
Allowance for loan losses....... 1,625 0.35% 1,423 0.33% 1,168 0.35%
Deferred loan fees.............. 3,430 0.74% 3,954 0.93% 3,546 1.07%
-------- ------ -------- ------ -------- ------
35,070 7.60% 32,053 7.54% 28,353 8.56%
-------- ------ -------- ------ -------- ------
Total loans held for
investment-Net............... $461,457 100.00% $425,060 100.00% $331,017 100.00%
======== ====== ======== ====== ======== ======
Real estate loans held for
sale......................... $ 7,823 $ 795 $ 5,334
======== ======== ========
</TABLE>
32
<PAGE> 36
Loan originations by type were as follows for the years ended:
TABLE 4
LOAN ORIGINATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
PERMANENT MORTGAGE LOAN ORIGINATIONS
1-4 family................................................ $104,097 $154,482 $ 85,892
Multi-family.............................................. -- -- --
Commercial real estate.................................... 4,694 7,508 4,941
Land...................................................... 573 1,116 241
-------- -------- --------
109,364 163,106 91,074
CONSTRUCTION FIRST MORTGAGE LOAN ORIGINATIONS
Residential development................................... 43,081 39,885 43,250
1-4 family................................................ 46,926 47,990 37,071
Multi-family.............................................. 670 -- 2,660
Commercial real estate.................................... 8,086 2,478 3,930
-------- -------- --------
98,763 90,353 86,911
NONMORTGAGE LOANS
Commercial................................................ 3,513 3,212 4,348
Consumer.................................................. 18,667 4,003 4,528
-------- -------- --------
22,180 7,215 8,876
-------- -------- --------
TOTAL LOAN ORIGINATIONS..................................... 230,307 260,674 186,861
PURCHASED LOANS
Commercial real estate.................................... 4,922 2,250 700
-------- -------- --------
TOTAL NEW LOANS............................................. $235,229 $262,924 $187,561
</TABLE>
ASSET QUALITY
Management has designed stringent underwriting standards to minimize credit
risk in the Company's loan portfolio. All loans are subject to these standards,
which include evaluating each applicant's ability to make periodic payments, his
or her equity in the property, and the value of the underlying collateral.
Management monitors the loan portfolio to determine that the level of credit
risk remains stable and acceptable.
The Bank defines non-performing loans as those loans where there is an
indication that the borrower no longer has the ability to repay. Generally,
these loans are more than 90 days delinquent. Non-performing assets include
non-performing loans. The Company's non-performing assets have consistently been
below peer group averages. The Company's ratio of non-performing assets to total
assets was 0.58%, 0.30% and 0.42% at December 31, 1997, 1996 and 1995,
respectively. According to the SNL Securities Thrift Performance as of
33
<PAGE> 37
September 30, 1997, the industry average ratio of non-performing assets to total
assets was 0.55% at September 30, 1997, and 0.59% and 0.63% at December 31, 1996
and 1995, respectively.
TABLE 5
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
NON-PERFORMING ASSETS 1997 1996 1995
--------------------- ------ ------ ------
<S> <C> <C> <C>
Total non-performing loans.................................. $2,144 $1,699 $2,052
Other non-performing assets................................. 1,331 -- --
------ ------ ------
Total non-performing assets................................. $3,475 $1,699 $2,052
====== ====== ======
Non-performing assets to total assets....................... 0.58% 0.30% 0.42%
Allowance for loan losses to non-performing loans........... 75.80% 83.76% 56.91%
Net charge-offs (recoveries) to average loans outstanding
for the year.............................................. 0.00% 0.01% 0.01%
</TABLE>
At December 31, 1997, non-performing loans included nine residential loans
totaling $872,000, four construction loans totaling $692,000, two land loans
totaling $181,000, one commercial business loan totaling $370,000 and twelve
consumer loans totaling $29,000. The nonperforming construction, land and
commercial business loans are to a single borrower who encountered financial
problems in 1997. The Bank has begun foreclosure proceedings on the property
securing the loans. Other non-performing assets included four investments
totaling $648,000 and three properties acquired in settlement of mortgage
obligations. The ratio of net charge-offs to average loans outstanding
illustrates the Company's commitment to minimizing credit risk through its
strict underwriting standards and collection procedures.
At December 31, 1997, there was one loan secured by a funeral home totaling
$495,000 which is not included in the table above. Indications of possible cash
flow problems have caused management concern regarding the borrower's ability to
comply with present loan repayment terms and may result in the classification of
this loan as non-performing in the future. Based on written opinions from an
independent fee appraiser, the collateral values of the property is sufficient
to cover the total outstanding debt.
ASSET AND LIABILITY MANAGEMENT
The Company's asset and liability management program is intended to
minimize the impact of significant changes in interest rates on net interest
income and net portfolio value. The Executive Committee of the Bank, which
includes representatives from the Board and from senior management, monitors and
evaluates methods for managing interest rate risk within acceptable levels as
determined by the Board of Directors. If projected changes in the Bank's net
portfolio value are not within the limits established by the Board, the Board
may direct management to change the asset and liability mix to bring interest
rate risk within such approved limits. Management believes the keys to
successful interest rate and credit risk management include the monitoring and
management of interest rate sensitivity and the quality of assets, discussed
above. Interest rate risk is the risk that net interest income or net portfolio
value will decline significantly in periods of changing interest rates.
Strongsville Savings has endeavored to buffer net income from the effect of
changes in interest rates by reducing the maturity or repricing mismatch between
its interest-earning assets and interest-bearing liabilities. The Bank's
strategy includes originating adjustable rate mortgage (ARM) loans, selling
certain fixed-rate residential mortgage loans to the Federal Home Loan Mortgage
Corporation (Freddie Mac) and investing in securities with short to medium
terms. This strategy has resulted in an investment of $231.2 million, or 46.6%
of the Company's total loan portfolio in ARM loans at December 31, 1997. The
Bank originated $129.3 million, $97.7 million and $95.7 million in ARM loans in
1997, 1996 and 1995, respectively. Although the Bank is committed to originating
ARM loans, management believes that discounted "teaser" rate loans diminish the
effectiveness of ARM loans for managing interest rate risk; therefore the Bank
does not offer teaser rate loans.
Strongsville Savings sold $54.8 million in long-term fixed-rate loans to
Freddie Mac during 1997. The Bank only sells loans to the secondary market on a
non-recourse basis with servicing retained.
34
<PAGE> 38
The Company's investment portfolio consists primarily of investment grade
corporate debt, government agency debt and mortgage-backed securities issued by
government agencies. Substantially all of the corporate debt and government
agency debt mature in three years or less.
The Company's strategy to reduce the maturity or repricing mismatch between
its interest rate sensitive assets and liabilities includes reducing the terms
to maturity of its long-term interest-earning assets, as noted above, and
lengthening the terms to repricing or maturity of its interest-bearing
liabilities. At December 31, 1997, the Company's long-term fixed-rate deposits
with terms exceeding three years were $44.2 million.
A common industry measure of a financial institution's general sensitivity
to interest rates is called the gap (the GAP). The GAP represents the difference
between the Company's interest-earning assets and interest-bearing liabilities
maturing within certain time frames as a percent of the Company's total assets.
Table 6 illustrates the maturities or repricing of the Company's assets and
liabilities at December 31, 1997 based on information from the financial model
used by Strongsville Savings concerning prepayments and decay rates of major
asset and liability categories.
TABLE 6
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MATURING OR WITHIN 6-12 1-3 3-5 5-10 10 OR MORE FAIR
REPRICING PERIODS 6 MONTHS MONTHS YEARS YEARS YEARS YEARS TOTAL VALUE
- ----------------- -------- -------- -------- -------- ------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Adjustable-rate mortgage
loans................. $ 28,959 $ 20,797 $ 25,527 $ 75,283 $ 75,120
Weighted average
yield............... 7.34% 7.23% 7.09% 7.22%
Fixed-rate mortgage
loans................. 18,301 17,193 58,948 45,783 73,848 39,662 253,735 251,536
Weighted average
yield............... 7.04% 7.04% 7.03% 7.01% 6.99% 7.02% 7.01%
Other loans............. 94,024 13,787 26,492 2,429 2,677 334 139,743 139,721
Weighted average
yield............... 9.60% 8.91% 8.90% 8.79% 8.85% 9.09% 9.37%
Investments............. 67,287 4,929 19,157 3,523 5,357 4,967 105,220 105,782
Weighted average
yield............... 6.54% 6.48% 5.81% 6.81% 9.16% 7.76% 6.61%
-------- -------- -------- -------- ------- ------- -------- --------
Total................... 208,571 56,706 130,124 51,735 81,882 44,963 573,981 572,159
======== ======== ======== ======== ======= ======= ======== ========
Interest-bearing
liabilities
Certificate of deposit
accounts.............. 139,627 119,841 102,903 44,216 406,587 408,756
Weighted average
rate................ 5.34% 5.89% 6.43% 6.71% 5.93%
Money market accounts... 2,077 1,799 5,088 2,862 2,806 873 15,505 15,507
Weighted average
rate................ 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50%
NOW and passbook
accounts.............. 11,096 9,882 27,947 15,720 15,415 4,797 84,857 85,166
Weighted average
rate................ 2.54% 2.54% 2.54% 2.54% 2.54% 2.54% 2.54%
Advances from the
FHLB.................. 523 525 22,627 4,463 28,138 28,178
Weighted average
rate................ 6.91% 6.91% 5.97% 6.86% 6.14%
-------- -------- -------- -------- ------- ------- -------- --------
Total................... 153,323 132,047 158,565 67,261 18,221 5,670 535,087 537,607
======== ======== ======== ======== ======= ======= ======== ========
Interest rate sensitivity
gap..................... $ 55,248 $(75,341) $(28,441) $(15,526) $63,661 $39,293 $ 38,894
Cumulative gap............ $ 55,248 $(20,093) $(48,534) $(64,060) $ (399) $38,894
Cumulative interest rate
sensitivity gap as a
percent of total assets
at December 31, 1997.... 9.15% -3.33% -8.04% -10.61% -0.07% 6.44%
Cumulative interest rate
sensitivity gap as a
percent of total assets
at December 31, 1996.... -0.87% -9.06% -4.46% -8.41% 2.27% 9.34%
</TABLE>
35
<PAGE> 39
The table presents the repricing dates of the Company's interest-earning
assets and interest-bearing liabilities at December 31, 1997. The annual
prepayment and decay rates used in this table are obtained from an independent
analysis service. Annual prepayment assumptions for 1997 range from 8% to 22% on
fixed-rate mortgage loans, 9% to 34% on ARM loans, 12% to 15% on non-residential
real estate mortgage loans, and 9% to 20% on other loans. Annual prepayment
assumptions for 1996 range from 7% to 18% on fixed-rate mortgage loans, 10% to
24% on ARM loans, 12% to 19% on non-residential real estate mortgage loans, and
12% to 21% on other loans. The NOW, money market deposit and passbook accounts'
decay rates were assumed to vary across time horizons from 0% to 33% in 1997 and
from 0% to 37% in 1996.
The method used to analyze interest-rate sensitivity in Table 6 has a
number of limitations. Certain assets and liabilities may react differently to
changes in interest rates even though they reprice or mature in the same or
similar time periods. The interest rates on certain assets and liabilities may
change at different times from changes in market rates, with some changing in
advance of changes in market rates and some lagging behind changes in market
rates. Also, certain assets, e.g. ARM loans, often have provisions that may
limit changes in interest rates each time the interest rate changes and on a
cumulative basis over the life of the loan. Additionally, the actual prepayments
and withdrawals experienced in the event of a change in interest rates could
deviate significantly from those assumed in calculating the data shown in the
table. Finally, the ability of some borrowers to service their debt may decrease
in the event of an interest rate increase.
LIQUIDITY
The Bank is required to maintain an average daily balance of liquid assets
(cash, certain time deposits, bankers' acceptances, specified United States
Government, state or federal agency obligations, shares of certain mutual funds
and certain corporate debt securities and commercial paper) equal to a monthly
average of not less than specified percentages of its net withdrawable deposit
accounts plus short-term borrowings. The average eligible liquidity at December
31, 1997 was 5.97%, which exceeded the 5.0% requirement. The Company's
short-term liquidity at December 31, 1997, was 4.62%, which exceeded the 1.0%
requirement.
Financial institutions, such as Strongsville Savings, must ensure that
sufficient funds are available to meet deposit withdrawals, loan commitments and
expenses. Management of cash flows requires the anticipation of deposit flows
and loan payments. The Company's primary sources of funds are deposits and loan
payments. The Bank uses funds from deposit inflows and loan payments primarily
to originate loans, and to purchase short-term investment securities and
interest-earning deposits.
At December 31, 1997, loans-in-process to be funded over a future period of
time totaled $30.0 million, and loan commitments or loans committed but not
closed totaled $30.0 million. There were no commitments to purchase or sell
loans at December 31, 1997 or 1996. Funding for these amounts is expected to be
provided by the sources described above. Management believes the Bank has
adequate resources to meet its normal funding requirements.
The Bank is a party to a credit agreement with the Federal Home Loan Bank
(FHLB) of Cincinnati whereby the Bank can obtain advances. The Bank had $28.1
million in advances outstanding from FHLB of Cincinnati at December 31, 1997.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data herein have been prepared in
accordance with generally accepted accounting principles, which require
measurement of financial condition and results of operations in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation.
Changes in the general level of prices for goods and services have a
relatively minor impact on the Company's total expenses because the Company's
primary assets and liabilities are monetary in nature. Increases in operating
expenses such as salaries and maintenance are in part attributable to inflation.
However, interest rates have a far more significant effect than inflation on the
performance of financial institutions, including the Bank.
36
<PAGE> 40
YEAR 2000 ISSUE
The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The Year 2000 (Y2K)
problem is pervasive and complex as virtually every computer operation will be
affected in some way by the rollover of the two digit year value to 00. The
issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause the system to
fail.
The Company is utilizing both internal and external resources to identify,
correct and test the systems for the Y2K compliance. It is anticipated that all
reprogramming efforts will be complete by December 31, 1998, allowing adequate
time for testing. To date, confirmations have been received from Emerald's
primary vendors that plans have been developed and are being implemented to
address processing of transactions in the year 2000. Management estimates that
Y2K compliance expense will amount to approximately $600,000 over the next two
years.
NEW ACCOUNTING PRONOUNCEMENTS
See the Notes to the Consolidated Financial Statements, Note 1, caption New
Accounting Standards for a discussion of accounting and reporting developments
affecting the Bank.
37
<PAGE> 41
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Statements of Financial Condition December 31,
1997 and 1996............................................. F-3
Consolidated Statements of Income Years ended December 31,
1997, 1996, and 1995...................................... F-4
Consolidated Statements of Shareholders' Equity Years ended
December 31, 1997, 1996, and 1995......................... F-5
Consolidated Statements of Cash Flows Years ended December
31, 1997, 1996, and 1995.................................. F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 42
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Emerald Financial Corp.:
We have audited the accompanying consolidated statement of financial
condition of Emerald Financial Corp. and Subsidiaries (Company), including The
Strongsville Savings Bank, as of December 31, 1997, and the related consolidated
statements of income, shareholders' equity, and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit. The consolidated financial
statements of The Strongsville Savings Bank and Subsidiary as of December 31,
1996 and for the years ended December 31, 1996 and 1995, were audited by other
auditors whose report thereon dated January 25, 1997, expressed an unqualified
opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1997 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Emerald Financial Corp. and Subsidiaries at December 31, 1997, and the results
of their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Clveland, Ohio
January 29, 1998
F-2
<PAGE> 43
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and cash equivalents
Cash and deposits with banks.............................. $ 7,729 $ 3,146
Interest-bearing deposits with banks...................... 3,033 4,406
Investment securities (note 2)
Held to maturity (fair values of $14,037 and $47,496 at
December 31, 1997 and 1996, respectively).............. 14,231 47,684
Available for sale (at fair value), (amortized cost of
$31,255 and $22,061 at December 31, 1997 and 1996,
respectively).......................................... 31,480 21,996
Mortgage-backed and related securities (note 3)
Held to maturity (fair values of $26,416 and $33,104 at
December 31, 1997 and 1996, respectively).............. 25,825 32,536
Available for sale (at fair value), (amortized cost of
$27,209 and $19,722 at December 31, 1997 and 1996,
respectively).......................................... 27,312 19,644
Loans held for investment, net (including allowance for loan
losses of $1,625 and $1,423 at December 31, 1997 and 1996,
respectively) (note 4).................................... 461,457 425,060
Loans held for sale (note 4)................................ 7,823 795
Accrued interest receivable................................. 3,343 3,238
Federal Home Loan Bank stock, at cost....................... 3,504 2,831
Premises and equipment, net (note 5)........................ 4,259 3,939
Cash surrender value of life insurance...................... 10,341 113
Prepaid expenses and other assets........................... 3,628 2,102
-------- --------
Total assets........................................... $603,965 $567,490
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits (note 6)......................................... $520,690 $493,471
Advances from Federal Home Loan Bank (note 7)............. 28,138 25,234
Advance payments by borrowers for taxes and insurance..... 1,574 1,502
Deferred federal income taxes (notes 8)................... 1,875 1,584
Accrued interest payable.................................. 1,002 586
Accounts payable and other accrued expenses............... 2,171 1,955
-------- --------
Total liabilities...................................... 555,450 524,332
-------- --------
Commitments and contingencies (note 14)
Shareholders' equity (notes 8 and 12)
Common stock, no par value; 10,000,000 shares authorized;
5,072,600 and 5,061,600 shares issued and outstanding
at December 31, 1997 and 1996, respectively............ 9,831 9,831
Retained earnings -- substantially restricted............. 38,468 33,422
Net unrealized gains (losses) on securities available for
sale................................................... 216 (95)
-------- --------
Total shareholders' equity............................. 48,515 43,158
-------- --------
Total liabilities and shareholders' equity............. $603,965 $567,490
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 44
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Interest income
Loans.................................................... $36,892 $32,442 $26,424
Investment securities.................................... 3,441 3,836 4,982
Mortgage-backed and related securities................... 3,882 3,110 3,192
Other investments........................................ 713 470 812
------- ------- -------
Total interest income................................. 44,928 39,858 35,410
------- ------- -------
Interest expense
Deposits (note 6)........................................ 26,575 23,516 20,428
Advances from Federal Home Loan Bank..................... 1,680 978 914
------- ------- -------
Total interest expense................................ 28,255 24,494 21,342
------- ------- -------
Net interest income................................... 16,673 15,364 14,068
Provision for loan losses (note 4)......................... 215 305 238
------- ------- -------
Net interest income after provision for loan losses... 16,458 15,059 13,830
Noninterest income
Loan servicing fees...................................... 738 623 464
Service fees and other charges........................... 952 680 537
Gain on sale of loans and other assets................... 463 1,008 971
Gain on sale of investment securities.................... 6 -- 26
Gain on sale of mortgage-backed securities............... 6 83 --
Other.................................................... 173 41 54
------- ------- -------
2,338 2,435 2,052
Noninterest expense
Salaries and employee benefits (note 10)................. 4,084 3,716 3,487
Net occupancy and equipment.............................. 1,550 1,549 1,392
Federal deposit insurance premium........................ 316 935 850
One-time SAIF assessment (note 11)....................... -- 2,481 --
Franchise tax............................................ 586 560 491
Other.................................................... 2,949 2,764 2,406
------- ------- -------
9,485 12,005 8,626
------- ------- -------
Income before federal income taxes.................... 9,311 5,489 7,256
Federal income taxes (note 8).............................. 3,170 1,941 2,539
------- ------- -------
Net income............................................ $ 6,141 $ 3,548 $ 4,717
======= ======= =======
Basic earnings per common share............................ $ 1.21 $ .70 $ .93
======= ======= =======
Diluted earnings per common share.......................... $ 1.18 $ .69 $ .93
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 45
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
NET
UNREALIZED
COMMON STOCK GAINS (LOSSES)
--------------------- ON SECURITIES TOTAL
SHARES RETAINED AVAILABLE SHAREHOLDERS'
OUTSTANDING AMOUNT EARNINGS FOR SALE EQUITY
----------- ------ -------- -------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994..... 5,061,600 $9,831 $27,360 $ (38) $37,153
Dividends -- $0.20 per share..... -- -- (1,013) -- (1,013)
Net unrealized gain in fair value
of securities.................. -- -- -- 234 234
Net income....................... -- -- 4,717 -- 4,717
--------- ------ ------- ----- -------
Balance at December 31, 1995..... 5,061,600 9,831 31,064 196 41,091
Dividends -- $0.235 per share.... -- -- (1,190) -- (1,190)
Net unrealized loss in fair value
of securities.................. -- -- -- (291) (291)
Net income....................... -- -- 3,548 -- 3,548
--------- ------ ------- ----- -------
Balance at December 31, 1996..... 5,061,600 9,831 33,422 (95) 43,158
Stock options exercised.......... 11,000 -- 106 -- 106
Tax benefits of stock options
exercised...................... -- -- 14 -- 14
Dividends -- $0.24 per share..... -- -- (1,215) -- (1,215)
Net unrealized gain in fair value
of securities.................. -- -- -- 311 311
Net income....................... -- -- 6,141 -- 6,141
--------- ------ ------- ----- -------
Balance at December 31, 1997..... 5,072,600 $9,831 $38,468 $ 216 $48,515
========= ====== ======= ===== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 46
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities
Net income................................................ $ 6,141 $ 3,548 $ 4,717
Adjustments to reconcile net income to net cash provided
by (used in)
operating activities
Provision for loan losses............................... 215 305 238
Gain on sale of loans and other assets.................. (463) (1,008) (971)
Gain on sale of investment securities................... (6) -- (26)
Gain on sale of mortgage-backed and related
securities............................................ (6) (83) --
Amortization of deferred loan fees, premiums, and
discounts, net........................................ (2,517) (2,780) (2,484)
Proceeds from sale of loans originated for sale......... 55,221 54,222 38,351
Disbursements on loans originated for sale.............. (61,820) (49,251) (43,258)
Depreciation and amortization........................... 740 815 821
Change in accrued interest receivable and payable....... 311 222 (595)
Deferred federal income taxes........................... 131 151 597
Other, net.............................................. (1,035) (282) (84)
-------- -------- --------
Net cash provided by (used in) operating activities... (3,088) 5,859 (2,694)
-------- -------- --------
Cash flows from investing activities
Net increase in loans..................................... (29,164) (89,255) (50,416)
Purchases of
Loans................................................... (4,922) (2,250) (700)
Mortgage-backed securities available for sale........... (14,519) (14,488) (7,138)
Mortgage-backed securities held to maturity............. -- (3,149) (14,446)
Investment securities available for sale................ (44,645) (30,600) (23,518)
Investment securities held to maturity.................. (18,200) (13,420) (35,658)
Federal Home Loan Bank stock............................ (441) (239) (437)
Premises and equipment.................................. (910) (566) (1,489)
Cash surrender value of life insurance.................. (10,000) -- --
Proceeds from
Maturities and principal repayments of
Investment securities available for sale.............. 19,746 17,906 538
Investment securities held to maturity................ 51,491 32,318 59,990
Mortgage-backed securities available for sale......... 5,738 2,604 123
Mortgage-backed securities held to maturity........... 6,712 8,035 6,980
Sales of available for sale investment securities....... 15,710 -- 2,518
Sales of available for sale mortgage-backed
securities............................................ 1,299 6,744 --
Sales of premises and equipment......................... -- 645 --
Sales of loans held for investment...................... -- -- 4,725
Other..................................................... (683) -- 11
-------- -------- --------
Net cash used in investing activities................... (22,788) (85,715) (58,917)
-------- -------- --------
Cash flows from financing activities
Net increase in deposits.................................. 27,219 60,908 69,513
Proceeds from advances from Federal Home Loan Bank........ 26,900 73,650 2,000
Payments on advances from Federal Home Loan Bank.......... (23,996) (61,749) (4,250)
Increase in advance payments by borrowers for taxes and
insurance............................................... 72 280 221
Exercise of stock options................................. 106 -- --
Payment of dividends on common stock...................... (1,215) (1,190) (1,013)
-------- -------- --------
Net cash provided by financing activities............... 29,086 71,899 66,471
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 3,210 (7,957) 4,860
Cash and cash equivalents at beginning of year.............. 7,552 15,509 10,649
-------- -------- --------
Cash and cash equivalents at end of year.................... $ 10,762 $ 7,552 $ 15,509
======== ======== ========
Supplemental disclosure of cash flow information
Cash paid during the year for
Interest................................................ $ 27,839 $ 24,333 $ 21,217
Income taxes............................................ 2,944 1,863 1,718
======== ======== ========
Supplemental disclosure of noncash investing activities
Transfer from mortgage loans to real estate owned......... $ 1,794 $ 696 $ --
Loans made to finance the sale of real estate owned....... 1,237 600 --
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 47
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Nature of Operations
Emerald Financial Corp. (Emerald or Company) is a unitary thrift holding
company whose wholly owned subsidiary is Strongsville Savings Bank (Bank).
Emerald became the Bank's holding company in a tax-free exchange of shares of
the Bank for shares of Emerald consummated on March 6, 1997. The Company formed
Emerald Development Corp., a wholly owned subsidiary, on June 3, 1997. The
development company was formed to take advantage of opportunities to develop
real estate as well as to enter into joint real estate development ventures in
the future. Also, the Bank has an inactive wholly owned subsidiary, Dennis
Financial Corp. The Bank conducts its principal activities from its Community
Financial Centers located in southwestern Cuyahoga, Lorain, and Medina counties.
The Bank's principal activities include residential lending and retail banking.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its Subsidiaries. All material intercompany transactions and balances have
been eliminated in consolidation.
(c) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(d) Investment and Mortgage-Backed Securities
The Company classifies debt and equity securities into one of three
categories: held to maturity, available for sale, or trading. Securities held to
maturity are limited to debt securities that the Company has the positive intent
and ability to hold to maturity; these securities are reported at amortized
cost. Securities held for trading are limited to debt and equity securities that
are held to be sold in the near term; these securities are reported at fair
value, and unrealized gains and losses are reflected in income. Securities held
as available for sale consist of all other securities; these securities are
reported at fair value, and unrealized gains and losses, net of deferred income
taxes, are reflected as a separate component of shareholders' equity.
Realized gains or losses on the sale of securities are reported in the
consolidated statements of income on the trade date. The cost of securities sold
is based on the specific identification method.
(e) Loans
Interest income on loans is based on the principal balance outstanding.
Interest is accrued and credited to income as earned unless there is a distinct
indication that the borrower's cash flow or collateral may not be sufficient to
meet contractual obligations. Loans are also placed on nonaccrual status when
principal or interest is past due more than 90 days, unless the loan is well
secured and in the process of collection. When a loan is placed on nonaccrual
status, all previously accrued and unpaid interest is charged against income.
Interest is subsequently recognized only to the extent that cash payments are
received. When the borrower has demonstrated the intent and ability to make
scheduled principal and interest payments, the loan may be returned to accrual
status.
Loan origination fees, net of certain direct loan origination costs, are
deferred and amortized over the life of the related loans as a yield adjustment
for loans originated for investment. Loan origination fees, net of certain
F-7
<PAGE> 48
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
direct loan origination costs, are deferred and recognized as a basis adjustment
for loans held for sale. Loan commitment fees are deferred and recognized as
yield adjustments over the estimated life of the related loans.
Residential mortgage loans held for sale are valued at the lower of
aggregate cost or market value. Gains or losses on sales are recognized upon
delivery.
In June 1996, the Financial Accounting Standards Board (FASB) issued SFAS
No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities, and was effective for transactions entered into
on or after January 1, 1997. The adoption of SFAS No. 125 did not have a
material impact on the Bank's consolidated financial position or results of
operations.
Impaired loans include all non-one-to-four family residential mortgage
loans greater than $500,000 on nonaccrual status. Loan impairment is measured as
the present value of expected future cash flows discounted at the loan's initial
effective interest rate, the fair value of the collateral of an impaired
collateral-dependent loan, or an observable market price.
(f) Federal Income Taxes
Deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which the temporary differences are expected to be
recovered or settled, and the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(g) Allowance for Loan Losses
The allowance for loan losses is maintained at a level management considers
adequate to absorb loan losses. Loans charged-off are charged to, and recoveries
are credited to, the allowance. Provisions for loan losses are based on
management's review of the historical loan loss experience, known and inherent
risks in the portfolio, current economic conditions, and such other factors
that, in management's judgment, are relevant.
(h) Premises and Equipment
Bank premises and equipment, including leasehold improvements, are stated
at cost less accumulated depreciation and amortization. Depreciation is computed
on the straight-line method over the estimated useful lives of the related
assets. Amortization of leasehold improvements is computed on the straight-line
method over the lives of the related leases or the useful lives of the related
assets, whichever is shorter. Maintenance, repairs, and minor improvements are
charged to operating expenses as incurred.
(i) Intangible Assets
Cost in excess of the fair value of net assets acquired (goodwill) is
stated net of accumulated amortization and is included in prepaid expenses and
other assets in the consolidated statements of financial condition. Goodwill
resulting from acquisitions is amortized over 25 years on a straight-line basis.
For acquisitions in which the fair value of liabilities assumed exceeds the fair
value of tangible and indentifiable intangible assets acquired, goodwill is
amortized by the level-yield method based upon the outstanding balances, and
over the estimated remaining lives, of the long-term assets acquired.
(j) Real Estate Acquired in Settlement of Loans
Real estate acquired in settlement of loans represents real estate acquired
through foreclosure, or deed in lieu of foreclosure, and is initially recorded
at the lower of cost or fair value less estimated selling costs. Valuations
F-8
<PAGE> 49
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
are performed periodically by management and an allowance for loan losses is
established if the carrying value of the property exceeds its fair value less
estimated selling costs.
(k) Earnings per Share
In February 1997, the Statement of Financial Accounting Standards (SFAS)
No. 128, Earnings per Share, was issued. SFAS No. 128 supersedes Accounting
Principles Board Opinion No. 15, Earnings per Share, and replaces the
presentation of primary and fully diluted earnings per share with basic and
diluted earnings per share. SFAS No. 128 was issued to simplify the computation
of earnings per share and make the U.S. standard more compatible with the
earnings per share standards of other countries and that of the International
Accounting Standards Committee. The Bank adopted SFAS No. 128, effective
December 31, 1997. In accordance with SFAS No. 128, all prior period earnings
per share data has been restated.
The following table reconciles the weighted average shares outstanding and
the income available to common shareholders used for basic and diluted earnings
per share:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Weighted average number of common shares
outstanding used in basic earnings per common
share calculation............................ 5,065,156 5,061,600 5,061,600
Net dilutive effect of stock options......... 150,136 49,163 --
---------- ---------- ----------
Weighted average number of shares outstanding
adjusted for effect of dilutive securities... 5,215,292 5,110,763 5,061,600
========== ========== ==========
Net income..................................... $6,141,223 $3,548,032 $4,716,855
========== ========== ==========
Basic earnings per common share................ $ 1.21 $ .70 $ .93
========== ========== ==========
Diluted earnings per common share.............. $ 1.18 $ .69 $ .93
========== ========== ==========
</TABLE>
(l) Shareholders' Equity
The Bank paid dividends of $1,215,000 in 1997; $1,190,000 in 1996; and
$1,013,000 in 1995. The Bank's ability to make capital distributions is
restricted by Office of Thrift Supervision (OTS) regulations. As a Tier 1
Association under OTS regulations, the Bank is granted the greatest flexibility
in capital distributions; the Bank is authorized to distribute the greater of
(1) 100 percent of year-to-date net income plus 50 percent of excess capital at
the beginning of the year or (2) 75 percent of net income over the most recent
four-quarter period. Dividend payments were limited to $14,514,000 at December
31, 1997.
On May 15, 1997, the board declared a two-for-one stock split in the form
of a 100 percent common stock dividend payable May 15, 1997 to stockholders of
record as of May 1, 1997. The stock split increased the Company's outstanding
common shares from 2.5 million to 5.1 million shares. Shareholders' equity has
been restated to give retroactive recognition to the stock split for all periods
presented. In addition, all references in the consolidated financial statements
and notes thererto to number of shares, per-share amounts, stock option data,
and market prices of the Company's common stock have been restated giving
retroactive recognition to the stock split.
(m) Consolidated Statements of Cash Flows
For purposes of the consolidated statements of cash flows, the Bank
considers all cash and deposits with banks maturing in three months or less to
be cash equivalents.
F-9
<PAGE> 50
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(n) New Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
This statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. Management believes the adoption
of this statement will not significantly impact the Company's consolidated
financial condition or results of operations.
In June 1997, the FASB also issued SFAS No. 131, Disclosures About Segments
of an Enterprise and Related Information. SFAS No. 131 requires public business
enterprises to report certain information about operating segments, as well as
certain information about products and services, geographic areas in which an
enterprise operates, and any major customers. SFAS No. 131 is effective for
fiscal years beginning after December 15, 1997. Management does not expect the
implementation of SFAS No. 131 to have a material impact on the Company's
consolidated financial condition or results of operations.
(o) Reclassifications
Certain amounts in the accompanying 1996 and 1995 consolidated financial
statements have been reclassified to conform to the 1997 presentation.
(2) INVESTMENT SECURITIES
Investment securities held to maturity as of December 31, 1997 and 1996,
consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
U.S. government and agency obligations.......... $ 7,750 $ -- $ -- $ 7,750
Corporate bonds................................. 5,816 1 -- 5,817
Other........................................... 665 -- (195) 470
------- ---- ----- -------
$14,231 $ 1 $(195) $14,037
======= ==== ===== =======
DECEMBER 31, 1996
U.S. government and agency obligations.......... $19,301 $ -- $ (3) $19,298
Corporate bonds................................. 26,829 70 (34) 26,865
Other........................................... 1,554 2 (223) 1,333
------- ---- ----- -------
$47,684 $ 72 $(260) $47,496
======= ==== ===== =======
</TABLE>
The weighted average yield on investment securities held to maturity was
5.76 percent and 5.94 percent as of December 31, 1997 and 1996, respectively.
F-10
<PAGE> 51
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The amortized cost and estimated market value of investment securities held
to maturity at December 31, 1997, by contractual maturity, are shown below
(dollars in thousands). Expected maturities may differ from contractual
maturities because certain securities contain provisions which permit the issuer
to repay, at par, the obligation prior to the stated maturity.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
--------- ----------
<S> <C> <C>
Due in one year or less.............................. $14,052 13,858
Due after one year through five years................ 179 179
------- -------
$14,231 14,037
======= =======
</TABLE>
Investment securities available for sale as of December 31, 1997 and 1996,
consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
U.S. government and agency obligations.......... $10,852 $ 1 $ (6) $10,847
Corporate bonds................................. 20,403 245 (15) 20,633
------- ---- ----- -------
$31,255 $246 $ (21) $31,480
======= ==== ===== =======
DECEMBER 31, 1996
U.S. government and agency obligations.......... $16,934 $ 16 $ (67) $16,883
Corporate bonds................................. 5,127 -- (14) 5,113
------- ---- ----- -------
$22,061 $ 16 $ (81) $21,996
======= ==== ===== =======
</TABLE>
The weighted average yield on investment securities available for sale was
6.55 percent and 5.87 percent as of December 31, 1997 and 1996, respectively.
The amortized cost and estimated market value of investment securities
available for sale at December 31, 1997, by contractual maturity, are shown
below (dollars in thousands). Expected maturities may differ from contractual
maturities because certain securities contain provisions which permit the issuer
to repay, at par, the obligation prior to the stated maturity.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
--------- ----------
<S> <C> <C>
Due in one year or less.............................. $ 6,347 $ 6,349
Due after one year through five years................ 24,908 25,131
------- -------
$31,255 $31,480
======= =======
</TABLE>
There were no sales of investment securities held to maturity in 1997,
1996, or 1995. Gross proceeds from sales of investment securities available for
sale during the years ended December 31, 1997 and 1995, totaled $15,710,000 and
$2,518,000, respectively; gross realized gains on these sales of investment
securities available for sale totaled $6,000 and $26,000 in 1997 and 1995,
respectively. There were no sales of investment securities available for sale in
1996.
At December 31, 1997 and 1996, investment securities with a book value of
$7,750,000 and $7,928,000, respectively, were pledged as collateral for public
funds and treasury, tax, and loan deposits.
F-11
<PAGE> 52
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) MORTGAGE-BACKED SECURITIES
Mortgage-backed securities held to maturity as of December 31, 1997 and
1996, consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Mortgage-backed securities
Federal Home Loan Mortgage Corporation (FHLMC)
participation certificates................. $ 3,223 $ 49 $ (5) $ 3,267
Federal National Mortgage Association
(FNMA)..................................... 758 -- (2) 756
Government National Mortgage Association
(GNMA)..................................... 4,883 201 -- 5,084
Other......................................... 3,823 26 -- 3,849
------- ---- ----- -------
12,687 276 (7) 12,956
Real estate mortgage investment trusts and
collateralized mortgage obligations
FHLMC participation certificates........... 2,778 28 -- 2,806
FNMA....................................... 6,421 238 -- 6,659
Other...................................... 3,939 59 (3) 3,995
------- ---- ----- -------
13,138 325 (3) 13,460
------- ---- ----- -------
$25,825 $601 $ (10) $26,416
======= ==== ===== =======
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------- ---- ----- -------
DECEMBER 31, 1996
Mortgage-backed securities
FHLMC participation certificates.............. $ 4,291 $ 54 $ (16) $ 4,329
FNMA.......................................... 941 -- (12) 929
GNMA.......................................... 6,109 225 -- 6,334
Other......................................... 5,235 -- (6) 5,229
------- ---- ----- -------
16,576 279 (34) 16,821
Real estate mortgage investment trusts and
collateralized mortgage obligations
FHLMC participation certificates........... 3,302 46 -- 3,348
FNMA....................................... 6,531 193 -- 6,724
Other...................................... 6,127 88 (4) 6,211
------- ---- ----- -------
15,960 327 (4) 16,283
------- ---- ----- -------
$32,536 $606 $ (38) $33,104
======= ==== ===== =======
</TABLE>
F-12
<PAGE> 53
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Mortgage-backed securities available for sale as of December 31, 1997 and
1996, consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Mortgage-backed securities
FHLMC participation certificates.............. $ 1,363 $ -- $ (3) $ 1,360
------- ---- ---- -------
1,363 -- (3) 1,360
Real estate mortgage investment trusts and
collateralized mortgage obligations
FHLMC participation certificates.............. 12,026 82 (13) 12,095
FNMA.......................................... 13,489 53 (15) 13,527
Other......................................... 331 -- (1) 330
------- ---- ---- -------
25,846 135 (29) 25,952
------- ---- ---- -------
$27,209 $135 $(32) $27,312
======= ==== ==== =======
DECEMBER 31, 1996
Mortgage-backed securities
FHLMC participation certificates.............. $ 1,649 $ -- $ (7) $ 1,642
------- ---- ---- -------
1,649 -- (7) 1,642
Real estate mortgage investment trusts and
collateralized mortgage obligations
FHLMC participation certificates.............. 12,821 7 (62) 12,766
FNMA.......................................... 5,252 10 (26) 5,236
------- ---- ---- -------
18,073 17 (88) 18,002
------- ---- ---- -------
$19,722 $ 17 $(95) $19,644
======= ==== ==== =======
</TABLE>
There were no sales of mortgage-backed securities held to maturity in 1997,
1996, or 1995. Gross proceeds from sales of mortgage-backed securities available
for sale during the years ended December 31, 1997 and 1996, totaled $1,299,000
and $6,744,000, respectively; gross realized gains on these sales of
mortgage-backed securities available for sale totaled $6,000 and $83,000 in 1997
and 1996, respectively. There were no sales of mortgage-backed securities
available for sale in 1995.
The Bank's portfolio of privately issued mortgage-backed securities is
backed by mortgages on residential and multifamily properties. These securities
are of investment grade.
(4) LOANS
The primary goal of the Bank's lending activities is to provide residential
real estate mortgage loans to homeowners in its lending area. The Bank's 14
Community Financial Centers are located in Strongsville, Hinckley, Berea, North
Royalton, Medina Township, Wellington, Parma Heights, Westlake, North
Ridgeville, Brecksville, Broadview Heights, Columbia Station, Avon, and
Brunswick.
F-13
<PAGE> 54
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The composition of the overall loan portfolio is as follows (dollars in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
-------- --------
<S> <C> <C>
Real estate mortgage loans
Permanent first mortgage loans
One-to-four family.............................. $319,796 $301,284
Multifamily..................................... 924 1,049
Commercial...................................... 52,499 46,883
Land............................................ 553 195
Construction first mortgage loans
Acquisition and development (residential)....... 56,217 54,670
One-to-four family.............................. 37,413 37,049
Multi-family.................................... 1,050 240
Commercial...................................... 6,879 2,376
-------- --------
Total mortgage loans............................ 475,331 443,746
Other loans
Commercial business................................ 5,736 4,250
Consumer installment............................... 15,460 9,117
-------- --------
Total other loans............................... 21,196 13,367
-------- --------
Total loans..................................... 496,527 457,113
Less
Undisbursed portion of loans in process............ (30,015) (26,676)
Deferred loan fees and discounts................... (3,430) (3,954)
Allowance for loan losses.......................... (1,625) (1,423)
-------- --------
(35,070) (32,053)
-------- --------
Total loans held for investment, net............ $461,457 $425,060
======== ========
Real estate mortgage loans held for sale............. $ 7,916 $ 806
Less deferred loan fees............................ (93) (11)
-------- --------
Total loans held for sale, net.................. $ 7,823 $ 795
======== ========
</TABLE>
Adjustable-rate mortgage and other loans represent $231,202,000 and
$193,674,000 of the loans included in the table above at December 31, 1997 and
1996, respectively.
The Bank sells loans to the secondary market in conjunction with certain
loan programs, to provide funding and as a tool for managing interest rate risk.
Loans are sold to the secondary market without recourse and with servicing
retained. The Bank was servicing loans for investors totaling $225,344,000 and
$192,578,000 at December 31, 1997 and 1996, respectively. Custodial escrow
balances maintained in connection with loans serviced for investors were
$1,957,000 and $2,057,000 at December 31, 1997 and 1996, respectively.
Residential acquisition and development loans are extended to local
builders and developers with whom the Bank has generally had long-standing
business relationships. These loans are secured by land zoned for residential
development located in the Bank's market area.
Under federal regulations, real estate loans to one borrower cannot exceed
15 percent of unimpaired capital and surplus without a waiver of this
requirement from the OTS. The Bank obtained such a waiver which increases the
limit on loans to one borrower for residential real estate to 30 percent of
unimpaired capital and surplus.
The Bank's commercial real estate loan portfolio includes permanent and
construction loans. Because commercial real estate loans are dependent on income
production or future development for repayment,
F-14
<PAGE> 55
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
management believes these loans present somewhat greater risk of default than
conventional mortgage loans. The Bank's commercial real estate loan portfolio
consists of loans collateralized by property located in the Bank's primary
lending area. The Bank's aggregate commercial real estate loans may not exceed
400 percent of its core capital. As of December 31, 1997, the Bank could lend an
additional $127,022,000 before reaching the $186,400,000 limit.
The following table summarizes the Bank's commercial real estate and
commercial construction loan portfolios by type of collateral (dollars in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
AMOUNT % AMOUNT %
------- ------ ------- ------
<S> <C> <C> <C> <C>
Permanent
Industrial/warehouse................ $ 7,481 12.60% $ 5,883 11.94%
Retail.............................. 17,973 30.27 11,436 23.22
Office buildings.................... 18,902 31.83 6,693 13.59
Churches............................ 1,922 3.24 1,748 3.55
Other............................... 6,221 10.47 21,123 42.88
------- ------ ------- ------
52,499 88.41 46,883 95.18
Construction
Retail.............................. 2,600 4.38 -- --
Office buildings.................... 850 1.43 365 0.74
Churches............................ -- -- 400 0.81
Other............................... 3,429 5.78 1,611 3.27
------- ------ ------- ------
6,879 11.59 2,376 4.82
------- ------ ------- ------
$59,378 100.00% $49,259 100.00%
======= ====== ======= ======
</TABLE>
Activity in the allowance for loan losses is as follows (dollars in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Balance at beginning of year..................... $1,423 $1,168 $ 948
Provision charged to expense..................... 215 305 238
Loans charged-off................................ (19) (60) (21)
Recoveries....................................... 6 10 3
------ ------ ------
Balance at end of year........................... $1,625 $1,423 $1,168
====== ====== ======
</TABLE>
Nonaccrual loans totaled $780,000 and $604,000 at December 31, 1997 and
1996, respectively. Interest income that would have been recorded under the
original terms of all nonaccrual loans during each period and the interest
income actually recognized for each period are summarized below (dollars in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Interest income that would have been recorded...... $119 $101 $49
Interest income recognized......................... 112 9 37
---- ---- ---
Interest income foregone........................... $ 7 $ 92 $12
==== ==== ===
</TABLE>
The Bank is not committed to lend additional funds to debtors whose loans
have been placed on nonaccrual status.
At December 31, 1997 and 1996, there were no loans which were considered to
be impaired.
F-15
<PAGE> 56
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) PREMISES AND EQUIPMENT
Premises and equipment consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
------ ------
<S> <C> <C>
Land..................................................... $ 612 $ 612
Buildings and leasehold improvements..................... 3,384 3,051
Furniture, fixtures, and equipment....................... 3,844 3,361
------ ------
7,840 7,024
Less accumulated depreciation and amortization........... 3,581 3,085
------ ------
$4,259 $3,939
====== ======
</TABLE>
During 1996, the Bank sold certain real estate, a portion of which is being
leased back. The sale resulted in a pretax gain of $298,000. Depreciation and
amortization expense related to Bank premises and equipment was $617,000 in
1997; $682,000 in 1996; and $678,000 in 1995.
The Bank has entered into a number of noncancelable operating leases with
respect to office space. Rental expense for all leases was $294,000 in 1997;
$251,000 in 1996; and $178,000 in 1995. The following is a schedule of future
minimum annual lease commitments as of December 31, 1997 (dollars in thousands):
<TABLE>
<S> <C>
1998................................ $ 284
1999................................ 274
2000................................ 239
2001................................ 232
2002................................ 233
Thereafter.......................... 826
------
$2,088
======
</TABLE>
(6) DEPOSITS
Deposit account balances are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
---------------------------- ----------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
DEPOSIT TYPE RATE AMOUNT % RATE AMOUNT %
------------ -------- -------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts................. 2.93% $ 51,629 9.91% 2.90% $ 46,034 9.33%
Negotiable order of withdrawal
(NOW)........................... 2.02 33,976 6.52 2.02 29,661 6.01
Commercial accounts (noninterest
bearing)........................ -- 12,992 2.50 -- 11,535 2.34
Money market deposit accounts..... 2.53 15,506 2.98 2.53 17,882 3.62
-------- ------ -------- ------
2.27 114,103 21.91 2.27 105,112 21.30
Certificates of deposit
4.50% and less.................. 4.01 26,391 5.07 2.54 1,849 0.37
4.51% to 5.50%.................. 5.38 52,424 10.07 5.34 116,857 23.68
5.51% to 6.50%.................. 6.04 264,388 50.78 6.03 187,013 37.90
6.51% to 7.50%.................. 7.36 55,516 10.66 7.32 73,823 14.96
7.51% and greater............... 8.92 7,868 1.51 8.85 8,817 1.79
-------- ------ -------- ------
6.06 406,587 78.09 6.11 388,359 78.70
-------- ------ -------- ------
5.23% $520,690 100.00% 5.29% 493,471 100.00%
======== ====== ======== ======
</TABLE>
F-16
<PAGE> 57
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The maturity periods of certificates of deposit were as follows (dollars in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------ ------------------
AMOUNT % AMOUNT %
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Within six months................. $139,626 34.34% $ 67,050 17.27%
Six months to one year............ 119,841 29.48 86,311 22.22
One to five years................. 115,317 28.36 99,135 25.53
Over five years................... 31,803 7.82 135,863 34.98
-------- ------ -------- ------
$406,587 100.00% $388,359 100.00%
======== ====== ======== ======
</TABLE>
Deposits over $100,000 at December 31, 1997 and 1996, total $82,306,000 and
$78,612,000, respectively. The Bank does not enter into brokered deposit
arrangements and had no brokered deposits at December 31, 1997 or 1996.
Interest expense on deposits is summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Passbook accounts.......................... $ 1,391 $ 1,328 $ 1,132
NOW accounts............................... 571 505 442
Money market deposit accounts.............. 413 499 673
Certificates of deposit.................... 24,200 21,184 18,181
------- ------- -------
$26,575 $23,516 $20,428
======= ======= =======
</TABLE>
(7) ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank (FHLB) consist of $20.5 million
with a weighted average variable rate of 5.90 percent and $7.6 million with a
weighted average fixed rate of 6.84 percent at December 31, 1997 and $21.0
million with a weighted average variable rate of 5.57 percent and $4.2 million
with a weighted average fixed rate of 6.96 percent at December 31, 1996.
Although individual loans are not specifically pledged, the FHLB requires
that the Bank have mortgage loans which are, among other things, clear of
pledges, liens, and encumbrances and equal to at least 150 percent of the
advances from the FHLB amounting to $42,207,175.95. The stock of the FHLB owned
by the Bank is also pledged as collateral for these borrowings.
Scheduled payments on FHLB advances at December 31, 1997 are as follows
(dollars in thousands):
<TABLE>
<S> <C>
1998............................... $ 1,043
1999............................... 2,683
2000............................... 19,949
2001............................... 1,463
2002............................... 3,000
-------
$28,138
=======
</TABLE>
F-17
<PAGE> 58
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) FEDERAL INCOME TAXES
Emerald and its wholly owned Subsidiaries file a consolidated federal
income tax return. A summary of the provision for federal income taxes is as
follows (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Current............................... $3,039 $1,790 $1,942
Deferred.............................. 131 151 597
------ ------ ------
Total $3,170 $1,941 $2,539
====== ====== ======
</TABLE>
A reconciliation between the expected income tax expense (benefit) using
the statutory federal rate and the actual consolidated income tax provision
follows (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
% OF % OF % OF
PRETAX PRETAX PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Tax expense at statutory rate..... $3,259 35.0% $1,921 35.0% $2,540 35.0%
Other............................. (89) (1.0) 20 .4 (1) .0
------ ---- ------ ---- ------ ----
$3,170 34.0% $1,941 35.4% $2,539 35.0%
====== ==== ====== ==== ====== ====
</TABLE>
Bank's net deferred tax liability are as follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1996
------ ------
<S> <C> <C>
Deferred tax assets
Loan loss allowances..................................... $ 608 $ 501
Other.................................................... 54 98
------ ------
Total deferred tax assets............................. 662 599
------ ------
Deferred tax liabilities
Deferred loan fees....................................... 645 344
FHLB stock dividends..................................... 486 407
Mortgage servicing rights................................ 115 148
Bad debt reserves over base year reserves................ 1,102 1,147
Depreciation and amortization............................ 168 137
Other.................................................... 21 --
------ ------
Total deferred tax liabilities........................ 2,537 2,183
------ ------
Net deferred tax liability............................ $1,875 $1,584
====== ======
</TABLE>
Retained earnings include $2,383,000 at December 31, 1997 for which no
provision for federal income taxes has been made. This amount represents
allocations of income during years prior to 1988 to bad debt deductions for tax
purposes only. These qualifying and nonqualifying base year reserves and
supplemental reserves will be recaptured into income in the event of certain
distributions and redemptions. Such recapture would create income for tax
purposes only, which would be subject to the then current corporate income tax
rate. Recapture would not occur upon the reorganization, merger, or acquisition
of the Bank, nor if the Bank is merged or liquidated tax-free into a bank or
undergoes a charter change. If the Bank fails to qualify as a bank or merges
into a nonbank entity, these reserves will be recaptured into income.
F-18
<PAGE> 59
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The favorable reserve method previously afforded to thrifts was repealed
for tax years beginning after December 31, 1995. Large thrifts were switched to
the specific charge-off method of Section 166. In general, a thrift is required
to recapture the amount of its qualifying and nonqualifying reserves in excess
of its qualifying and nonqualifying base year reserves. As the Bank has
previously provided deferred taxes on the recapture amount, no additional
financial statement tax expense will result from the recapture.
(9) LONG-TERM INCENTIVE PLAN
Options have been granted under the Emerald Financial Corp. 1994 Long-Term
Incentive Plan (Plan) to key employees and directors of the Bank. Options
awarded under the Plan are vested one year after the date granted. Following is
activity under the plan during the years ended December 31, 1997, 1996, and
1995:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Options outstanding, beginning of year................ 418,000 418,000 418,000
Exercised at $9.63 per share.......................... (11,000) -- --
Forfeited............................................. -- -- --
Granted............................................... 82,000 -- --
------- ------- -------
Options outstanding, end of year...................... 489,000 418,000 418,000
======= ======= =======
Exercisable at $9.13 per share........................ 340,000 340,000 340,000
Exercisable at $9.63 per share........................ 67,000 78,000 78,000
Exercisable at $14.25 per share....................... 82,000 -- --
Options available for grant, end of year.............. -- 82,000 82,000
</TABLE>
The expiration dates of the stock options outstanding at December 31, 1997
are January 11, 1999 for 8,000 options granted at $9.13; January 11, 2004 for
332,000 options granted at $9.13; October 18, 2004 for 67,000 options granted at
$9.63; and June 1, 2007 for 82,000 options granted at $14.25.
SFAS No. 123, Accounting for Stock-Based Compensation, encourages, but does
not require, adoption of a fair-value-based accounting method for employee
stock-based compensation arrangements and was effective January 1, 1996.
Management has elected to continue to use the Accounting Principles Board
Opinion 25, Accounting for Stock Issued to Employees, intrinsic value method for
measurement and recognition of stock-based compensation. Accordingly, no
compensation cost has been recognized. Had compensation cost for the Company's
plan been determined consistent with SFAS 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net income
As reported.................................... $6,141 $3,548 $4,717
Pro forma...................................... 5,832 3,310 4,478
Earnings per common share
Basic
As reported................................. 1.21 .70 .93
Pro forma................................... 1.15 .65 .89
Diluted
As reported................................. 1.18 .69 .93
Pro forma................................... 1.12 .65 .89
</TABLE>
The fair value for each option grant used in the foregoing pro forma
amounts is estimated on the date of grant using an option pricing model. The
model incorporates the following weighted-average assumptions used
F-19
<PAGE> 60
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for grants in 1997, 1996, and 1995; 2.0 percent dividend growth; 37.0 percent
expected volatility; risk-free interest rates ranging from 5.03 percent to 7.71
percent; and expected lives ranging from five to ten years.
(10) EMPLOYEE BENEFIT PLANS
The Bank has a profit-sharing retirement plan covering substantially all
employees, to which the Bank makes discretionary contributions as determined
annually by its Board of Directors. Contributions were $144,000 in 1997;
$139,000 in 1996; and $173,000 in 1995.
The Bank also has a qualified, tax-exempt profit-sharing plan with a cash
or deferred feature qualifying under Section 401(k) of the Internal Revenue
Code; under this plan, the Bank provides matching contributions of up to 3
percent of qualifying employees' annual eligible compensation. The Bank's
contributions were $88,000 in 1997; $79,000 in 1996; and $68,000 in 1995.
In addition, the Bank has a nonqualified, unfunded Supplemental Executive
Retirement Plan (SERP) that provides certain officers with retirement benefits.
SERP pension costs charged to noninterest expense amounted to $75,000 in 1997;
$100,000 in 1996; and $116,000 in 1995.
(11) SAVINGS ASSOCIATION INSURANCE FUND ASSESSMENT
On September 30, 1996, the Omnibus Appropriations Bill was enacted which
imposed a special assessment on Savings Association Insurance Fund (SAIF)
deposits held as of March 31, 1995, to recapitalize the SAIF. Therefore, the
Bank recorded a one-time pretax charge of $2,481,000 representing the special
assessment of 65.7 basis points on the Bank's deposits held as of March 31,
1995. This assessment was deductible for tax purposes on the Bank's fiscal year
1996 federal income tax return.
(12) REGULATORY MATTERS
Office of Thrift Supervision regulations require savings institutions to
maintain certain minimum levels of regulatory capital. An institution that fails
to comply with its regulatory capital requirements must obtain OTS approval of a
capital plan and can be subject to a capital directive and certain restrictions
on its operations. At December 31, 1997, the minimum regulatory capital
regulations require institutions to have tangible capital equal to 1.5 percent
of adjusted total assets, a 3 percent leverage capital ratio, and an 8 percent
risk-based capital ratio. At December 31, 1997, the Bank exceeded all of the
aforementioned regulatory capital requirements.
The prompt corrective action regulations of the Federal Deposit Insurance
Corporation define specific capital categories based on an institution's capital
ratios. The capital categories, in declining order, are "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized,"
and "critically undercapitalized." To be considered "well capitalized," an
institution must generally have a leverage ratio of at least 5 percent, a Tier 1
risk-based capital ratio of at least 6 percent, and a total risk-based capital
ratio of at least 10 percent.
F-20
<PAGE> 61
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1997 and 1996, the Bank was in compliance with regulatory
capital requirements and is considered "well capitalized" as set forth below
(dollars in thousands):
<TABLE>
<CAPTION>
TIER 1 TOTAL
CORE/ RISK- RISK-
EQUITY TANGIBLE LEVERAGE BASED BASED
CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1997
GAAP capital....................... $ 47,324 $ 47,324 $ 47,324 $ 47,324 $ 47,324
Goodwill........................... (663) (663) (663) (663)
Unrealized gains on securities
available for sale............... (61) (61) (61) (61)
General valuation allowances....... -- -- -- 1,625
-------- -------- -------- --------
Regulatory capital................. 46,600 46,600 46,600 48,225
Total regulatory assets............ 602,910
--------
Adjusted total assets.............. 602,155 602,155
-------- --------
Risk-weighted assets............... 375,289 375,289
-------- --------
Capital ratio...................... 7.85% 7.74% 7.74% 12.42% 12.85%
Regulatory requirement............. 1.50% 3.00% 8.00%
Regulatory capital category
Well capitalized -- equal to or
greater than.................. 5.00% 6.00% 10.00%
DECEMBER 31, 1996
GAAP capital....................... $ 43,158 $ 43,158 $ 43,158 $ 43,158 $ 43,158
Goodwill........................... (786) (786) (786) (786)
Unrealized losses on securities
available for sale............... 95 95 95 95
General valuation allowances....... -- -- -- 1,418
-------- -------- -------- --------
Regulatory capital................. 42,467 42,467 42,467 43,885
Total regulatory assets............ 567,515
--------
Adjusted total assets.............. 566,872 566,872
-------- --------
Risk-weighted assets............... 339,237 339,237
-------- --------
Capital ratio...................... 7.60% 7.49% 7.49% 12.52% 12.94%
Regulatory requirement............. 1.50% 3.00% 8.00%
Regulatory capital category
Well capitalized -- equal to or
greater than.................. 5.00% 6.00% 10.00%
</TABLE>
Management believes, as of December 31, 1997, that the Bank meets all
capital requirements to which it is subject. Events beyond management's control,
such as fluctuations in interest rates or a downturn in the economy in areas in
which the Bank's loans and securities are concentrated, could adversely affect
future earnings and, consequently, the Bank's ability to meet its future capital
requirements.
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
Disclosures About Fair Value of Financial Instruments. The estimated fair value
amounts have been determined by the Bank using available market information and
appropriate valuation
F-21
<PAGE> 62
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
methodologies. However, considerable judgment is necessarily required to
interpret market data to develop the estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts the
Bank could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents................... $ 10,762 $ 10,762 $ 7,552 $ 7,552
Investment securities
Held to maturity......................... 14,231 14,037 47,684 47,496
Available for sale....................... 31,480 31,480 21,996 21,996
Mortgage-backed securities
Held to maturity......................... 25,825 26,416 32,536 33,104
Available for sale....................... 27,312 27,312 19,644 19,644
Loans held for investment, net.............. 461,457 458,525 425,060 420,412
Loans held for sale......................... 7,823 7,852 795 805
Accrued interest receivable................. 3,343 3,343 3,238 3,238
Federal Home Loan Bank stock................ 3,504 3,504 2,831 2,831
Financial liabilities
Deposits.................................... 520,690 521,211 493,471 494,358
Advances from Federal Home Loan Bank........ 28,138 28,178 25,234 25,196
Advance payments by borrowers for taxes and
insurance................................ 1,574 1,574 1,502 1,502
Accrued interest payable.................... 1,002 1,002 586 586
</TABLE>
The fair value estimates are based on the following methods and
assumptions:
- Cash and cash equivalents, accrued interest receivable, advance
payments by borrowers for taxes and insurance, and accrued interest
payable. The carrying amounts approximate their fair value.
- Investment securities and mortgage-backed securities. Fair values
for securities are based on quoted market prices or dealer quotes; where
such quotes are not available, fair values are based on quoted market
prices of comparable instruments.
- Loans held for investment. The fair values of loans receivable are
estimated using a discounted cash flow calculation that applies estimated
discount rates reflecting the credit and interest rate risk inherent in the
loans to homogeneous categories of loans with similar financial
characteristics; these loan categories are further segmented into fixed and
adjustable rate interest terms.
- Loans held for sale. Fair values are based on actual sales prices
for loans subject to sales commitments; fair values of loans not subject to
sales commitments are based on the market price of loans with similar
characteristics.
- Federal Home Loan Bank stock. This item is valued at cost, which
represents redemption value and approximates fair value.
- Deposits. The fair values of fixed maturity certificate accounts
are estimated using a discounted cash flow calculation that applies
interest rates currently offered for deposits of similar remaining
maturities. The fair values of other deposit accounts (passbook, NOW, and
money market accounts) equal their carrying values (i.e., the amount
payable on demand at the reporting date).
F-22
<PAGE> 63
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- Advances from Federal Home Loan Bank. The fair value of FHLB
advances is estimated by discounting future cash flows at rates currently
available for borrowings with similar terms and remaining maturities.
- Off-balance sheet financial instruments. The fair value of
commitments is estimated using the fees currently charged to enter similar
agreements, taking into account the remaining terms of the agreements and
the counterparties' credit standing. For fixed-rate loan commitments, fair
value also considers the difference between current levels of interest
rates and the committed rates. The fair value of undisbursed lines of
credit is based on fees currently charged for similar agreements or on
estimated cost to terminate them or otherwise settle the obligations with
the counterparties at the reporting date. The carrying amount and fair
value of off-balance sheet instruments is not significant as of December
31, 1997 and 1996.
(14) COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Bank enters into commitments with
off-balance sheet risk to meet the financing needs of its customers. Commitments
to extend credit involve elements of credit risk and interest rate risk in
excess of the amount recognized in the consolidated statements of financial
condition. The Bank's exposure to credit loss in the event of nonperformance by
the other party to the commitment is represented by the contractual amount of
the commitment. The Bank uses the same credit policies in making commitments as
it does for on-balance sheet instruments. Interest rate risk on commitments to
extend credit results from the possibility that interest rates may have moved
unfavorably from the position of the Bank since the time the commitment was
made.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates of 60 days or other
termination clauses and may require payment of a fee. Since some of the
commitments may expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements.
The Bank evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained by the Bank upon extension of credit is
based on management's credit evaluation of the applicant. Collateral held is
generally residential and commercial real estate.
The Bank's lending is concentrated in northeastern Ohio; as a result, the
economic conditions and market for real estate in northeastern Ohio could have a
significant impact on the Bank.
At December 31, 1997, the Bank had commitments to lend $29,974,000, of
which $14,492,000 were for adjustable-rate loans and $15,482,000 were for
fixed-rate loans. At December 31, 1996, the Bank had commitments to lend
$34,800,000, of which $17,457,000 were for adjustable-rate loans and $17,343,000
were for fixed-rate loans. Adjustable-rate loans generally reprice with the
prime rate or the one- or three-year constant maturity treasury rate. The
interest rates and fees associated with these commitments were prevailing at the
time applications were taken. In management's opinion, these loans will be
funded through normal operations.
There were no commitments to sell any loans at either December 31, 1997 or
1996.
As of December 31, 1997 and 1996, the Bank had line-of-credit commitments
totaling $8,175,000 and $1,809,000, respectively. Commitments generally are
extended at prime-sensitive interest rates and are secured by real estate.
There are pending against the Bank various lawsuits and claims which arise
in the normal course of business. In the opinion of management, any liabilities
that may result from pending lawsuits and claims will not materially affect the
consolidated financial position of the Bank.
F-23
<PAGE> 64
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(15) PARENT COMPANY ONLY FINANCIAL STATEMENTS
The condensed statements of financial condition as of December 31, 1997,
and related condensed statements of income and cash flows for the period from
March 6, 1997 through December 31, 1997 for Emerald Financial Corp. should be
read in conjunction with the consolidated financial statements and the notes
thereto (dollars in thousands).
<TABLE>
<S> <C>
CONDENSED STATEMENT OF FINANCIAL CONDITION
Assets
Cash...................................................... $ 77
Securities available for sale............................. 5,372
Note receivable........................................... 85
Equity in net assets of the Bank.......................... 47,324
Interest receivable on investments........................ 104
Other assets.............................................. 83
-------
Total assets........................................... $53,045
=======
Liabilities and shareholders' equity
Other liabilities......................................... 130
Notes payable............................................. 4,400
Shareholders' equity...................................... 48,515
-------
Total liabilities and shareholders' equity............. $53,045
=======
CONDENSED STATEMENT OF INCOME
Income
Equity in earnings of the Bank............................ $ 6,175
Interest income........................................... 328
-------
Total income........................................... 6,503
-------
Expenses
Interest.................................................. 268
Other..................................................... 133
-------
Total expenses......................................... 401
-------
Income before federal income taxes..................... 6,102
Federal income tax benefit.................................. 39
-------
Net income............................................. $ 6,141
=======
CONDENSED STATEMENT OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $ 6,141
Adjustments to reconcile net income to net cash used in
operating activities
Equity in earnings of the Bank............................ (6,175)
Amortization and accretion................................ 18
Effect of change in deferred federal income taxes......... (80)
Increase in the liabilities............................... 102
Increase in interest receivable........................... (104)
Other, net................................................ (104)
-------
Net cash used in operating activities.................. (202)
-------
</TABLE>
F-24
<PAGE> 65
EMERALD FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<S> <C>
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available for sale................. (5,137)
Dividend from the Bank.................................... 2,180
-------
Net cash used in investing activities.................. (2,957)
-------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings.................................... 4,425
Repayment of borrowings..................................... (80)
Dividend paid............................................... (1,215)
Proceeds from stock options exercised....................... 106
-------
Net cash provided by financing activities.............. 3,236
-------
Net increase in cash and cash equivalents................... 77
Cash and cash equivalents at beginning of period............ --
-------
Cash and cash equivalents at end of period.................. $ 77
=======
</TABLE>
F-25
<PAGE> 66
APPENDIX A
EMERALD FINANCIAL CORP.
1998 STOCK OPTION AND INCENTIVE PLAN
1. Plan Purpose. The purpose of the Plan is to promote the long-term
interests of the Corporation and its shareholders by providing a means for
attracting and retaining directors, officers and employees of the Corporation
and its Affiliates. It is intended that designated Options granted pursuant to
the provisions of this Plan to persons employed by the Corporation or its
Affiliates will qualify as Incentive Stock Options. Options granted to persons
who are not employees will be Non-Qualified Stock Options.
2. Definitions. The following definitions are applicable to the Plan:
"Affiliate"--means any "parent corporation" or "subsidiary corporation" of
the Corporation, as such terms are defined in Section 424(e) and (f),
respectively, of the Code.
"Award"--means the grant of an Incentive Stock Option, a Non-Qualified
Stock Option, a Stock Appreciation Right, Restricted Stock or other property or
securities, or any combination thereof, as provided in the Plan.
"Award Agreement"--means the agreement evidencing the grant of an Award
made under the Plan.
"Bank"--means The Strongsville Savings Bank, and any successor entity.
"Cause" or "cause"--means, in connection with termination or cessation of
service as a director, officer or employee of the Corporation or an Affiliate,
personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty
involving personal profit, intentional failure to perform stated duties or gross
negligence.
"Code"--means the Internal Revenue Code of 1986, as amended.
"Committee"--means the Committee referred to in Section 3 hereof.
"Continuous Service"--means the absence of any interruption or termination
of service as a director, officer or employee of the Corporation or an
Affiliate, except that when used with respect to persons granted an Incentive
Option "Continuous Service" means the absence of any interruption or termination
of service as an employee of the Corporation or an Affiliate. Service shall not
be considered interrupted in the case of sick leave, military leave or any other
leave of absence approved by the Corporation or in the case of transfers between
payroll locations of the Corporation or between the Corporation, its parent, its
subsidiaries or its successor.
"Corporation"--means Emerald Financial Corp., an Ohio corporation, or any
successor thereto as provided in Section 19 herein.
"Employee"--means any person, including an officer or director, who is
employed by the Corporation or any Affiliate.
"ERISA"--means the Employee Retirement Income Security Act of 1974, as
amended.
"Exercise Price"--means (i) in the case of an Option, the price per Share
at which the Shares subject to such Option may be purchased upon exercise of
such Option and (ii) in the case of a Right, the price per Share which, upon
grant, the Committee determines shall be used to calculate the aggregate value a
Participant shall be entitled to receive pursuant to Sections 9 or 12 hereof
upon exercise of such Right.
"Incentive Stock Option"--means an option to purchase Shares granted by the
Committee pursuant to Section 6 hereof which is subject to the limitations and
restrictions of Section 8 hereof and is intended to qualify under Section 422 of
the Code. Unless otherwise set forth in the Award Agreement, any Option that
does not qualify as an Incentive Stock Option for any reason shall be deemed a
Non-Qualified Stock Option.
"Market Value"--means the average of the high and low quoted sales prices
on the date in question (or, if there is no reported sale on such date, on the
last preceding date on which any reported sale occurred) of a Share on the
Composite Tape for the New York Stock Exchange-Listed Stocks, or, if on such
date the Shares are not
A-1
<PAGE> 67
quoted on the Composite Tape, on the New York Stock Exchange, or, if the Shares
are not listed or admitted to trading on such Exchange, on the principal United
States securities exchange registered under the Securities Exchange Act of 1934
on which the Shares are listed or admitted to trading, or, if the Shares are not
listed or admitted to trading on any such exchange, the mean between the closing
high bid and low asked quotations with respect to a Share on such date on the
National Association of Securities Dealers, Inc., Automated Quotations System,
or any similar system then in use, or, if no such quotations are available, the
fair market value on such date of a Share as the Board of Directors shall
determine.
"Non-Employee Director"--means a director who (a) is an outside director,
as defined in Section 162(m) of the Code, and (b) is a Non-Employee Director, as
defined in Rule 16b-3(b)(3) of the Securities and Exchange Commission or any
successor rule thereto.
"Non-Qualified Stock Option"--means an option to purchase Shares granted by
the Committee pursuant to Section 6 hereof which does not qualify, for any
reason, as an Incentive Stock Option under Section 422(b) of the Code.
"Option"--means an Incentive Stock Option or a Non-Qualified Stock Option.
"Participant"--means any director, officer or employee of the Corporation
or any Affiliate who is selected by the Committee to receive an Award.
"Plan"--means the 1998 Stock Option and Incentive Plan of the Corporation.
"Related"--means (i) in the case of a Right, a Right which is granted in
connection with, and to the extent exercisable, in whole or in part, in lieu of,
an Option or another Right and (ii) in the case of an Option, an Option which is
granted in connection with, and to the extent exercisable, in whole or in part,
in lieu of, a Right or another Option.
"Restricted Stock"--means Shares awarded to a Participant by the Committee
pursuant to Section 10(a) hereof.
"Right"--means a Stock Appreciation Right.
"Shares"--means the shares of Common Stock of the Corporation, without par
value.
"Stock Appreciation Right"--means a stock appreciation right with respect
to Shares granted by the Committee pursuant to the Plan.
3. Administration. The Plan shall be administered by a Committee consisting
of two or more members, each of whom shall be a Non-Employee Director. The
members of the Committee shall be appointed from time to time by the Board of
Directors of the Corporation and shall serve at the discretion of the Board of
Directors. Except as limited by the express provisions of the Plan or by
resolutions adopted by the Board of Directors of the Corporation, the Committee
shall have sole and complete authority and discretion to (i) select Participants
and grant Awards; (ii) determine the number of Shares to be subject to types of
Awards generally, as well as to individual Awards granted under the Plan; (iii)
determine the terms and conditions upon which Awards shall be granted under the
Plan; (iv) prescribe the form and terms of instruments evidencing such grants;
and (v) establish from time to time regulations for the administration of the
Plan, interpret the Plan, and make all determinations deemed necessary or
advisable for the administration of the Plan.
Without in any way limiting the authority of the Committee under the terms
of the Plan, the Committee may provide in any Award Agreement that the recipient
of the Award shall maintain in confidence the amount and terms of his or her
award, except as disclosure thereof may be required under applicable law. An
Award shall be subject to forfeiture at the Committee's discretion for violation
of the confidentiality provisions of an Award Agreement, except insofar as such
Award relates to Options or Rights that have been exercised or Shares that have
become vested by lapse of any applicable restrictions.
A majority of the Committee shall constitute a quorum, and the acts of a
majority of the members present at any meeting at which a quorum is present, or
acts approved in writing by a majority of the Committee without a meeting, shall
be acts of the Committee.
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4. Eligibility. The Committee may select from time to time Participants in
the Plan from those directors, officers and employees of the Corporation or its
Affiliates who, in the opinion of the Committee, are responsible for or
contribute to the management, growth and profitability of the Corporation and
its Affiliates. Subject to adjustment as set forth in Section 11, the maximum
number of Shares subject to an Award granted to any individual Participant in
any calendar year shall be Fifty Thousand (50,000) Shares.
5. Shares Subject to Plan. Subject to adjustment by the operation of
Section 11 hereof, the maximum number of Shares with respect to which Awards may
be made under the Plan is 250,000, plus any Shares surrendered to the
Corporation in payment of the exercise price of Options or Rights issued under
the Plan. The Shares with respect to which Awards may be made under the Plan may
be authorized and unissued shares or issued shares heretofore or hereafter
reacquired and held as treasury shares. Shares that are subject to Related
Rights and Related Options shall be counted only once in determining whether the
maximum number of Shares with respect to which Awards may be granted under the
Plan has been exceeded. An Award shall not be considered to have been made under
the Plan with respect to any Option or Right that terminates. New Awards may be
granted under the Plan with respect to the number of Shares as to which such
termination has occurred.
6. General Terms and Conditions of Options and Rights. The Committee shall
have full and complete authority and discretion, except as expressly limited by
the Plan, to grant Options and/or Rights and to provide the terms and conditions
(which need not be identical among Participants) thereof. In particular, the
Committee shall prescribe the following terms and conditions: (i) the Exercise
Price of any Option or Right, which shall not be less than the Market Value per
Share at the date of grant of such Option or Right, (ii) the number of Shares
subject to, and the expiration date of, any Option or Right, which expiration
date shall not exceed ten years from the date of grant, (iii) the manner, time
and rate (cumulative or otherwise) of exercise of such Option or Right, and (iv)
the restrictions, if any, to be placed upon such Option or Right or upon Shares
which may be issued upon exercise of such Option or Right. Notwithstanding the
foregoing, subject to adjustment by the operation of Section 11 hereof, no
individual shall be granted Awards with respect to more than 125,000 of the
total shares subject to the Plan. No Awards shall vest and become exercisable
earlier than one year from the date the Plan is approved by shareholders of the
Corporation.
Furthermore, at the time of any Award, the Participant shall enter into an
agreement with the Corporation in a form specified by the Committee, agreeing to
the terms and conditions of the Award and such other matters as the Committee,
in its sole discretion, shall determine (the "Option Agreement").
7. Exercise of Options or Rights.
(a) Except as provided herein, an Option or Right granted under the Plan
shall be exercisable during the lifetime of the Participant to whom such Option
or Right was granted only by such Participant and, except as provided in
paragraphs (c) and (d) of this Section 7, no such Option or Right may be
exercised unless at the time such Participant exercises such Option or Right,
such Participant has maintained Continuous Service since the date of grant of
such Option or Right.
(b) To exercise an Option or Right under the Plan, the Participant to whom
such Option or Right was granted shall give written notice to the Corporation in
form satisfactory to the Committee (and, if partial exercises have been
permitted by the Committee, by specifying the number of Shares with respect to
which such Participant elects to exercise such Option or Right) together with
full payment of the Exercise Price, if any and to the extent required. The date
of exercise shall be the date on which such notice is received by the
Corporation. Payment, if any is required, shall be made either (i) in cash
(including check, bank draft or money order) or (ii) by delivering (A) Shares
already owned by the Participant and having a fair market value equal to the
applicable exercise price, such fair market value to be determined in such
appropriate manner as may be provided by the Committee or as may be required in
order to comply with or to conform to requirements of any applicable laws or
regulations, or (B) a combination of cash and such Shares.
(c) If a Participant to whom an Option or Right was granted shall cease to
maintain Continuous Service for any reason (excluding death or disability and
termination of employment by the Corporation or any Affiliate for cause), such
Participant may, but only within the period of three months immediately
succeeding such cessation of Continuous Service and in no event after the
expiration date of such Option or Right, exercise such Option or
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Right to the extent that such Participant was entitled to exercise such Option
or Right at the date of such cessation; provided, however, that such right of
exercise after cessation of Continuous Service shall not be available to a
Participant if the Committee otherwise determines and so provides in the
applicable instrument or instruments evidencing the grant of such Option or
Right. If a Participant to whom an Option or Right was granted shall cease to
maintain Continuous Service by reason of death or disability then, unless the
Committee shall have otherwise provided in the instrument evidencing the grant
of an Option or Stock Appreciation Right, all Options and Rights granted and not
fully exercisable shall become exercisable in full upon the happening of such
event and shall remain so exercisable (i) in the event of death for the period
described in paragraph (d) of this Section 7 and (ii) in the event of disability
for a period of three months following such date. If the Continuous Service of a
Participant to whom an Option or Right was granted by the Corporation is
terminated for cause, all rights under any Option or Right of such Participant
shall expire immediately upon the giving to the Participant of notice of such
termination.
(d) In the event of the death of a Participant while in the Continuous
Service of the Corporation or an Affiliate or within the three month period
referred to in paragraph (c) of this Section 7, the person to whom any Option or
Right held by the Participant at the time of his death is transferred by will or
the laws of descent and distribution, or in the case of an Award other than an
Incentive Stock Option, pursuant to a qualified domestic relations order, as
defined in the Code or Title 1 of ERISA or the rules thereunder may, but only to
the extent such Participant was entitled to exercise such Option or Right as set
forth in paragraph (c) of this Section 7, exercise such Option or Right at any
time within a period of one year succeeding the date of death of such
Participant, but in no event later than ten years from the date of grant of such
Option or Right. Following the death of any Participant to whom an Option was
granted under the Plan, irrespective of whether any Related Right shall have
been granted to the Participant or whether the person entitled to exercise such
Related Right desires to do so, the Committee may, as an alternative means of
settlement of such Option, elect to pay to the person to whom such Option is
transferred by will or by the laws of descent and distribution, or in the case
of an Option other than an Incentive Stock Option, pursuant to a qualified
domestic relations order, as defined in the Code or Title I of ERISA or the
rules thereunder, the amount by which the Market Value per Share on the date of
exercise of such Option shall exceed the Exercise Price of such Option,
multiplied by the number of Shares with respect to which such Option is properly
exercised. Any such settlement of an Option shall be considered an exercise of
such Option for all purposes of the Plan.
8. Incentive Stock Options. Incentive Stock Options may be granted only to
Participants who are Employees. Any provision of the Plan to the contrary
notwithstanding, (i) no Incentive Stock Option shall be granted more than ten
years from the date the Plan is adopted by the Board of Directors of the
Corporation and no Incentive Stock Option shall be exercisable more than ten
years from the date such Incentive Stock Option is granted, (ii) the Exercise
Price of any Incentive Stock Option shall not be less than the Market Value per
Share on the date such Incentive Stock Option is granted, (iii) any Incentive
Stock Option shall not be transferable by the Participant to whom such Incentive
Stock Option is granted other than by will or the laws of descent and
distribution, and shall be exercisable during such Participant's lifetime only
by such Participant, (iv) no Incentive Stock Option shall be granted to any
individual who, at the time such Incentive Stock Option is granted, owns stock
possessing more than ten percent of the total combined voting power of all
classes of stock of the Corporation or any Affiliate unless the Exercise Price
of such Incentive Stock Option is at least 110 percent of the Market Value per
Share at the date of grant and such Incentive Stock Option is not exercisable
after the expiration of five years from the date such Incentive Stock Option is
granted, and (v) the aggregate Market Value (determined as of the time any
Incentive Stock Option is granted) of the Shares with respect to which Incentive
Stock Options are exercisable for the first time by a Participant in any
calendar year shall not exceed $100,000.
9. Stock Appreciation Rights. A Stock Appreciation Right shall, upon its
exercise, entitle the Participant to whom such Stock Appreciation Right was
granted to receive a number of Shares or cash or combination thereof, as the
Committee in its discretion shall determine, the aggregate value of which (i.e.,
the sum of the amount of cash and/or Market Value of such Shares on date of
exercise) shall equal (as nearly as possible, it being understood that the
Corporation shall not issue any fractional shares) the amount by which the
Market Value per Share on the date of such exercise shall exceed the Exercise
Price of such Stock Appreciation Right, multiplied by the number of Shares with
respect of which such Stock Appreciation Right shall have been exercised. A
Stock
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Appreciation Right may be Related to an Option or may be granted independently
of any Option as the Committee shall from time to time in each case determine.
At the time of grant of an Option the Committee shall determine whether and to
what extent a Related Stock Appreciation Right shall be granted with respect
thereto; provided, however, and notwithstanding any other provision of the Plan,
that if the Related Option is an Incentive Stock Option, the Related Stock
Appreciation Right shall satisfy all the restrictions and limitations of Section
8 hereof as if such Related Stock Appreciation Right were an Incentive Stock
Option and as if other rights which are Related to Incentive Stock Options were
Incentive Stock Options. In the case of a Related Option, such Related Option
shall cease to be exercisable to the extent of the Shares with respect to which
the Related Stock Appreciation Right was exercised. Upon the exercise or
termination of a Related Option, any Related Stock Appreciation Right shall
terminate to the extent of the Shares with respect to which the Related Option
was exercised or terminated.
10. Restricted Stock and Performance Awards.
(a) Restricted Stock. The Committee is hereby authorized to grant Awards of
Restricted Stock to Participants with the following terms and conditions and
with such additional terms and conditions not inconsistent with the provisions
of the Plan as the Committee shall determine:
(i) Restrictions. Shares of Restricted Stock shall be subject to such
restrictions as the Committee may impose (including, without limitation, any
limitation on the right to vote a Share of Restricted Stock or the right to
receive any dividend or other right or property with respect thereto), which
restrictions may lapse separately or in combination at such time or times,
in such installments or otherwise as the Committee may deem appropriate.
(ii) Stock Certificates. Any Restricted Stock granted under the Plan shall
be evidenced by issuance of a stock certificate or certificates, which
certificate or certificates shall be held by the Corporation. Such
certificate or certificates shall be registered in the name of the
Participant and shall bear an appropriate legend referring to the
restrictions applicable to such Restricted Stock.
(iii) Forfeiture; Delivery of Shares. Except as otherwise determined by the
Committee, upon termination of service during the applicable restriction
period, all Shares of Restricted Stock at such time subject to restriction
shall be forfeited to the Corporation; provided, however, that the Committee
may waive in whole or in part any or all remaining restrictions with respect
to Shares of Restricted Stock. Shares representing Restricted Stock that is
no longer subject to restrictions shall be delivered to the holder thereof
promptly after the applicable restrictions lapse or are waived.
(b) Performance Awards. The Committee is hereby authorized to grant
performance Awards to Participants subject to the terms of the Plan and any
applicable Award Agreement. A performance Award granted under the Plan (i) may
be denominated or payable in cash, Shares (including, without limitation,
Restricted Stock), other securities, other Awards or other property and (ii)
shall confer on the holder thereof the right to receive payments, in whole or in
part, upon the achievement of such performance goals during such performance
periods as the Committee shall establish. Subject to the terms of the Plan and
any applicable Award Agreement, the performance goals to be achieved during any
performance period, the length of any performance period, the amount of any
performance Award granted and the amount of any payment or transfer to be made
pursuant to any performance Award shall be determined by the Committee.
11. Adjustments Upon Changes in Capitalization. In the event of any change
in the outstanding Shares subsequent to the effective date of the Plan by reason
of any reorganization, recapitalization, stock split, stock dividend,
combination or exchange of shares, merger, consolidation or any change in the
corporate structure or Shares of the Corporation, the maximum aggregate number
and class of shares as to which Awards may be granted under the Plan and the
number, class and exercise price of shares with respect to which Awards have
been granted under the Plan shall be appropriately adjusted by the Committee,
whose determination shall be conclusive. Creation of a class of Serial Preferred
Stock or issuance of such shares hereafter shall not be deemed to constitute a
change requiring adjustment under this Section.
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12. Effect of Merger and Change in Control.
(a) Merger. In the event of any merger, consolidation or combination of the
Corporation (other than a merger, consolidation or combination in which the
Corporation is the continuing entity and which does not result in the
outstanding Shares being converted into or exchanged for different securities,
cash or other property, or any combination thereof) pursuant to a plan or
agreement the terms of which are binding upon all shareholders of the
Corporation (except to the extent that dissenting shareholders may be entitled,
under statutory provisions or provisions contained in the articles of
incorporation, to receive the appraised or fair value of their holdings), any
Participant to whom an Option or Right has been granted shall have the right
(subject to the provisions of the Plan and any limitation or vesting period
applicable to such Option or Right), thereafter and during the term of each such
Option or Right, to receive upon exercise of any such Option or Right an amount
equal to the excess of the fair market value on the date of such exercise of the
securities, cash or other property, or combination thereof, receivable upon such
merger, consolidation or combination in respect of a Share over the Exercise
Price of such Right or Option, multiplied by the number of Shares with respect
to which such Option or Right shall have been exercised. Such amount may be
payable fully in cash, fully in one or more of the kind or kinds of property
payable in such merger, consolidation or combination, or partly in cash and
partly in one or more of such kind or kinds of property, all in the discretion
of the Committee.
(b) Change in Control. Each of the events specified in the following
clauses (i) through (iii) of this Section 12(b) shall be deemed a "change in
control": (i) any third person, including a "group," as defined in Section
13(d)(3) of the Securities Exchange Act of 1934, shall become the beneficial
owner of shares of the Corporation with respect to which 25% or more of the
total number of votes for the election of the Board of Directors of the
Corporation may be cast (other than any person or group owning 25% or more of
the Common Stock as of the date of adoption of the Plan, and other than any
person who, together with members of his immediate family, owns 25% or more of
the Common Stock as of the date of adoption of the Plan), (ii) as a result of,
or in connection with, any cash tender offer, merger or other business
combination, sale of assets or contested election, or combination of the
foregoing, the persons who were directors of the Corporation shall cease to
constitute a majority of the Board of Directors of the Corporation, or (iii) the
shareholders of the Corporation shall approve an agreement providing either for
a transaction in which the Corporation will cease to be an independent, publicly
owned corporation or for a sale or other disposition of all or substantially all
the assets of the Corporation. Upon a change in control, unless the Committee
shall have otherwise provided in the Award Agreement, any restricted period with
respect to Restricted Stock awarded to such Participant shall lapse and all
Shares awarded as Restricted Stock shall become fully vested in the Participant
to whom such Shares were awarded. If a tender offer or exchange offer for Shares
(other than such an offer by the Corporation) is commenced, or if the event
specified in clause (iii) above shall occur, unless the Committee shall have
otherwise provided in the Award Agreement, all Options and Stock Appreciation
Rights granted and not fully exercisable shall become exercisable in full upon
the happening of such event; provided, however, that no Option or Stock
Appreciation Right that has previously been exercised or otherwise terminated
shall become exercisable.
13. Assignments and Transfers. No Award nor any right or interest of a
Participant under the Plan in any instrument evidencing any Award under the Plan
may be assigned, encumbered or transferred except, in the event of the death of
a Participant, by will or the laws of descent and distribution or in the case of
Awards other than Incentive Stock Options pursuant to a qualified domestic
relations order, as defined in the Code or Title I of ERISA or the rules
thereunder.
14. Employee Rights Under the Plan. No director, officer or employee shall
have a right to be selected as a Participant nor, having been so selected, to be
selected again as a Participant and no director, officer, employee or other
person shall have any claim or right to be granted an Award under the Plan or
under any other incentive or similar plan of the Corporation or any Affiliate.
Neither the Plan nor any action taken thereunder shall be construed as giving
any employee any right to be retained in the employ of the Corporation or any
Affiliate.
15. Delivery and Registration of Stock. The Corporation's obligation to
deliver Shares with respect to an Award shall, if the Committee so requests, be
conditioned upon the receipt of a representation as to the investment intention
of the Participant to whom such Shares are to be delivered, in such form as the
Committee shall determine to be necessary or advisable to comply with the
provisions of the Securities Act of 1933 or any
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<PAGE> 72
other Federal, state or local securities legislation or regulation. It may be
provided that any representation requirement shall become inoperative upon a
registration of the Shares or other action eliminating the necessity of such
representation under the Securities Act of 1933 or other applicable securities
law. The Corporation shall not be required to deliver any Shares under the Plan
prior to (i) the admission of such shares to listing on any stock exchange on
which Shares may then be listed, and (ii) the completion of such registration or
other qualification of such Shares under any state or Federal law, rule or
regulation, as the Committee shall determine to be necessary or advisable.
16. Withholding Tax. Upon the termination of the restricted period with
respect to any shares of Restricted Stock (or at any such earlier time, if any,
that an election is made by the Participant under Section 83(b) of the Code, or
any successor provision thereto, to include the value of such shares in taxable
income), the Corporation shall have the right to require the Participant or
other person receiving such shares to pay the Corporation the amount of any
taxes which the Corporation is required to withhold with respect to such shares,
or, in lieu thereof, to retain or sell without notice, a sufficient number of
shares held by it to cover the amount required to be withheld. The Corporation
shall have the right to deduct from all dividends paid with respect to shares of
Restricted Stock the amount of any taxes which the Corporation is required to
withhold with respect to such dividend payments.
The Corporation shall have the right to deduct from all amounts paid in
cash with respect to the exercise of a Right under the Plan any taxes required
by law to be withheld with respect to such cash payments. Where a Participant or
other person is entitled to receive Shares pursuant to the exercise of an Option
or Right pursuant to the Plan, the Corporation shall have the right to require
the Participant or such other person to pay the Corporation the amount of any
taxes which the Corporation is required to withhold with respect to such Shares,
or, in lieu thereof, to retain, or sell without notice, a number of such Shares
sufficient to cover the amount required to be withheld.
All withholding decisions pursuant to this Section 16 shall be at the sole
discretion of the Committee or the Corporation.
17. Amendment or Termination. The Board of Directors of the Corporation may
amend, suspend or terminate the Plan or any portion thereof at any time, but
(except as provided in Section 11 hereof) no amendment shall be made without
approval of the shareholders of the Corporation which shall (i) increase the
aggregate number of Shares with respect to which Awards may be made under the
Plan (except pursuant to Section 11), (ii) materially increase the benefits
accruing to Participants, (iii) materially change the requirements as to
eligibility for participation in the Plan or (iv) change the class of persons
eligible to participate in the Plan; provided, that no such amendment,
suspension or termination shall impair the rights of any Participant, without
his consent, in any Award made pursuant to the Plan.
18. Effective Date and Term of Plan. The Plan shall become effective upon
its adoption by shareholders of the Corporation. It shall continue in effect for
a term of ten years unless sooner terminated under Section 17 hereof.
19. Successors. All obligations of the Corporation under the Plan, with
respect to Awards granted hereunder, shall be binding on any successor to the
Corporation, whether the existence of such successor is the result of a direct
or indirect purchase, merger, consolidation or otherwise, of all or
substantially all of the business and/or assets of the Corporation.
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PROXY
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a shareholder of
Emerald Financial Corp. (the "Company"), hereby appoints Mike Kalinich
and Kenneth J. Piechowski, or either of them, with full power of
substitution, my true and lawful Proxy to represent and vote on behalf of
the undersigned the same number of shares which the undersigned is then
entitled to vote, for the matters as may come before the Annual Meeting
of Shareholders of Emerald Financial Corp. to be held on April 16, 1998
and at any adjournments or postponements thereof, as follows:
<TABLE>
<CAPTION>
<S> <C>
1. Election of Directors.
[ ] FOR all nominees listed below [ ] WITHHOLD AUTHORITY
(except as marked to the contrary below). to vote for all nominees listed below.
William A. Fraunfelder, Jr. Glenn W. Goist John F. Ziegler
</TABLE>
INSTRUCTION: TO WITHHOLD YOUR VOTE FOR A NOMINEE OR MORE THAN ONE
NOMINEE, WRITE THE NAME(S) OF THE NOMINEE(S) BELOW.
-------------------------------------------------------------------------
2. The approval of the amendment of Article Fourth of the Company's
Amended and Restated Articles of Incorporation to increase authorized
P shares of Common Stock, without par value, from 10,000,000 to
R 20,000,000.
O [ ] FOR [ ] AGAINST [ ] ABSTAIN
X 3. The approval of the 1998 Stock Option and Incentive Plan.
Y [ ] FOR [ ] AGAINST [ ] ABSTAIN
4. The approval of the appointment of KPMG Peat Marwick LLP as auditors
for the fiscal year ending December 31, 1998.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
5. In their discretion, the Proxies are authorized to vote upon such
other business as may properly come before the meeting.
(Continued and to be signed on reverse side)
(Continued from other side)
THIS PROXY WILL BE VOTED AS DIRECTED. BUT IF NO INSTRUCTIONS ARE
SPECIFIED, THIS PROXY WILL BE VOTED FOR EACH OF THE PROPOSALS STATED. IF
ANY OTHER BUSINESS IS PRESENTED AT SUCH MEETING, THIS PROXY WILL BE
VOTED, BY THOSE NAMED IN THIS PROXY, IN ACCORDANCE WITH THEIR BEST
JUDGMENT. AT PRESENT, THE BOARD OF DIRECTORS KNOWS OF NO OTHER BUSINESS
TO BE PRESENTED AT THE MEETING.
[ ] Please mark here if attending meeting
THE UNDERSIGNED ACKNOWLEDGES
RECEIPT FROM EMERALD FINANCIAL
CORP. PRIOR TO THE EXECUTION
OF THIS PROXY OF A NOTICE OF
ANNUAL MEETING OF
SHAREHOLDERS, A PROXY
STATEMENT DATED MARCH 20,
1998, AND ANNUAL REPORT TO
SHAREHOLDERS FOR THE YEAR
ENDING DECEMBER 31, 1997.
Date , 1998
-------------------
------------------------------
------------------------------
Signature(s) of shareholder(s)
PLEASE DATE AND SIGN NAME
EXACTLY AS IT APPEARS HEREON.
WHEN SIGNING AS EXECUTOR,
ATTORNEY, GUARDIAN,
ADMINISTRATOR, TRUSTEE OR IN
ANY OTHER REPRESENTATIVE
CAPACITY, PLEASE GIVE FULL
TITLE AS SUCH. IF A
CORPORATION, PLEASE SIGN IN
FULL CORPORATE NAME BY THE
PRESIDENT OR OTHER DULY
AUTHORIZED OFFICER. IF A
PARTNERSHIP, PLEASE SIGN IN
PARTNERSHIP NAME BY A DULY
AUTHORIZED PERSON (GENERAL
PARTNER).
Proxy Card
