<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
- --------------------------------------------------------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to_____________
COMMISSION FILE NUMBER: 000-22201
EMERALD FINANCIAL CORP.
-----------------------
(Exact name of registrant as specified in its charter)
OHIO 34-1842953
------------------------------ -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
14092 PEARL ROAD
STRONGSVILLE, OHIO 44136
---------------------------- --------
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (440) 238-7311
CAPITAL STOCK, WITHOUT PAR VALUE
--------------------------------
Title of Class
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Capital Stock, No Par Value 10,296,527
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(Class) (Outstanding at September 30, 1998)
<PAGE> 2
EMERALD FINANCIAL CORP.
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item I. Financial Statements:
Consolidated Statements of Financial
Condition as of September 30, 1998, and
December 31, 1997.............................................................. 2
Consolidated Statements of Income for
the Three and Nine Month Periods Ended September
30, 1998 and 1997.............................................................. 3
Consolidated Statements of Cash Flows
for the Nine Month Periods Ended September
30, 1998 and 1997.............................................................. 4
Notes to Consolidated Financial Statements..................................... 5
Selected Financial Information........................................................... 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................................. 9
Tables......................................................................... 21
Item 3. Qualitative and Quantitative Disclosures
about Market Risk............................................................. 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................................. 25
Item 2. Changes in Securities.......................................................... 25
Item 3. Defaults on Senior Securities.................................................. 25
Item 4. Submission of Matters to a Vote of Shareholders................................ 25
Item 5. Other Information.............................................................. 25
Item 6. Exhibits and Reports on Form 8-K............................................... 25
SIGNATURES....................................................................................... 26
EXHIBIT INDEX.................................................................................... 27
</TABLE>
1
<PAGE> 3
EMERALD FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
- -----------------------------------------------------------------------------------------------------------------------
(In thousands, except share data)
<S> <C> <C>
ASSETS:
CASH AND CASH EQUIVALENTS
Cash and deposits with banks $ 6,796 $ 7,729
Interest bearing deposits with banks 8,406 3,033
INVESTMENT SECURITIES
Held-to-maturity (fair values of $ 6,609 and $14,037 at
September 30, 1998 and December 31, 1997, respectively) 6,772 14,231
Available for sale (amortized cost of $34,855 and $31,256 at
September 30, 1998 and December 31, 1997, respectively) 35,379 31,480
MORTGAGE-BACKED SECURITIES
Held-to-maturity (fair value of $26,416 at December 31, 1997) - 25,825
Available for sale (amortized cost of $50,846 and $27,209 at
September 30, 1998 and December 31, 1997, respectively) 51,040 27,312
LOANS-NET
(Including allowance for loan losses of $1,666 and $1,625 at
September 30, 1998 and December 31, 1997, respectively) 497,294 461,457
Loans held for sale 6,814 7,823
Accrued interest receivable 3,516 3,343
Federal Home Loan Bank stock-at cost 3,757 3,504
Premises and equipment-net 4,323 4,259
Cash surrender value of life insurance 16,149 10,341
Prepaid expenses and other assets 2,745 3,628
- -----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 642,991 $ 603,965
=======================================================================================================================
LIABILITIES:
Deposits $ 537,842 $ 520,690
Federal Home Loan Bank advances 45,652 28,138
Deferred federal income taxes 1,680 1,875
Advance payments by borrowers 884 1,574
Accrued interest payable 797 1,002
Accounts payable and other 2,433 2,171
- -----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 589,288 555,450
SHAREHOLDERS' EQUITY
Common stock, no par value, 20,000,000 shares authorized,
10,296,527 and 10,145,200 shares issued and outstanding
at September 30, 1998 and December 31, 1997, respectively. 9,962 9,831
Accumulated other comprehensive income 322 216
Retained earnings 43,419 38,468
- -----------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 53,703 48,515
- -----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 642,991 $ 603,965
=======================================================================================================================
</TABLE>
See notes to unaudited consolidated financial statements
2
<PAGE> 4
EMERALD FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars In thousands, except per share data)
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans $ 9,935 $ 9,384 $ 28,984 $ 27,370
Investment securities 566 977 1,866 2,735
Mortgage-backed securities 865 950 2,632 2,999
Other 168 139 635 528
- ------------------------------------------------------------------------------------------------------------------------------------
11,534 11,450 34,117 33,632
INTEREST EXPENSE
Deposits 6,777 6,805 20,008 19,849
Advances from the Federal Home Loan Bank 465 456 1,288 1,248
- ------------------------------------------------------------------------------------------------------------------------------------
7,242 7,261 21,296 21,097
- ------------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 4,292 4,189 12,821 12,535
Provision for loan losses 225 108 583 277
- ------------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 4,067 4,081 12,238 12,258
NON-INTEREST INCOME
Gain on sale of loans and other assets 241 114 804 265
Loan service fees 229 191 665 534
Other 519 293 1,511 730
- ------------------------------------------------------------------------------------------------------------------------------------
989 598 2,980 1,529
NON-INTEREST EXPENSE
Salaries and employee benefits 965 989 2,778 3,060
Net occupancy and equipment 396 400 1,164 1,168
Franchise tax 158 146 484 439
Federal deposit insurance 82 79 250 234
Amortization of goodwill 28 30 84 92
Other 871 643 2,379 1,864
- ------------------------------------------------------------------------------------------------------------------------------------
Non-interest expense 2,500 2,287 7,139 6,857
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 2,556 2,392 8,079 6,930
Provision for federal income taxes 804 815 2,594 2,381
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF
A CHANGE IN ACCOUNTING PRINCIPLE 1,752 1,577 5,485 4,549
Cumulative effect of a change in accounting
principle, net of related income taxes of $61 117 - 117 -
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 1,869 $ 1,577 $ 5,602 $ 4,549
====================================================================================================================================
Earnings per common share - Basic $ 0.18 $ 0.16 $ 0.54 $ 0.46
Earnings per common share - Diluted $ 0.17 $ 0.15 $ 0.52 $ 0.44
</TABLE>
See notes to consolidated financial statements
3
<PAGE> 5
EMERALD FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
- ------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,602 $ 4,549
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan losses 583 277
Gain from sale of loans and other assets (982) (265)
Accretion of discounts and other deferred yield items (2,606) (1,801)
Depreciation and amortization 555 570
Effect of change in accrued interest receivable and payable (378) (389)
Federal Home Loan Bank stock dividends (195) (170)
Deferred federal income taxes (250) 174
Net change in other assets and liabilities (5,338) (816)
Proceeds from sale of loans originated for sale 73,634 35,954
Disbursements on loans originated for sale (71,897) (37,297)
- ------------------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (1,272) 786
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans (32,863) (35,356)
Purchases of:
Loans (926) (4,922)
Mortgage-backed securities available for sale (24,838) (9,478)
Investment securities available for sale (26,267) (34,751)
Investment securities held to maturity (21,950) (10,700)
Premises and equipment (517) (682)
Federal Home Loan Bank stock (58) (440)
Proceeds from:
Principal repayments and maturities of:
Mortgage-backed securities available for sale 12,222 980
Mortgage-backed securities held to maturity 5,098 4,963
Investment securities available for sale 12,748 13,201
Investment securities held to maturity 29,209 38,454
Sales of available for sale mortgage-backed securities 9,939 1,300
Sales of available for sale investment securities 10,120 8,467
Net expenditure on foreclosed real estate (260) (911)
Proceeds from sale of foreclosed real estate 599 897
- ------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (27,744) (28,978)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 17,152 29,186
Payments on advances from the Federal Home Loan Bank (10,486) (20,446)
Proceeds from advances from the Federal Home Loan Bank 28,000 23,400
Net decrease in escrows (690) (735)
Effect of stock options exercised 940 96
Common shares issued under Dividend Reinvestment Plan 131 -
Payment of dividends on common stock (1,591) (911)
- ------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 33,456 30,590
- ------------------------------------------------------------------------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 4,440 2,398
CASH AND CASH EQUIVALENTS, AT BEGINNING OF THE PERIOD 10,762 7,552
- ------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, AT END OF THE PERIOD $ 15,202 $ 9,950
============================================================================================================
</TABLE>
See notes to unaudited consolidated financial statements
4
<PAGE> 6
EMERALD FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. NATURE OF OPERATIONS
--------------------
Emerald Financial Corp. (Emerald or Company) is a unitary thrift
holding company formed in 1996 which became the parent company of The
Strongsville Savings Bank (Strongsville or Bank) on March 6, 1997, through a
tax-free exchange of shares of Strongsville for shares of Emerald. The Company's
primary holding is The Strongsville Savings Bank. The Bank expects to change its
name to Emerald Savings Bank in April 1999 to align its identity with that of
the holding company, Emerald Financial Corp. The Bank conducts its principal
activities from its Community Financial Centers ("Offices") located in
southwestern Cuyahoga County, Lorain County and Medina County. The Bank's
principal activities include residential lending and retail banking.
2. BASIS OF PRESENTATION
---------------------
The consolidated financial statements of the Company include the
accounts of Emerald and the accounts of its wholly owned subsidiary, The
Strongsville Savings Bank. All significant inter-company transactions have been
eliminated. In the opinion of management, the accompanying unaudited financial
statements include all adjustments (consisting only of normal recurring
accruals) which the Company considers necessary for a fair presentation of (a)
the results of operations for the three and nine month periods ended September
30, 1998 and 1997; (b) the financial condition at September 30, 1998, and
December 31, 1997; and (c) the statements of cash flows for the nine month
periods ended September 30, 1998 and 1997. The results of operations for the
three and nine month periods ended September 30, 1998 are not necessarily
indicative of the results that may be expected for a full year. Certain prior
period data has been reclassified to conform to current year presentation.
3. STATEMENTS OF CASH FLOWS
------------------------
For purposes of the Statements of Cash Flows, Emerald considers all
cash and deposits with banks with original maturities of less than three months
to be cash equivalents.
Income tax payments of $2,587,000 and $2,075,000 were made during the
nine-month periods ended September 30, 1998 and 1997, respectively. Interest
paid totaled $21,501,000 and $21,006,000 for the nine-month periods ended
September 30, 1998 and 1997, respectively. There were transfers from loans to
real estate owned of $233,000 with $510,000 in loans made to finance the sale of
real estate owned during the nine month period ended September 30, 1998. There
were transfers from loans to real estate owned of $738,000 with $765,000 in
loans made to finance the sale of real estate owned during the nine month period
ended September 30, 1997.
5
<PAGE> 7
4. SHAREHOLDERS' EQUITY
--------------------
On April 20, 1998, the board declared a two-for-one stock split in the
form of a 100 percent common stock dividend payable May 15, 1998 to shareholders
of record as of May 1, 1998. The stock split increased the Company's outstanding
common shares from 5.1 million to 10.2 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 thereto 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.
5. EARNINGS PER SHARE
------------------
Basic and diluted earnings per share are presented in accordance with
Statement of Accounting Standards No. 128, Earnings per Share. 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>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Weighted average number of common
shares outstanding used in basic
earnings per common share calculation 10,282,251 10,130,766 10,261,348 10,125,750
Net dilutive effect of stock options 458,415 292,656 469,037 230,390
- ------------------------------------------------- -------------- -------------- --------------- --------------
Weighted average number of shares outstanding
adjusted for effect of dilutive securities 10,740,666 10,423,422 10,730,385 10,356,140
================================================= ============== ============== =============== ==============
Income before cumulative effect of a change in
accounting principle $1,752,000 $1,577,000 $5,485,000 $4,549,000
Cumulative effect of a change in
accounting principle, net of related income
taxes 117,000 -- 117,000 --
- ------------------------------------------------- -------------- -------------- --------------- --------------
Net income $1,869,000 $1,577,000 $5,602,000 $4,549,000
================================================= ============== ============== =============== ==============
Basic earnings per common share:
Income before cumulative effect of a change in
accounting principle $ 0.17 $ 0.16 $ 0.53 $ 0.46
Cumulative effect of a change in
accounting principle, net of related income
taxes 0.01 -- 0.01 --
================================================= ============== ============== =============== ==============
BASIC EARNINGS PER COMMON SHARE $ 0.18 $ 0.16 $ 0.54 $ 0.46
================================================= ============== ============== =============== ==============
Diluted earnings per common share:
Net income from operations $ 0.16 $ 0.15 $ 0.51 $ 0.44
Cumulative effect of change in accounting
Principle, net of related income taxes 0.01 -- 0.01 --
================================================= ============== ============== =============== ==============
DILUTED EARNINGS PER COMMON SHARE $ 0.17 $ 0.15 $ 0.52 $ 0.44
================================================= ============== ============== =============== ==============
</TABLE>
6
<PAGE> 8
6. COMPREHENSIVE INCOME
--------------------
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income, was issued in September 1997 and became effective on
January 1, 1998. This statement requires companies to report all items that are
recognized as components of comprehensive income under accounting standards.
Emerald's comprehensive income for the three and nine month periods ended
September 30, 1998 and 1997 are:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------------- --------------- -------------- -------------
(In thousands)
<S> <C> <C> <C> <C>
Net income $1,869 $1,577 $5,602 $4,549
Unrealized holding gains arising in period 46 18 246 306
Tax effect 16 6 84 103
Less reclassification of gains in net income -- ( 22) ( 86) ( 22)
Tax effect -- 7 30 7
------------- --------------- -------------- -------------
Comprehensive income $1,899 $1,574 $5,708 $4,737
============= =============== ============== =============
</TABLE>
7. NEW ACCOUNTING STANDARDS
------------------------
The Company adopted Statement of Financial Accountings Standards (SFAS)
No. 131, Disclosures about segments of an Enterprise and Related Information, on
January 1, 1998. This statement provides accounting and reporting standards for
the way public enterprises are to report information about operating segments in
annual financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. Adoption of SFAS
No. 131 has not resulted in increased reporting and disclosure requirements.
The Company adopted SFAS No. 132, Employers' Disclosures about Pensions
and Other Postretirement Benefits, on January 1, 1998. This statement revises
employers' disclosures about pension and other postretirement benefit plans. It
does not change the measurement or recognition of those plans. It standardizes
the disclosure requirements for pensions and other postretirement benefits,
requires additional information on changes in the benefit obligations and fair
values of plan assets that will facilitate financial analysis, and eliminates
certain disclosures. Adoption of SFAS No. 132 has not resulted in increased
reporting and disclosure requirements.
The Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, in June 1998. The
statement is effective for quarters beginning after June 15, 1999, with earlier
application encouraged. The statement requires that all derivatives be
recognized as either assets or liabilities in the statement of financial
condition and those instruments be measured at fair value. The statement also
requires certain criteria to be met to apply hedge accounting. The Company
adopted the statement on July 1, 1998, and reclassified $20,727,000 in
securities from held-to-maturity to available for sale, of these $5,944,000 were
sold during the quarter, resulting in a transition gain of $178,000 which is
recorded as a change in accounting principle in the consolidated statements of
income.
7
<PAGE> 9
- --------------------------------------------------------------------------------
SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
Unaudited
(Dollars in thousands, except per-share data)
<S> <C> <C> <C> <C>
ANNUALIZED RETURNS AND OPERATING RATIOS
Basic earnings per share $ 0.18 $ 0.16 $ 0.54 $ 0.46
Diluted earnings per share $ 0.17 $ 0.15 $ 0.52 $ 0.44
Return on Average Assets 1.19% 1.04% 1.21% 1.02%
Return on Average Equity 14.03% 13.68% 14.48% 13.50%
Noninterest expense to
average assets 1.58% 1.51% 1.53% 1.53%
Efficiency ratio 49.05% 48.79% 47.05% 49.20%
OTHER SELECTED FINANCIAL RATIOS
Yield on average interest-earning assets 7.70% 7.76% 7.70% 7.74%
Cost of average interest-bearing liabilities 5.12% 5.28% 5.10% 5.21%
Interest rate spread 2.58% 2.48% 2.60% 2.53%
Net margin on interest-earning assets 2.86% 2.84% 2.90% 2.89%
Non-performing loans to total loans 0.27% 0.31% 0.27% 0.31%
Non-performing assets to total assets 0.33% 0.24% 0.33% 0.24%
Net recoveries (charge-offs) to average loans -0.11% 0.00% -0.15% -0.01%
Dividends per share $ 0.085 $ 0.03 $ 0.155 $ 0.09
Annualized total asset growth 16.60% 0.27% 8.62% 8.46%
Average total assets $ 627,130 $ 603,756 $ 616,259 $ 592,043
Average loans, net (includes held for sale) 495,981 458,261 480,226 446,753
Average interest-earning assets 599,484 590,067 590,394 579,156
Average deposits 534,609 520,151 528,272 511,535
Average advances from the FHLB 31,522 30,063 28,902 27,997
Average shareholders' equity 53,293 46,093 51,565 44,945
Weighted average shares outstanding-Basic 10,282,251 10,130,766 10,261,348 10,125,750
Weighted average shares outstanding-Diluted 10,740,666 10,423,423 10,730,385 10,356,140
Shares outstanding at period end 10,296,527 10,143,200 10,296,527 10,143,200
</TABLE>
8
<PAGE> 10
Part I, Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
- -------
Emerald Financial Corp. (Emerald or Company), a unitary thrift holding
company, became the holding company of The Strongsville Savings Bank
(Strongsville or Bank) in a tax-free exchange of shares of the Bank for shares
of Emerald on March 6, 1997. As a result, Emerald owns and operates the Bank.
The Bank was founded in 1961 as an Ohio-chartered, federally insured savings
association whose business activities are concentrated in the greater Cleveland,
Ohio area. The Company conducts its business through its home office in
Strongsville and its thirteen additional full-service Community Financial
Centers located in Cuyahoga, Lorain and Medina counties.
The Bank's principal business is attracting deposits from the general
public and making loans secured by first mortgage liens on residential and other
real estate. The Bank and the banking industry in general are significantly
affected by prevailing economic conditions, the general level and trend of
interest rates as well as by government policies and regulations concerning,
among other things, fiscal affairs, housing and financial institutions.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- ---------------------------------------------
The Company's total assets at September 30, 1998, were $643.0 million,
representing an increase of $39.0 million, or 8.6%, annualized, for the nine
month period and of $39.5 million, or 6.5% for the twelve month period ended
September 30, 1998. The increase in assets was primarily concentrated in the
mortgage loan portfolio.
The Company's deposits were $537.8 million at September 30, 1998,
representing an increase of $17.2 million, or 4.4%, annualized, during the nine
month period and of $15.2 million, or 2.9% during the twelve month period ended
September 30, 1998.
Net interest income was $4.3 million for the quarter ended September
30, 1998, an increase of $0.1 million over the third quarter of 1997. The
increase in interest-earning assets combined with an increase in interest rate
spread, caused the improvement. Average interest-earning assets increased $9.4
million from $590.1 million for the third quarter of 1997 to $599.5 million for
the third quarter of 1998. The Bank's interest rate spread increased 10 basis
points from 2.48% during the third quarter of 1997 to 2.58% during the third
quarter of 1998.
Net income for the third quarter of 1998, at $1.9 million, was $0.3
million more than the $1.6 million for the same period in 1997. The increase was
primarily due to the increase in non-interest income.
9
<PAGE> 11
Net interest income was $12.8 million for the nine months ended
September 30, 1998, an increase of $0.3 million over the nine months ended
September 30, 1997. The increase in interest-earning assets combined with an
increase in interest rate spread, caused the improvement. Average
interest-earning assets increased $11.2 million from $579.2 million for the
first nine months of 1997 to $590.4 million for the same period in 1998. The
Bank's interest rate spread increased 7 basis points from 2.53% during the first
nine months of 1997 to 2.60% during the same period in 1998.
Net income for the nine months ended September 30, 1998, at $5.6
million, was $1.1 million more than the $4.5 million for the same period in
1997. The increase was primarily due to the increase in noninterest income.
Tables 1(a) and 1(b) present 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. Tables 1(a) and 1(b) also present 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. 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 at amortized
cost.
10
<PAGE> 12
- --------------------------------------------------------------------------------
TABLE 1(a)
AVERAGE BALANCE TABLE
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
1998 1997
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Loans, net (1) $ 495,981 $ 9,935 8.01% $ 458,261 $ 9,384 8.19%
Investment securities 35,789 566 6.32% 62,455 977 6.26%
Mortgage-backed securities 52,656 865 6.57% 56,800 950 6.69%
Other interest-earning assets 15,058 168 4.45% 12,551 139 4.45%
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 599,484 11,534 7.70% 590,067 11,450 7.76%
Noninterest-earning assets 27,646 13,689
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 627,130 $ 603,756
===================================================================================================================================
INTEREST-BEARING LIABILITIES
Deposits (2) $ 534,609 $ 6,777 5.07% $ 520,151 $ 6,805 5.23%
Advances from FHLB 31,522 465 5.89% 30,063 456 6.07%
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 566,131 7,242 5.12% 550,214 7,261 5.28%
Noninterest-bearing liabilities 7,706 7,449
Shareholders' equity 53,293 46,093
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 627,130 $ 603,756
===================================================================================================================================
Net interest income $ 4,292 $ 4,189
Interest-rate spread 2.58% 2.48%
Net interest margin 2.86% 2.84%
Ratio of average interest-
earning assets to average
interest-bearing liabilities 105.89% 107.24%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Average balances include non-accrual loans. Interest income includes
deferred loan fee amortization of $317,000 and $403,000 for the three
months ended September 30, 1998 and 1997, respectively.
(2) Deposits include noninterest-bearing demand accounts which were
$15,133,000 and $11,858,000 at September 30, 1998 and 1997, respectively.
11
<PAGE> 13
- --------------------------------------------------------------------------------
TABLE 1 (b)
AVERAGE BALANCE TABLE
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Loans, net (1) $ 480,226 $28,984 8.05% $ 446,753 $27,370 8.17%
Investment securities 41,018 1,866 6.07% 59,505 2,735 6.13%
Mortgage-backed securities 52,823 2,632 6.64% 57,695 2,999 6.93%
Other interest-earning assets 16,327 635 5.19% 15,203 528 4.63%
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 590,394 34,117 7.70% 579,156 33,632 7.74%
Noninterest-earning assets 25,865 12,887
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 616,259 $ 592,043
===================================================================================================================================
INTEREST-BEARING LIABILITIES
Deposits (2) $ 528,272 $20,008 5.05% $ 511,535 $19,849 5.17%
Advances from FHLB 28,902 1,288 5.94% 27,997 1,248 5.94%
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 557,174 21,296 5.10% 539,532 21,097 5.21%
Noninterest-bearing liabilities 7,520 7,566
Shareholders' equity 51,565 44,945
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 616,259 $ 592,043
===================================================================================================================================
Net interest income $12,821 $12,535
Interest-rate spread 2.60% 2.53%
Net interest margin 2.90% 2.89%
Ratio of average interest-
earning assets to average
interest-bearing liabilities 105.96% 107.34%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Average balances include non-accrual loans. Interest income includes
deferred loan fee amortization of $1,034,000 and $1,195,000 for the nine
months ended September 30, 1998 and 1997, respectively.
(2) Deposits include noninterest-bearing demand accounts which were
$15,133,000 and $11,858,000 at September 30, 1998 and 1997, respectively.
12
<PAGE> 14
Tables 2(a) and 2(b) present certain information regarding changes in Emerald's
interest income and interest expense for the three and nine month periods ended
September 30, 1998 and 1997. The tables show the changes in interest income and
expense by major category attributable to changes in the average balance
(volume) and 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.
<TABLE>
<CAPTION>
TABLE 2 (a)
- -----------------------------------------------------------------------------------------------------------------------------------
RATE/VOLUME TABLE
THREE MONTHS ENDED SEPTEMBER 30, THREE MONTHS ENDED SEPTEMBER 30,
1998 COMPARED TO 1997 1997 COMPARED TO 1996
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGES IN DUE TO CHANGES IN
VOLUME RATE TOTAL VOLUME RATE TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME ON INTEREST-EARNING ASSETS
Loans, net $ 753 $ (202) $ 551 $ 855 $ 95 $ 950
Investment securities (421) 10 (411) 76 13 89
Mortgage-backed securities (68) (17) (85) 274 (23) 251
Other 29 - 29 55 (4) 51
- -----------------------------------------------------------------------------------------------------------------------------------
Total 293 (209) 84 1,260 81 1,341
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE ON INTEREST-BEARING LIABILITIES
Deposits 275 (303) (28) 703 95 798
Advances from FHLB 22 (13) 9 178 6 184
- -----------------------------------------------------------------------------------------------------------------------------------
Total 297 (316) (19) 881 101 982
- -----------------------------------------------------------------------------------------------------------------------------------
CHANGE IN NET INTEREST INCOME $ (4) $ 107 $ 103 $ 379 $ (20) $ 359
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TABLE 2 (b)
- ------------------------------------------------------------------------------------------------------------------------------------
RATE/VOLUME TABLE
NINE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1998 COMPARED TO 1997 1997 COMPARED TO 1996
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGES IN DUE TO CHANGES IN
VOLUME RATE TOTAL VOLUME RATE TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME ON INTEREST-EARNING ASSETS
Loans, net $ 2,008 $ (394) $ 1,614 $ 3,866 $ (256) $ 3,610
Investment securities (843) (26) (869) (235) 29 (206)
Mortgage-backed securities (245) (122) (367) 652 (3) 649
Other 41 66 107 214 (30) 184
- -----------------------------------------------------------------------------------------------------------------------------------
Total 961 (476) 485 4,497 (260) 4,237
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE ON INTEREST-BEARING LIABILITIES
Deposits 548 (389) 159 2,441 170 2,611
Advances from FHLB 40 - 40 486 11 497
- -----------------------------------------------------------------------------------------------------------------------------------
Total 588 (389) 199 2,927 181 3,108
- -----------------------------------------------------------------------------------------------------------------------------------
CHANGE IN NET INTEREST INCOME $ 373 $ (87) $ 286 $ 1,570 $ (441) $ 1,129
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 15
NET INTEREST INCOME
- --------------------------------------------------------------------------------
Net interest income is the primary component of net income and is
determined by the characteristics of interest-earning assets and
interest-bearing liabilities, including the spread, or the difference between
the yields earned and the rates paid on those assets and liabilities. Net
interest income is the difference between interest income and interest expense.
<TABLE>
<CAPTION>
Three months ended September Nine months ended September
30, 1998 30, 1998
--------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Net interest income:
Current period $4,292 $12,821
Prior period 4,189 12,535
--------------------------------------------------------------
Dollar change from prior period $ 103 $ 286
--------------------------------------------------------------
Percent change from prior period 2.45% 2.28%
==============================================================
</TABLE>
Interest income
- ---------------
Interest income for the three months ended September 30, 1998, was
$11.5 million, compared to $11.4 million for the third quarter of 1997, an
increase of $0.1 million or 0.73%. This increase was due to the increase in
average interest-earning assets to $599.5 million for the third quarter of 1998
from $590.1 million for the third quarter of 1997 as demonstrated on Table 1(a).
The effect of the increase in interest-earning assets was offset somewhat by the
6 basis point decline in the average yield on interest-earning assets to 7.70%
for the third quarter of 1998 from 7.76% for the like period in 1997.
Interest income for the nine months ended September 30, 1998, was $34.1
million, compared to $33.6 million for the like period in 1997, an increase of
$0.5 million or 1.44%. This increase was due to the increase in average
interest-earning assets to $590.4 million for the first nine months of 1998 from
$579.2 million for the like period in 1997 as demonstrated on Table 1(b). The
effect of the increase in interest-earning assets was offset somewhat by the 4
basis point decline in the average yield on interest-earning assets to 7.70% for
the 1998 period from 7.74% for the 1997 period.
Interest expense
- ----------------
Interest expense decreased slightly during the quarter ended September
30, 1998, compared to the same period in 1997 primarily due to a decrease in the
average cost of interest-bearing liabilities, offset by an increase in average
interest-bearing liabilities. Average interest-bearing liabilities were $566.1
million and $550.2 million for the third quarter of 1998 and 1997, respectively,
an increase of $15.9 million. The average cost of interest-bearing liabilities
decreased 16 basis points to 5.12% for the third quarter of 1998 from 5.28% for
the same period in 1997.
14
<PAGE> 16
Interest expense increased during the nine months ended September 30,
1998, compared to the same period in 1997 primarily due to an increase in
average interest-bearing liabilities of $17.7 million, offset by a decrease in
the average cost of interest-bearing liabilities. Average interest-bearing
liabilities were $557.2 million and $539.5 million for the first three-quarters
of 1998 and 1997, respectively. The average cost of interest-bearing liabilities
decreased 11 basis points to 5.10% for the 1998 period from 5.21% for the 1997
period. This decrease partially offset the effect of the increase in
interest-bearing liabilities.
Provision for loan losses
- -------------------------
The provision for loan losses for the three months ended September 30,
1998, was $225,000 compared to $108,000 for the same period in 1997. The
provision for loan losses for the nine months ended September 30, 1998, was
$583,000 compared to $277,000 for the same period in 1997. The provisions for
all periods were commensurate with management's estimate of the credit risk in
the loan portfolio. Economic conditions in the Bank's market area were stable.
Further discussion and other information relating to loan losses and
nonperforming assets are included in the section titled "Asset Quality."
NONINTEREST INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended September Nine months ended September
30, 1998 30, 1998
------------------------------ ------------------------------
(Dollars in thousands)
Noninterest income:
<S> <C> <C>
Current period $ 989 $ 2,980
Prior period 598 1,529
------------------------------ ------------------------------
Dollar change from prior period $ 391 $ 1,451
------------------------------ ------------------------------
Percent change from prior period 65.38% 94.95%
============================== ==============================
</TABLE>
Noninterest income consists primarily of fees earned for servicing
loans and providing services for customers, gains on loan sales and earnings
credited to bank owned life insurance. The increase in noninterest income during
the third quarter of 1998 as compared the same quarter in 1997 is due to: an
increase in gains on sales of loans of $136,000; increases in loan service fees
of $38,000 and increases in other noninterest income of $217,000. Earnings
credited to bank owned life insurance were $236,000 during the quarter ended
September 30, 1998.
The increase in noninterest income during the nine month period ended
September 30, 1998 as compared to the same period in 1997 is due to: an increase
in gains on sales of loans and investment securities available for sale of
$539,000; increases in loan service fees of $131,000 and increases in other
noninterest income of $781,000. Earnings credited to bank owned life insurance
were $589,000 during the nine months ended September 30, 1998.
15
<PAGE> 17
NONINTEREST EXPENSE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended September Nine months ended September
30, 1998 30, 1998
------------------------------ -----------------------------
(Dollars in thousands)
Noninterest expense:
<S> <C> <C>
Current period $ 2,500 $ 7,139
Prior period 2,287 6,857
------------------------------ -----------------------------
Dollar change from prior period $ 213 $ 282
------------------------------ -----------------------------
Percent change from prior period 9.33% 4.12%
============================== =============================
</TABLE>
Management is pleased with the efficiency ratio of 49.05% for the third
quarter of 1998, representing a slight increase from the 48.79% a year ago. The
efficiency ratio for the first nine months of 1998 was 47.05%, an improvement
over the 49.20% for the same period in 1997.
FEDERAL INCOME TAXES
- --------------------------------------------------------------------------------
The Bank provided $804,000 for federal income tax during the third
quarter of 1998 and $815,000 during the like period in 1997. The Bank provided
$2,594,000 for federal income tax during the nine months ended September 30,
1998 and $2,381,000 during the like period in 1997. Income before the provision
for federal income taxes is the primary factor in determining the provision for
federal income taxes.
FINANCIAL RESOURCES AND LIQUIDITY
- --------------------------------------------------------------------------------
Financial institutions, such as the Bank, 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 Bank's primary sources of funds are deposits and loan payments.
The Bank uses the funds from deposit inflows and loan payments primarily to
originate loans and to purchase investment securities.
At September 30, 1998, loans-in-process to be funded over a future
period of time totaled $43 million, and mortgage loan commitments or loans
committed but not closed totaled $50 million. 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 of Cincinnati whereby the Bank can obtain advances. The Bank had $46
million in advances outstanding at September 30, 1998.
16
<PAGE> 18
For an analysis of Emerald's cash flows, refer to the Consolidated
Statements of Cash Flows on page 4. Management believes the Bank has adequate
resources to meet its normal funding requirements.
SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Shareholders' equity was $53.7 million at September 30, 1998, an
increase of $5,188,000, or 14.26%, annualized, during the first nine months of
1998. This increase was primarily the result of net income. Emerald paid
dividends in the first nine months of 1998 of 15.5 cents per share, an increase
of 72.22% over the 9.0 cents per share dividend paid in the first nine months of
1997. The dividend payments in 1998 consisted of regular dividends of 10.5 cents
per share and a special dividend of 5.0 cents per share.
The Company's return on average assets was 1.19% and return on average
equity was 14.03% for the third quarter of 1998.
At September 30, 1998, the Bank was in excess of all capital
requirements specified by federal regulations as shown by the following table.
<TABLE>
<CAPTION>
TIER 1 LEVERAGE TIER 1 RISK-BASED TOTAL RISK-BASED
CAPITAL CAPITAL CAPITAL
------------------- -------------------- -------------------
(Dollars in thousands)
<S> <C> <C> <C>
Capital amount - Actual $ 51,938 $ 51,938 $ 53,604
Capital amount -- Well capitalized 32,065 38,477 42,000
------------------- -------------------- -------------------
Amount in excess of requirement $19,873 $13,461 $11,604
=================== ==================== ===================
Capital ratio - Actual 8.10% 12.37% 12.96%
Capital ratio - Well capitalized 5.00% 6.00% 10.00%
------------------- -------------------- -------------------
Amount in excess of requirement 3.10% 6.37% 2.96%
=================== ==================== ===================
</TABLE>
The Bank's capital levels at September 30, 1998, qualify it as a
"well-capitalized" institution, the highest of five tiers under applicable
federal definitions.
QUALIFIED THRIFT LENDER TEST
- --------------------------------------------------------------------------------
Savings associations insured by the Savings Association Insurance Fund
of the Federal Deposit Insurance Corporation are required to maintain 65% of
total portfolio assets in Qualified Thrift Investments. As of September 30,
1998, the Bank had 89.32% of total assets invested in Qualified Thrift
Investments.
17
<PAGE> 19
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 systems for Y2K compliance. Critical internal systems
have been evaluated and corrected or replaced where necessary for Y2K
compliance. Critical internal systems are in the testing phase. The Bank is in
the process of replacing certain internal systems scheduled for replacement
during 1998 with systems that are Y2K compliant. These systems are expected to
cost approximately $350,000 and will be capitalized and depreciated over their
estimated useful lives. Management estimates that Y2K compliance expense will
cost an additional $200,000 over the next year.
Systems of critical third party providers have also been evaluated and
reprogrammed or replaced where necessary. These third party provider's systems
are in the process of their own internal testing. Third party providers expect
to begin Y2K testing with Bank data in the first quarter of 1999.
18
<PAGE> 20
ASSET QUALITY
- --------------------------------------------------------------------------------
Table 3 sets forth information regarding non-performing assets at
September 30, 1998, December 31, 1997, and September 30, 1997.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
TABLE 3
NON-PERFORMING ASSETS ANALYSIS
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1998 1997 1997
- --------------------------------------------------------------------------------------------------------
(Dollars In thousands)
<S> <C> <C> <C>
NON-ACCRUING LOANS
1-4 family - permanent $ 487 $ 156 $ 217
1-4 family - construction 327 692 413
Multi-family and Commercial
real estate - - -
Land and development 181 181 -
Commercial non-real estate 8 370 370
Consumer and other 2 29 26
- -------------------------------------------------------------------------------------------------------
Total 1,005 1,428 1,026
LOANS DELINQUENT 90 DAYS OR MORE
AND STILL ACCRUING
1-4 family - permanent 306 716 439
1-4 family - construction - - -
Multi-family and Commercial
real estate 52 - -
Land and development - - -
Commercial non-real estate - - -
Consumer and other - - -
- -------------------------------------------------------------------------------------------------------
Total 358 716 439
Total non-performing loans 1,363 2,144 1,465
Investments, net of allowance for credit
losses of $162,000 at September 30,
1998 and December 31,1997. 422 486 -
Real estate owned 320 683 -
- -------------------------------------------------------------------------------------------------------
Total non-performing assets $ 2,105 $ 3,313 $ 1,465
=======================================================================================================
Allowances for loan losses $ 1,666 $ 1,625 $ 1,687
=======================================================================================================
Non-performing loans to total loans-net 0.27% 0.45% 0.31%
Non-performing assets to total assets 0.33% 0.55% 0.24%
Allowance for loan losses to ending
loan balance (before allowance) 0.33% 0.35% 0.36%
Allowance for loan losses to
non-performing loans 122.24% 75.80% 115.13%
- -------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 21
Table 4 presents information concerning activity in the allowance for
loan losses during the three and nine-month periods ended September 30, 1998 and
1997.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
TABLE 4
ACTIVITY IN THE ALLOWANCE FOR LOAN LOSSES
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Allowance: Beginning of the period $ 1,576 $ 1,577 $ 1,625 $ 1,423
Provision charged to expense 225 108 583 277
CHARGE-OFFS:
1-4 family - permanent - - - 5
1-4 family - construction 132 - 132 -
Multi-family and Commercial
real estate - - - -
Land and development - - - -
Commercial non-real estate - - 370 -
Consumer and other 6 - 45 19
- --------------------------------------------------------------------------------------------------------------------------
138 - 547 24
RECOVERIES
1-4 family - permanent 2 - 2 -
1-4 family - construction - - - -
Multi-family and Commercial
real estate - - - -
Land and development - - - -
Commercial non-real estate - - - -
Consumer and other 1 2 3 11
- --------------------------------------------------------------------------------------------------------------------------
3 2 5 11
- --------------------------------------------------------------------------------------------------------------------------
Net recoveries (charge-offs) (135) 2 (542) (13)
- --------------------------------------------------------------------------------------------------------------------------
Allowance: End of the period $ 1,666 $ 1,687 $ 1,666 $ 1,687
==========================================================================================================================
Net charge-offs during the period to
average loans outstanding during the
period (Annualized) 0.11% 0.00% 0.15% 0.00%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The amount of the allowance for loan losses is based on management's
analysis of risks inherent in the various segments of the loan portfolio,
management's assessment of known or potential problem credits which have come to
management's attention during the ongoing analysis of credit quality, historical
loss experience, current economic conditions, and other factors. Loan loss
estimates are reviewed periodically, and adjustments, if any, are reported in
earnings in the period in which they become known.
20
<PAGE> 22
Table A sets forth the composition of the Bank's loan portfolio at
September 30, 1998, December 31, 1997.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
TABLE A
LOAN PORTFOLIO COMPOSITION
SEPTEMBER 30, 1998 DECEMBER 31, 1997
AMOUNT PERCENT AMOUNT PERCENT
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REAL ESTATE MORTGAGE LOANS: (Dollars In thousands)
Permanent first mortgage loans:
1-4 family $ 334,109 67.19% $ 319,796 69.30%
Multi-family 810 0.16% 924 0.20%
Commercial real estate 53,495 10.75% 52,499 11.38%
Land 590 0.12% 553 0.12%
- -----------------------------------------------------------------------------------------------------------------
Total permanent mortgage loans 389,004 78.22% 373,772 81.00%
- -----------------------------------------------------------------------------------------------------------------
Construction first mortgage loans:
Residential development 79,814 16.04% 56,217 12.18%
1-4 family 43,105 8.67% 37,413 8.11%
Multi-family 825 0.17% 1,050 0.23%
Commercial real estate 8,131 1.64% 6,879 1.49%
- -----------------------------------------------------------------------------------------------------------------
Total construction loans 131,875 26.52% 101,559 22.01%
- -----------------------------------------------------------------------------------------------------------------
Total mortgage loans 520,879 104.74% 475,331 103.01%
- -----------------------------------------------------------------------------------------------------------------
OTHER LOANS
Commercial 6,602 1.33% 5,736 1.24%
Consumer 17,817 3.58% 15,460 3.35%
- -----------------------------------------------------------------------------------------------------------------
Total other loans 24,419 4.91% 21,196 4.59%
- -----------------------------------------------------------------------------------------------------------------
Total loans 545,298 109.65% 496,527 107.60%
Less:
Loans in process 42,740 8.59% 30,015 6.50%
Allowance for loan losses 1,666 0.34% 1,625 0.35%
Deferred yield items 3,598 0.72% 3,430 0.75%
- -----------------------------------------------------------------------------------------------------------------
48,004 9.65% 35,070 7.60%
- -----------------------------------------------------------------------------------------------------------------
Total loans held for investment-Net $ 497,294 100.00% $ 461,457 100.00%
=================================================================================================================
Real estate loans held for sale $ 6,814 $ 7,823
=================================================================================================================
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 23
Table B sets forth the activities in the Bank's loan portfolio for the
three and nine-month periods ended September 30, 1998, and 1997.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
TABLE B
ACTIVITY IN THE LOAN PORTFOLIO
FOR THE QUARTER ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
PERMANENT MORTGAGE LOAN ORIGINATIONS
1-4 family $ 37,288 $ 30,276 $ 127,531 $ 75,205
Multi-family - - - -
Commercial real estate 2,454 926 6,837 3,555
Land 3,717 128 5,267 373
- -----------------------------------------------------------------------------------------------------------------
43,459 31,330 139,635 79,133
CONSTRUCTION FIRST MORTGAGE LOAN ORIGINATIONS
Residential development 14,393 17,677 49,714 36,293
1-4 family 12,612 10,487 37,014 35,788
Multi-family - 670 - 670
Commercial real estate - 5,250 4,090 6,893
- -----------------------------------------------------------------------------------------------------------------
27,005 34,084 90,818 79,644
NONMORTGAGE LOANS
Commercial 628 555 2,276 2,238
Consumer 4,338 4,414 12,305 15,552
- -----------------------------------------------------------------------------------------------------------------
4,966 4,969 14,581 17,790
- -----------------------------------------------------------------------------------------------------------------
TOTAL LOAN ORIGINATIONS 75,430 70,383 245,034 176,567
PURCHASED LOANS
Commercial real estate - 500 926 4,922
- -----------------------------------------------------------------------------------------------------------------
TOTAL NEW LOANS 75,430 70,883 245,960 181,489
LESS
Principal repayments 37,819 33,719 123,698 94,181
Loan sales 21,383 15,882 74,477 36,327
- -----------------------------------------------------------------------------------------------------------------
59,202 49,601 198,175 130,508
- -----------------------------------------------------------------------------------------------------------------
NET INCREASE IN LOANS $ 16,228 $ 21,282 $ 47,785 $ 50,981
=================================================================================================================
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE> 24
Table C sets forth the composition of the Bank's deposits by interest
rate category at September 30, 1998, December 31, 1997.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
TABLE C
DEPOSIT COMPOSITION
----------------------------------------------------------------------
SEPTEMBER 30, 1998 DECEMBER 31, 1997
WTD AVG WTD AVG
COST AMOUNT PERCENT COST AMOUNT PERCENT
- ----------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
PASSBOOK ACCOUNTS 2.92% $ 58,348 10.85% 2.93% $ 51,629 9.91%
NOW ACCOUNTS 2.02% 34,273 6.37% 1.98% 33,976 6.52%
MONEY MARKET DEPOSIT ACCOUNTS 2.53% 14,573 2.71% 2.53% 15,506 2.98%
COMMERCIAL ACCOUNTS 0.00% 15,134 2.81% 0.00% 12,992 2.50%
- ----------------------------------------------------------------------------------------------------
2.26% 122,328 22.74% 2.26% 114,103 21.91%
CERTIFICATES OF DEPOSIT:
4.50% and less 4.03% 19,709 3.67% 4.01% 26,391 5.07%
4.51% to 5.50% 5.39% 88,174 16.39% 5.38% 52,424 10.07%
5.51% to 6.50% 5.97% 249,020 46.30% 6.04% 264,388 50.78%
6.51% to 7.50% 7.36% 51,016 9.49% 7.36% 55,516 10.66%
7.51% and greater 8.97% 7,595 1.41% 8.92% 7,868 1.51%
- ----------------------------------------------------------------------------------------------------
5.98% 415,514 77.26% 6.06% 406,587 78.09%
- ----------------------------------------------------------------------------------------------------
TOTAL DEPOSITS 5.13% $537,842 100.00% 5.23% $520,690 100.00%
====================================================================================================
- ----------------------------------------------------------------------------------------------------
</TABLE>
Table D sets forth the remaining terms to maturity for the certificates
of deposit at September 30, 1998.
<TABLE>
<CAPTION>
TABLE D
CERTIFICATES OF DEPOSIT MATURING/REPRICING DURING:
(In Thousands)
<S> <C>
The year ending September 30, 1999 $ 267,767
The year ending September 30, 2000 89,070
The year ending September 30, 2001 17,250
The year ending September 30, 2002 5,651
The year ending September 30, 2003 5,159
After September 30, 2003 30,617
- ------------------------------------------------------------
$ 415,514
============================================================
</TABLE>
23
<PAGE> 25
Part I, Item 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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.
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 fixed rate 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.
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. Management believes there have been no significant
changes in the Company's GAP during the nine months ended September 30, 1998.
24
<PAGE> 26
PART II
ITEM 1 Legal Proceedings
-----------------
There were no legal proceedings requiring disclosure during the
quarter.
ITEM 2 Changes in Securities
---------------------
There were no changes in securities during the quarter.
ITEM 3 Defaults of Senior Securities
-----------------------------
There were no defaults of senior securities during the quarter.
ITEM 4 Submission of Matters to a Vote of Security Holders
---------------------------------------------------
There were no matters subject to a vote of security holders during the
quarter.
ITEM 5 Other Information
-----------------
There is no other information to be reported.
ITEM 6 Exhibits and Reports on Form 8-K
--------------------------------
(a) Not applicable
(b) No reports on Form 8-K were filed during the quarter.
25
<PAGE> 27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EMERALD FINANCIAL CORP.
------------------------
(Registrant)
Date November 12, 1998
/s/ Thomas P. Perciak
President and Chief Executive Officer
Date November 12, 1998
/s/ John F. Ziegler
Executive Vice President and Chief Financial
Officer
26
<PAGE> 28
INDEX TO EXHIBITS
Page No.
--------
Exhibit 11. COMPUTATION OF EARNINGS PER SHARE N/A
The computation of earnings per
share is included in Footnote 5
to the unaudited financial
statements on page 6 of Form
10-Q for September 30, 1998.
Exhibit 27. FINANCIAL DATA SCHEDULE 28
27
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS IN
FORM 10-Q FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998, FOR
EMERALD FINANCIAL CORP. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 6,796
<INT-BEARING-DEPOSITS> 8,406
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 86,419
<INVESTMENTS-CARRYING> 6,772
<INVESTMENTS-MARKET> 6,609
<LOANS> 504,108
<ALLOWANCE> 1,666
<TOTAL-ASSETS> 642,991
<DEPOSITS> 537,842
<SHORT-TERM> 2,877
<LIABILITIES-OTHER> 5,794
<LONG-TERM> 86,419
0
0
<COMMON> 9,962
<OTHER-SE> 43,741
<TOTAL-LIABILITIES-AND-EQUITY> 642,991
<INTEREST-LOAN> 28,984
<INTEREST-INVEST> 4,498
<INTEREST-OTHER> 635
<INTEREST-TOTAL> 34,117
<INTEREST-DEPOSIT> 20,008
<INTEREST-EXPENSE> 21,296
<INTEREST-INCOME-NET> 12,821
<LOAN-LOSSES> 583
<SECURITIES-GAINS> 54
<EXPENSE-OTHER> 7,139
<INCOME-PRETAX> 8,079
<INCOME-PRE-EXTRAORDINARY> 8,079
<EXTRAORDINARY> 0
<CHANGES> 117
<NET-INCOME> 5,602
<EPS-PRIMARY> .54
<EPS-DILUTED> .52
<YIELD-ACTUAL> 2.90
<LOANS-NON> 1,005
<LOANS-PAST> 358
<LOANS-TROUBLED> 320
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 547
<RECOVERIES> 3
<ALLOWANCE-CLOSE> 1,666
<ALLOWANCE-DOMESTIC> 1,666
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
