<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 June 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 10,274,287
- --------------------------------------------------------------------------------
(Class) (Outstanding at June 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 June 30, 1998, and
December 31, 1997.............................................................. 2
Consolidated Statements of Income for
the Three and Six Month Periods Ended June
30, 1998 and 1997.............................................................. 3
Consolidated Statements of Cash Flows
for the Six Month Periods Ended June
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.................................. 19
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.............................................................. 26
Item 6. Exhibits and Reports on Form 8-K............................................... 27
SIGNATURES....................................................................................... 28
EXHIBIT INDEX.................................................................................... 29
</TABLE>
1
<PAGE> 3
EMERALD FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
- ---------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C>
ASSETS:
CASH AND CASH EQUIVALENTS
Cash and deposits with banks $ 8,735 $ 7,729
Interest bearing deposits with banks 1,206 3,033
INVESTMENT SECURITIES
Held-to-maturity (fair values of $ 7,920 and $14,037 at
June 30, 1998 and December 31, 1997, respectively) 8,086 14,231
Available for sale (amortized cost of $26,730 and $31,256 at
June 30, 1998 and December 31, 1997, respectively) 27,131 31,480
MORTGAGE-BACKED SECURITIES
Held-to-maturity (fair values of $21,252 and $26,416 at
June 30, 1998 and December 31, 1997, respectively) 20,727 25,825
Available for sale (amortized cost of $33,393 and $27,209 at
June 30, 1998 and December 31, 1997, respectively) 33,517 27,312
LOANS-NET
(Including allowance for loan losses of $1,576 and $1,625 at
June 30, 1998 and December 31, 1997, respectively) 483,688 461,457
Loans held for sale 3,943 7,823
Accrued interest receivable 3,409 3,343
Federal Home Loan Bank stock-at cost 3,690 3,504
Premises and equipment-net 4,316 4,259
Cash surrender value of life insurance 15,840 10,341
Prepaid expenses and other assets 3,081 3,628
- ---------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 617,369 $ 603,965
=====================================================================================================================
LIABILITIES:
Deposits $ 531,623 $ 520,690
Federal Home Loan Bank advances 27,113 28,138
Deferred federal income tax 1,742 1,875
Advance payments by borrowers 111 1,574
Accrued interest payable 1,763 1,002
Accounts payable and other 2,532 2,171
- ---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 564,884 555,450
SHAREHOLDERS' EQUITY
Common stock, no par value, 20,000,000 shares authorized,
10,274,287 and 10,145,200 shares issued and outstanding
at June 30, 1998 and December 31, 1997, respectively. 9,874 9,831
Accumulated other comprehensive income 292 216
Retained earnings 42,319 38,468
- ---------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 52,485 48,515
- ---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 617,369 $ 603,965
=====================================================================================================================
Shareholders' Equity per share $ 5.11 $ 4.78
Tangible Equity per share $ 5.02 $ 4.70
</TABLE>
See notes to unaudited consolidated financial statements
2
<PAGE> 4
EMERALD FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
(Dollars In thousands, except per share data)
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans $ 9,637 $ 9,222 $ 19,049 $ 17,986
Investment securities 663 900 1,300 1,758
Mortgage-backed securities 897 985 1,767 2,049
Other 225 208 467 389
- ---------------------------------------------------------------------------------------------------------------------------------
11,422 11,315 22,583 22,182
INTEREST EXPENSE
Deposits 6,712 6,687 13,231 13,044
Advances from the Federal Home Loan Bank 408 422 823 792
- ---------------------------------------------------------------------------------------------------------------------------------
7,120 7,109 14,054 13,836
- ---------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 4,302 4,206 8,529 8,346
Provision for loan losses 244 91 358 169
- ---------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 4,058 4,115 8,171 8,177
NON-INTEREST INCOME
Gain on sale of assets 190 103 563 151
Loan service fees 236 177 436 343
Other 531 226 992 437
- ---------------------------------------------------------------------------------------------------------------------------------
957 506 1,991 931
NON-INTEREST EXPENSE
Salaries and employee benefits 877 1,010 1,813 2,071
Net occupancy and equipment 363 387 768 768
Franchise tax 163 146 326 293
Federal deposit insurance 87 79 168 155
Amortization of goodwill 28 31 56 62
Other 728 631 1,508 1,221
- ---------------------------------------------------------------------------------------------------------------------------------
Non-interest expense 2,246 2,284 4,639 4,570
INCOME BEFORE FEDERAL INCOME TAXES 2,769 2,337 5,523 4,538
Provision for federal income taxes 892 801 1,790 1,566
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 1,877 $ 1,536 $ 3,733 $ 2,972
=================================================================================================================================
Earnings per common share - Basic $ 0.18 $ 0.15 $ 0.36 $ 0.30
Earnings per common share - Diluted $ 0.17 $ 0.15 $ 0.35 $ 0.29
Weighted average number of common
shares outstanding 10,266,690 10,123,200 10,232,842 10,123,200
</TABLE>
See notes to consolidated financial statements
3
<PAGE> 5
EMERALD FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1998 1997
- -------------------------------------------------------------------------------------------------------------------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 3,733 $ 2,972
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan losses 358 169
Gain from sale of loans and other assets (563) (151)
Accretion of discounts and other deferred yield items (1,143) (1,118)
Depreciation and amortization 365 380
Effect of change in accrued interest
receivable and payable 695 (326)
Federal Home Loan Bank stock dividends (128) (108)
Deferred federal income taxes (172) 245
Net change in other assets and liabilities (5,081) (1,036)
Proceeds from sale of loans originated for sale 52,447 20,253
Disbursements on loans originated for sale (48,073) (21,588)
- -------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,438 (308)
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans (20,166) (20,864)
Purchases of:
Loans (926) (4,422)
Mortgage-backed securities available for sale (16,692) (9,011)
Investment securities available for sale (16,302) (27,089)
Investment securities held to maturity (14,750) (7,600)
Premises and equipment (354) (430)
Federal Home Loan Bank stock (58) (440)
Proceeds from:
Principal repayments and maturities of:
Mortgage-backed securities available for sale 6,567 561
Mortgage-backed securities held to maturity 5,098 3,089
Investment securities available for sale 10,709 -
Investment securities held to maturity 20,894 35,697
Sales of available for sale mortgage-backed securities 3,995 -
Sales of available for sale investment securities 10,120 -
- -------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (11,865) (30,509)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 10,933 28,648
Payments on advances from the Federal Home Loan Bank (1,025) (7,906)
Proceeds from advances from the Federal Home Loan Bank - 13,400
Net decrease in escrows (1,463) (1,463)
Effect of stock options exercised 836 -
Common shares issued under Dividend Reinvestment Plan 42 -
Payment of dividends on common stock (717) (607)
- -------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 8,606 32,072
- -------------------------------------------------------------------------------------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (821) 1,255
CASH AND CASH EQUIVALENTS, AT BEGINNING OF THE PERIOD 10,762 7,552
- -------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, AT END OF THE PERIOD $ 9,941 $ 8,807
=========================================================================================================================
</TABLE>
See notes to unaudited consolidated financial statements
4
<PAGE> 6
EMERALD FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 six month periods ended June 30,
1998 and 1997; (b) the financial condition at June 30, 1998, and December 31,
1997; and (c) the statements of cash flows for the six month periods ended June
30, 1998 and 1997. The results of operations for the three and six month periods
ended June 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 maturities of less than three months to be
cash equivalents.
Income tax payments of $1,422,000 and $1,351,000 were made during the
six month periods ended June 30, 1998 and 1997, respectively. Interest paid
totaled $13,293,000 and $13,627,000 for the six month periods ended June 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 six month period ended June 30, 1998. There were transfers from
loans to real estate owned of $951,000 with $544,000 in loans made to finance
the sale of real estate owned during the six month period ended June 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 JUNE 30, SIX MONTHS ENDED JUNE 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 10,266,690 10,123,200 10,232,842 10,123,200
Net dilutive effect of stock options 530,360 127,885 482,945 99,741
--------------------------------------------------------------------
Weighted average number of shares
outstanding adjusted for effect of
dilutive securities 10,797,050 10,251,085 10,715,787 10,222,941
====================================================================
Net income $ 1,877,000 $ 1,536,000 $ 3,733,000 $ 2,972,000
====================================================================
Basic earnings per common share $ 0.18 $ 0.15 $ 0.36 $ 0.30
====================================================================
Diluted earnings per common share $ 0.17 $ 0.15 $ 0.35 $ 0.29
====================================================================
</TABLE>
6. COMPREHENSIVE INCOME
--------------------
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income, was issued in June 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. The Company's
comprehensive income for the quarters ended June 30, 1998 and 1997 are as
follows:
6
<PAGE> 8
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1998 1997 1998 1997
------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Net income $1,877 $1,536 $3,733 $2,972
Unrealized holding gains (losses) arising
during the period 94 466 200 288
Tax effect of unrealized holding gains
(losses) arising during the period 32 158 68 98
Less reclassification adjustment for gains
and losses included in net income (58) -- (57) --
------------------------------------------------------------
Comprehensive income $1,881 $1,844 $3,808 $3,162
============================================================
</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 pubic 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. Management has
determined that adoption of SFAS No.
131 will not result 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. Management has determined that adoption of SFAS No. 132
will not result 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 does not anticipate the statement to
have a material impact on the Company's financial statements.
7
<PAGE> 9
- --------------------------------------------------------------------------------
SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 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 $ 0.15 $ 0.36 $ 0.30
Diluted earnings per share $ 0.17 $ 0.15 $ 0.35 $ 0.29
Return on Average Assets 1.21% 1.02% 1.22% 1.01%
Return on Average Equity 14.54% 13.66% 14.73% 13.40%
Noninterest expense to
average assets 1.43% 1.50% 1.50% 1.54%
Efficiency ratio 43.75% 48.89% 46.03% 49.40%
OTHER SELECTED FINANCIAL RATIOS
Interest rate spread 2.62% 2.51% 2.62% 2.54%
Net yield on interest-earning assets 2.90% 2.87% 2.91% 2.91%
Yield on average interest-earning assets 7.71% 7.73% 7.71% 7.73%
Cost of average interest-bearing liabilities 5.09% 5.22% 5.09% 5.19%
Non-performing loans to total loans 0.31% 0.25% 0.31% 0.25%
Non-performing assets to total assets 0.36% 0.24% 0.36% 0.24%
Net recoveries (charge-offs) to average loans -0.34% 0.01% -0.17% 0.00%
Dividends per share $ 0.035 $ 0.03 $ 0.07 $ 0.06
Annualized total asset growth 1.02% 9.82% 4.44% 12.54%
Average total assets $ 619,161 $ 600,063 $ 610,733 $ 586,089
Average loans, net (includes held for sale) 478,394 449,753 472,217 440,904
Average interest-earning assets 592,544 585,825 585,773 573,610
Average deposits 532,763 516,253 525,052 506,702
Average advances from the FHLB 27,233 28,039 27,570 26,946
Average shareholders' equity 51,631 44,964 50,686 44,362
Weighted average shares outstanding-Basic 10,266,690 10,123,200 10,232,842 10,123,200
Weighted average shares outstanding-Diluted 10,797,050 10,251,085 10,715,787 10,222,941
Shares outstanding at period end 10,274,287 10,123,200 10,274,287 10,123,200
- ------------------------------------------------------------------------------------------------------------------------------
</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 Company's principal business has historically been 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 June 30, 1998, were $617.4 million,
representing an increase of $13.4 million, or 4.4%, annualized, for the six
month period and of $14.3 million, or 2.4% for the twelve month period ended
June 30, 1998. The increase in assets was primarily concentrated in the mortgage
loan portfolio.
The Company's deposits were $531.6 million at June 30, 1998,
representing an increase of $10.9 million, or 4.2%, annualized, during the six
month period and of $9.5 million, or 1.8% during the twelve month period ended
June 30, 1998.
Net interest income was $4.3 million for the quarter ended June 30,
1998, an increase of $0.1 million over the second 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 $6.7 million
from $585.8 million for the second quarter of 1997 to $592.5 million for the
second quarter of 1998. The Bank's interest rate spread increased 11 basis
points from 2.51% during the second quarter of 1997 to 2.62% during the second
quarter of 1998.
Net income for the second quarter of 1998, at $1.9 million, was $0.4
million more than the $1.5 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 $8.5 million for the six months ended June 30,
1998, an increase of $0.2 million over the six months ended June 30, 1997. The
increase in interest-earning assets combined with an increase in interest rate
spread, caused the improvement. Average interest-earning assets increased $12.2
million from $573.6 million for the first half of 1997 to $585.8 million for the
first half of 1998. The Bank's interest rate spread increased 8 basis points
from 2.54% during the first half of 1997 to 2.62% during the first half of 1998.
Net income for the six months ended June 30, 1998, at $3.7 million, was
$0.7 million more than the $3.0 million for the same period in 1997. The
increase was primarily due to the increase in noninterest income.
10
<PAGE> 12
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.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
TABLE 1(a)
AVERAGE BALANCE TABLE
FOR THE THREE MONTHS ENDED JUNE 30,
1998 1997
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
- ------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Loans, net (1) $ 478,394 $ 9,637 8.06% $ 449,753 $ 9,222 8.20%
Investment securities 42,949 663 6.17% 59,829 900 6.02%
Mortgage-backed securities 53,191 897 6.75% 58,730 985 6.70%
Other interest-earning assets 18,010 225 5.00% 17,513 208 4.74%
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 592,544 11,422 7.71% 585,825 11,315 7.73%
Noninterest-earning assets 26,617 14,238
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 619,161 $ 600,063
==============================================================================================================================
INTEREST-BEARING LIABILITIES
Deposits (2) $ 532,763 $ 6,712 5.04% $ 516,253 $ 6,687 5.18%
Advances from FHLB 27,233 408 5.99% 28,039 422 6.02%
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 559,996 7,120 5.09% 544,292 7,109 5.22%
Noninterest-bearing liabilities 7,535 10,807
Shareholders' equity 51,630 44,964
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 619,161 $ 600,063
==============================================================================================================================
Net interest income $ 4,302 $ 4,206
Interest-rate spread 2.62% 2.51%
Net interest margin 2.90% 2.87%
Ratio of average interest-
earning assets to average
interest-bearing liabilities 105.81% 107.63%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Average balances include non-accrual loans. Interest income includes
deferred loan fee amortization of $327,000 and $411,000 for the three
months ended June 30, 1998 and 1997, respectively.
(2) Deposits include noninterest-bearing demand accounts which were $14,343,000
and $11,559,000 at June 30, 1998 and 1997, respectively.
11
<PAGE> 13
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
TABLE 1 (b)
AVERAGE BALANCE TABLE
FOR THE SIX MONTHS ENDED JUNE 30,
1998 1997
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
- -----------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Loans, net (1) $ 472,217 $19,049 8.07% $ 440,904 $17,986 8.16%
Investment securities 43,676 1,300 5.95% 58,005 1,758 6.06%
Mortgage-backed securities 52,908 1,767 6.68% 58,150 2,049 7.05%
Other interest-earning assets 16,972 467 5.51% 16,551 389 4.70%
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 585,773 22,583 7.71% 573,610 22,182 7.73%
Noninterest-earning assets 24,960 12,479
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 610,733 $ 586,089
=============================================================================================================================
INTEREST-BEARING LIABILITIES
Deposits (2) $ 525,052 $13,231 5.04% $ 506,702 $13,044 5.15%
Advances from FHLB 27,570 823 5.97% 26,946 792 5.88%
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 552,622 14,054 5.09% 533,648 13,836 5.19%
Noninterest-bearing liabilities 7,425 8,079
Shareholders' equity 50,686 44,362
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 610,733 $ 586,089
=============================================================================================================================
Net interest income $ 8,529 $ 8,346
Interest-rate spread 2.62% 2.54%
Net interest margin 2.91% 2.91%
Ratio of average interest-
earning assets to average
interest-bearing liabilities 106.00% 107.49%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Average balances include non-accrual loans. Interest income includes
deferred loan fee amortization of $717,000 and $792,000 for the six months
ended June 30, 1998 and 1997, respectively.
(2) Deposits include noninterest-bearing demand accounts which were $14,343,000
and $11,559,000 at June 30, 1998 and 1997, respectively.
12
<PAGE> 14
Tables 2(a) and 2(b) present certain information regarding changes in interest
income and interest expense of the Company for the three and six month periods
ended June 30, 1998 and 1997. The tables show the changes in interest income and
interest expense by major category attributable to changes in the average
balance (volume) and the changes in interest rates. The net change not
attributable to either rate or volume is allocated on a prorata basis to the
change in rate or volume.
<TABLE>
<CAPTION>
TABLE 2 (a)
- ----------------------------------------------------------------------------------------------------------------------------------
RATE/VOLUME TABLE
THREE MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 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 $ 567 $ (152) $ 415 $ 1,232 $ (39) $ 1,193
Investment securities (260) 23 (237) (43) (13) (56)
Mortgage-backed securities (94) 6 (88) 243 (16) 227
Other 6 11 17 120 (8) 112
- ----------------------------------------------------------------------------------------------------------------------------------
Total 219 (112) 107 1,552 (76) 1,476
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE ON INTEREST-BEARING LIABILITIES
Deposits 166 (141) 25 885 138 1,023
Advances from FHLB (12) (2) (14) 124 14 138
- ----------------------------------------------------------------------------------------------------------------------------------
Total 154 (143) 11 1,009 152 1,161
- ----------------------------------------------------------------------------------------------------------------------------------
CHANGE IN NET INTEREST INCOME $ 65 $ 31 $ 96 $ 543 $ (228) $ 315
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TABLE 2 (b)
- ----------------------------------------------------------------------------------------------------------------------------------
RATE/VOLUME TABLE
SIX MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 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)
INTEREST INCOME ON INTEREST-EARNING ASSETS
<S> <C> <C> <C> <C> <C> <C>
Loans, net $ 1,258 $ (195) $ 1,063 $ 2,999 $ (339) $ 2,660
Investment securities (427) (31) (458) (309) 14 (295)
Mortgage-backed securities (178) (104) (282) 374 24 398
Other 10 68 78 158 (25) 133
- ----------------------------------------------------------------------------------------------------------------------------------
Total 663 (262) 401 3,222 (326) 2,896
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE ON INTEREST-BEARING LIABILITIES
Deposits 456 (269) 187 1,724 89 1,813
Advances from FHLB 19 12 31 308 5 313
- ----------------------------------------------------------------------------------------------------------------------------------
Total 475 (257) 218 2,032 94 2,126
- ----------------------------------------------------------------------------------------------------------------------------------
CHANGE IN NET INTEREST INCOME $ 188 $ (5) $ 183 $ 1,190 $ (420) $ 770
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</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 Six months ended June
June 30, 1998 30, 1998
----------------------- -----------------------
(Dollars in thousands)
<S> <C> <C>
Net interest income:
Current period $ 4,302 $ 8,529
Prior period 4,206 8,346
-----------------------------------------------
Dollar change from prior period $ 96 $ 183
-----------------------------------------------
Percent change from prior period 2.29% 2.19%
======================= =======================
</TABLE>
Interest income
- ---------------
Interest income for the three months ended June 30, 1998, was $11.4
million, compared to $11.3 million for the second quarter of 1997, an increase
of $0.1 million or 0.95%. This increase was due to the increase in average
interest-earning assets to $592.5 million for the second quarter of 1998 from
$585.8 million for the second quarter of 1997 as demonstrated on Table 1(a). The
effect of the increase in interest-earning assets was offset somewhat by the 2
basis point decline in the average yield on interest-earning assets to 7.71% for
the second quarter of 1998 from 7.73% for the like period in 1997.
Interest income for the six months ended June 30, 1998, was $22.6
million, compared to $22.2 million for the first half of 1997, an increase of
$0.4 million or 1.81%. This increase was due to the increase in average
interest-earning assets to $585.8 million for the first half of 1998 from $573.6
million for the first half of 1997 as demonstrated on Table 1(b). The effect of
the increase in interest-earning assets was offset somewhat by the 2 basis point
decline in the average yield on interest-earning assets to 7.71% for the first
half of 1998 from 7.73% for the like period in 1997.
Interest expense
- ----------------
Interest expense increased during the quarter ended June 30, 1998,
compared to the same period in 1997 primarily due to an increase in average
interest-bearing liabilities of $15.7 million, or 2.89%, offset by a decrease in
the average cost of interest-bearing liabilities. Average interest-bearing
liabilities were $560.0 million and $544.3 million for the second quarter of
1998 and 1997, respectively. The average cost of interest-bearing liabilities
decreased 13 basis points to 5.09% for the second quarter of
14
<PAGE> 16
1998 from 5.22% for the same period in 1997. This decrease partially offset
the effect of the increase in interest-bearing liabilities.
Interest expense increased during the six months ended June 30, 1998,
compared to the same period in 1997 primarily due to an increase in average
interest-bearing liabilities of $19.0 million, or 3.56%, offset by a decrease in
the average cost of interest-bearing liabilities. Average interest-bearing
liabilities were $552.6 million and $533.6 million for the first half of 1998
and 1997, respectively. The average cost of interest-bearing liabilities
decreased 10 basis points to 5.09% for the first half of 1998 from 5.19% for the
same period in 1997. 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 June 30, 1998,
was $244,000 compared to $91,000 for the same period in 1997. The provision for
loan losses for the six months ended June 30, 1998, was $358,000 compared to
$169,000 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 Six months ended June
June 30, 1998 30, 1998
-----------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Noninterest income:
Current period $ 957 $ 1,991
Prior period 506 931
-----------------------------------------------
Dollar change from prior period $ 451 $ 1,060
-----------------------------------------------
Percent change from prior period 88.98% 113.93%
===============================================
</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 second quarter of 1998 as compared the same quarter in 1997 is due to: an
increase in gains on sales of loans and investment securities available for sale
of $87,000; increases in loan service fees of $59,000 and increases other
noninterest income of $305,000. Earnings credited to bank owned life insurance
were $199,000 during the quarter ended June 30, 1998.
15
<PAGE> 17
The increase in noninterest income during the first half of 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 $412,000; increases in
loan service fees of $93,000 and increases other noninterest income of $555,000.
Earnings credited to bank owned life insurance were $353,000 during the six
months ended June 30, 1998.
NONINTEREST EXPENSE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended Six months ended June
June 30, 1998 30, 1998
----------------------- -----------------------
(Dollars in thousands)
<S> <C> <C>
Noninterest expense:
Current period $ 2,246 $ 4,639
Prior period 2,284 4,570
-----------------------------------------------
Dollar change from prior period $ ( 38) $ 69
-----------------------------------------------
Percent change from prior period (1.68)% 1.52%
======================= =======================
</TABLE>
The nominal changes in noninterest expense for the three and six month
periods ended June 30, 1998 as compared to the same periods in 1997 are
primarily due to the deferral of direct loan origination costs offset by general
price increases. Management is pleased with the efficiency ratio of 43.75% for
the second quarter of 1998, which has improved from the 48.89% a year ago. The
efficiency ratio for the first half of 1998 was 46.03%, an improvement over the
49.40% for the first half of 1997.
FEDERAL INCOME TAXES
- --------------------------------------------------------------------------------
The Bank provided $892,000 for federal income tax during the second
quarter of 1998 and $801,000 during the like period in 1997. The Bank provided
$1,790,000 for federal income tax during the six months ended June 30, 1998 and
$1,566,000 during the like period in 1997. Income before the provision for
federal income taxes increased for the compared periods resulting in a
corresponding increase in the provision for federal income taxes.
FINANCIAL RESOURCES AND LIQUIDITY
- --------------------------------------------------------------------------------
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 the funds from deposit inflows and loan payments
primarily to originate loans and to purchase investment securities.
16
<PAGE> 18
At June 30, 1998, loans-in-process to be funded over a future period of
time totaled $43 million, and 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 $27
million in advances outstanding at June 30, 1998.
For an analysis of Emerald's cash flows, refer to the Consolidated
Statements of Cash Flows on page 4. Management believes the Company has adequate
resources to meet its normal funding requirements.
SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Shareholders' equity was $52.5 million at June 30, 1998, an increase of
$3,970,000, or 16.36%, annualized, during the first six months of 1998. This
increase was primarily the result of net income. Emerald paid dividends in the
first half of 1998 of 7.0(cent) per share, an increase of 16.67% over the
6.0(cent) per share dividend paid in the first half of 1997.
The Company's return on average assets was 1.21% and return on average
equity was 14.54% for the second quarter of 1998.
At June 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 $ 50,678 $ 50,678 $ 52,254
Capital amount -- Well capitalized 30,788 23,734 39,556
------------------------------------------------------------
Amount in excess of requirement $19,890 $26,944 $12,698
============================================================
Capital ratio -- Actual 8.23% 12.81% 13.21%
Capital ratio -- Well capitalized 5.00% 6.00% 10.00%
------------------------------------------------------------
Amount in excess of requirement 3.23% 6.81% 3.21%
============================================================
</TABLE>
Strongsville Savings' capital levels at June 30, 1998, qualify it as a
"well-capitalized" institution, the highest of five tiers under applicable
federal definitions.
17
<PAGE> 19
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 June 30, 1998, the
Bank had 84.85% of total assets invested in Qualified Thrift Investments.
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 one and one half years.
18
<PAGE> 20
ASSET QUALITY
- --------------------------------------------------------------------------------
Table 3 sets forth information regarding non-performing assets at June
30, 1998, December 31, 1997, and June 30, 1997.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
TABLE 3
NON-PERFORMING ASSETS ANALYSIS
JUNE 30, DECEMBER 31, JUNE 30,
1998 1997 1997
- -------------------------------------------------------------------------------------------------------
(Dollars In thousands)
<S> <C> <C> <C>
NON-ACCRUING LOANS
1-4 family - permanent $ 568 $ 156 $ 61
1-4 family - construction 459 692 413
Multi-family and Commercial
real estate - - -
Land and development 181 181 -
Commercial non-real estate - 370 -
Consumer and other 9 29 22
- -------------------------------------------------------------------------------------------------------
Total 1,217 1,428 496
LOANS DELINQUENT 90 DAYS OR MORE
AND STILL ACCRUING
1-4 family - permanent 275 716 640
1-4 family - construction - - -
Multi-family and Commercial
real estate - - -
Land and development - - -
Commercial non-real estate - - -
Consumer and other - - -
- -------------------------------------------------------------------------------------------------------
Total 275 716 640
Total non-performing loans 1,492 2,144 1,136
Investments, net of allowance for credit
losses of $162,000 at June 30, 1998
December 31,1997. 396 486 -
Real estate owned 330 683 340
- -------------------------------------------------------------------------------------------------------
Total non-performing assets $ 2,218 $ 3,313 $ 1,476
=======================================================================================================
Allowances for loan losses $ 1,576 $ 1,625 $ 1,577
=======================================================================================================
Non-performing loans to total loans-net 0.31% 0.45% 0.25%
Non-performing assets to total assets 0.36% 0.55% 0.24%
Allowance for loan losses to ending
loan balance (before allowance) 0.32% 0.35% 0.35%
Allowance for loan losses to
non-performing loans 105.65% 75.80% 138.85%
- -------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 21
Table 4 presents information concerning activity in the allowance for
loan losses during the three and six month periods ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
TABLE 4
ACTIVITY IN THE ALLOWANCE FOR LOAN LOSSES
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Allowance at the beginning of the period $ 1,740 $ 1,500 $ 1,625 $ 1,423
Provision charged to expense 244 91 358 169
Charge-offs:
- ------------
1-4 family - permanent - 5 - 5
1-4 family - construction - - - -
Multi-family and Commercial
real estate - - - -
Land and development - - - -
Commercial non-real estate 370 - 370 -
Consumer and other 39 14 39 19
- ---------------------------------------------------------------------------------------------------------------------------
409 19 409 24
Recoveries
- ----------
1-4 family - permanent - - - -
1-4 family - construction - - - -
Multi-family and Commercial
real estate - - - -
Land and development - - - -
Commercial non-real estate - - - -
Consumer and other 1 5 2 9
- ---------------------------------------------------------------------------------------------------------------------------
1 5 2 9
- ---------------------------------------------------------------------------------------------------------------------------
Net recoveries (charge-offs) (408) (14) (407) (15)
- ---------------------------------------------------------------------------------------------------------------------------
Allowance at the end of the period $ 1,576 $ 1,577 $ 1,576 $ 1,577
===========================================================================================================================
Net charge-offs during the period to average
loans outstanding during the period
(Annualized) 0.34% 0.01% 0.17% 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 June
30, 1998, December 31, 1997, and June 30, 1997.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
TABLE A
LOAN PORTFOLIO COMPOSITION
JUNE 30, 1998 DECEMBER 31, 1997 JUNE 30, 1997
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
REAL ESTATE MORTGAGE LOANS: (Dollars In thousands)
Permanent first mortgage loans:
1-4 family $ 333,267 68.90% $ 319,796 69.30% $ 314,328 69.65%
Multi-family 838 0.17% 924 0.20% 991 0.22%
Commercial real estate 50,602 10.46% 52,499 11.38% 52,280 11.58%
Land 598 0.12% 553 0.12% 283 0.06%
- ------------------------------------------------------------------------------------------------------------------------------
Total permanent mortgage loans 385,305 79.65% 373,772 81.00% 367,882 81.51%
- ------------------------------------------------------------------------------------------------------------------------------
Construction first mortgage loans:
Residential development 71,511 14.78% 56,217 12.18% 54,591 12.09%
1-4 family 40,399 8.35% 37,413 8.11% 44,317 9.82%
Multi-family 900 0.19% 1,050 0.23% - 0.00%
Commercial real estate 10,542 2.18% 6,879 1.49% 1,288 0.30%
- ------------------------------------------------------------------------------------------------------------------------------
Total construction loans 123,352 25.50% 101,559 22.01% 100,196 22.21%
- ------------------------------------------------------------------------------------------------------------------------------
Total mortgage loans 508,657 105.15% 475,331 103.01% 468,078 103.72%
- ------------------------------------------------------------------------------------------------------------------------------
OTHER LOANS
Commercial 6,367 1.32% 5,736 1.24% 4,695 1.04%
Consumer 16,960 3.51% 15,460 3.35% 12,532 2.78%
- ------------------------------------------------------------------------------------------------------------------------------
Total other loans 23,327 4.83% 21,196 4.59% 17,227 3.82%
- ------------------------------------------------------------------------------------------------------------------------------
Total loans 531,984 109.98% 496,527 107.60% 485,305 107.54%
Less:
Loans in process 43,129 8.92% 30,015 6.50% 28,826 6.39%
Allowance for loan losses 1,576 0.32% 1,625 0.35% 1,577 0.35%
Deferred yield items 3,591 0.74% 3,430 0.75% 3,607 0.80%
- ------------------------------------------------------------------------------------------------------------------------------
48,296 9.98% 35,070 7.60% 34,010 7.54%
- ------------------------------------------------------------------------------------------------------------------------------
Total loans held for investment-Net $ 483,688 100.00% $ 461,457 100.00% $ 451,295 100.00%
==============================================================================================================================
Real estate loans held for sale $ 3,943 $ 7,823 $ 2,264
==============================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 23
Table B sets forth the activities in the Bank's loan portfolio for the
three and six month periods ended June 30, 1998, and 1997.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
TABLE B
ACTIVITY IN THE LOAN PORTFOLIO
FOR THE QUARTER ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
PERMANENT MORTGAGE LOAN ORIGINATIONS
1-4 family $ 47,285 $ 25,666 $ 90,243 $ 44,929
Multi-family - - - -
Commercial real estate 3,464 1,169 4,383 2,629
Land 1,050 165 1,550 245
- --------------------------------------------------------------------------------------------------------------------
51,799 27,000 96,176 47,803
CONSTRUCTION FIRST MORTGAGE LOAN ORIGINATIONS
Residential development 16,017 7,122 35,321 18,616
1-4 family 12,784 17,044 24,402 25,301
Multi-family - - - -
Commercial real estate 2,775 735 4,090 1,643
- --------------------------------------------------------------------------------------------------------------------
31,576 24,901 63,813 45,560
NONMORTGAGE LOANS
Commercial 1,020 1,218 1,648 1,683
Consumer 4,427 5,576 7,967 11,138
- --------------------------------------------------------------------------------------------------------------------
5,447 6,794 9,615 12,821
- --------------------------------------------------------------------------------------------------------------------
TOTAL LOAN ORIGINATIONS 88,822 58,695 169,604 106,184
PURCHASED LOANS
Commercial real estate 926 - 926 4,422
- --------------------------------------------------------------------------------------------------------------------
TOTAL NEW LOANS 89,748 58,695 170,530 110,606
LESS
Principal repayments 42,307 35,072 85,878 60,462
Loan sales 17,343 13,412 53,094 20,445
- --------------------------------------------------------------------------------------------------------------------
59,650 48,484 138,972 80,907
- --------------------------------------------------------------------------------------------------------------------
NET INCREASE IN LOANS $ 30,098 $ 10,211 $ 31,558 $ 29,699
====================================================================================================================
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE> 24
Table C sets forth the composition of the Bank's deposits by interest
rate category at June 30, 1998, December 31, 1997, and June 30, 1997.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
TABLE C
DEPOSIT COMPOSITION
--------------------------------------------------------------------------------------------
JUNE 30, 1998 DECEMBER 31, 1997 JUNE 30, 1997
WTD AVG WTD AVG WTD AVG
COST AMOUNT PERCENT COST AMOUNT PERCENT COST AMOUNT PERCENT
- --------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PASSBOOK ACCOUNTS 2.90% $ 56,367 10.60% 2.93% $ 51,629 9.91% 2.91% $ 48,808 9.35%
NOW ACCOUNTS 1.95% 35,665 6.71% 1.98% 33,976 6.52% 1.99% 31,678 6.07%
MONEY MARKET DEPOSIT ACCOUNTS 2.53% 15,030 2.83% 2.53% 15,506 2.98% 2.53% 16,663 3.19%
COMMERCIAL ACCOUNTS 0.00% 13,142 2.47% 0.00% 12,992 2.50% 0.00% 11,082 2.12%
- --------------------------------------------------------------------------------------------------------------------------------
2.26% 120,204 22.61% 2.26% 114,103 21.91% 2.28% 108,231 20.73%
CERTIFICATES OF DEPOSIT:
4.50% and less 4.01% 20,671 3.89% 4.01% 26,391 5.07% 2.52% 1,237 0.24%
4.51% to 5.50% 5.38% 62,598 11.77% 5.38% 52,424 10.07% 5.28% 87,857 16.83%
5.51% to 6.50% 6.03% 269,512 50.70% 6.04% 264,388 50.78% 6.05% 250,809 48.04%
6.51% to 7.50% 7.36% 51,102 9.61% 7.36% 55,516 10.66% 7.33% 65,659 12.57%
7.51% and greater 8.96% 7,536 1.42% 8.92% 7,868 1.51% 8.89% 8,326 1.59%
- --------------------------------------------------------------------------------------------------------------------------------
6.05% 411,419 77.39% 6.06% 406,587 78.09% 6.13% 413,888 79.27%
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS 5.19% $ 531,623 100.00% 5.23% $ 520,690 100.00% 5.34% $522,119 100.00%
================================================================================================================================
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Table D sets forth the remaining terms to maturity for the certificates
of deposit at June 30, 1998.
TABLE D
CERTIFICATES OF DEPOSIT MATURING/REPRICING DURING:
(In Thousands)
<TABLE>
<S> <C>
The year ending June 30, 1999 $ 257,203
The year ending June 30, 2000 93,903
The year ending June 30, 2001 18,168
The year ending June 30, 2002 6,420
The year ending June 30, 2003 5,316
After June 30, 2003 30,409
- ------------------------------------------------------------
$ 411,419
- ------------------------------------------------------------
</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 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 six months ended June 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
----------------------------------------------------
(a) The Annual Meeting of Shareholders was held on April 16, 1998.
(b) The following three directors were elected for the three year
term stated. All were elected without opposition.
<TABLE>
<CAPTION>
Director Term
------------------------------------- ------------
<S> <C> <C>
William A. Fraunfelder, Jr. 1998 to 2001
Glenn W. Goist 1998 to 2001
John F. Ziegler 1998 to 2001
</TABLE>
The remaining directors and year in which their current term
expires are as follows:
<TABLE>
<CAPTION>
Director Term
------------------------------------- ------------
<S> <C>
Thomas P. Perciak 2000
Joan M. Dzurilla 2000
Mike Kalinich, Sr. 2000
George P. Bohnert, Jr. 1999
John J. Plucinsky 1999
Kenneth J. Piechowski 1999
</TABLE>
(c) The following matters were voted upon at the Annual
Shareholders Meeting, with the allocation of the votes cast indicated.
(i) Election of three directors for three-year terms
expiring in 2001. The nominees were elected and the record of
votes was as follows:
25
<PAGE> 27
<TABLE>
<CAPTION>
Nominee Votes for Votes Abstaining Shares not
against Votes Voted
----------------------------- ------------------- ------------ ---------------- ----------------
<S> <C> <C> <C> <C>
William A. Fraunfelder, Jr. 4,591,231.170 0 10,777.737 513,635.093
Glenn W. Goist 4,590,731.170 0 11,277.737 513,635.093
John F. Ziegler 4,589,231.170 0 12,777.737 513,635.093
</TABLE>
(ii) Ratification of amendment to the Company's Amended
and Restated Articles of Incorporation to increase Authorized
Shares of Common Stock form 10,000,000 to 20,000,000.
Increase in Authorized Shares of Common Stock was ratified as
proposed and the record of votes was as follows:
<TABLE>
<CAPTION>
Votes Votes Abstaining Shares not
for against Votes Voted
--------------------- -------------- ----------------- ----------------
<S> <C> <C> <C> <C>
4,561,646.186 17,942.897 22,419.824 513,635.093
</TABLE>
(iii) Adoption of the 1998 Stock Option and Incentive Plan
The 1998 Stock Option and Incentive Plan was adopted as
proposed and the record of votes was as follows:
<TABLE>
<CAPTION>
Votes Votes Abstaining Shares not
for against Votes Voted
--------------------- -------------- ----------------- ----------------
<S> <C> <C> <C> <C>
4,504,396.543 66,291.921 31,320.443 513,635.093
</TABLE>
(iv) Ratification of KPMG Peat Marwick LLP as the
Company's independent auditors for the year ended December 31,
1998.
KPMG Peat Marwick LLP were ratified as proposed and the
record of votes was as follows:
<TABLE>
<CAPTION>
Votes Votes Abstaining Shares not
for against Votes Voted
--------------------- -------------- ----------------- ----------------
<S> <C> <C> <C> <C>
4,573,874.726 11,882.940 16,251.241 513,635.093
</TABLE>
(d) Not applicable.
ITEM 5 Other Information
-----------------
There is no other information to be reported.
26
<PAGE> 28
ITEM 6 Exhibits and Reports on Form 8-K
--------------------------------
(a) Not applicable
(b) No reports on Form 8-K were filed during the quarter.
27
<PAGE> 29
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 August 5, 1998
/s/ Thomas P. Perciak
President and Chief Executive Officer
Date August 5, 1998
/s/ John F. Ziegler
Executive Vice President and Chief
Financial Officer
28
<PAGE> 30
INDEX TO EXHIBITS
Page No.
--------
Exhibit 11. COMPUTATION OF EARNINGS PER SHARE 30
Exhibit 27. FINANCIAL DATA SCHEDULE 31
29
<PAGE> 1
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
The computation of earnings per share is included in Footnote 5 to the
unaudited financial statements on page 6 of Form 10-Q for June 30, 1998.
30
<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 SIX MONTH PERIODS ENDED JUNE 30, 1998, FOR EMERALD
FINANCIAL CORP. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> MAR-31-1998 DEC-31-1997
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 8,735 8,735
<INT-BEARING-DEPOSITS> 1,206 1,206
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 60,648 60,648
<INVESTMENTS-CARRYING> 28,813 28,813
<INVESTMENTS-MARKET> 29,172 29,172
<LOANS> 487,631 487,631
<ALLOWANCE> 1,576 1,576
<TOTAL-ASSETS> 617,369 617,369
<DEPOSITS> 531,623 531,623
<SHORT-TERM> 1,043 1,043
<LIABILITIES-OTHER> 6,148 6,148
<LONG-TERM> 26,070 26,070
9,874 9,874
0 0
<COMMON> 0 0
<OTHER-SE> 42,611 42,611
<TOTAL-LIABILITIES-AND-EQUITY> 617,369 617,369
<INTEREST-LOAN> 9,637 19,049
<INTEREST-INVEST> 1,560 3,067
<INTEREST-OTHER> 225 467
<INTEREST-TOTAL> 11,422 22,583
<INTEREST-DEPOSIT> 6,712 13,231
<INTEREST-EXPENSE> 7,120 14,054
<INTEREST-INCOME-NET> 4,302 8,529
<LOAN-LOSSES> 244 358
<SECURITIES-GAINS> 54 54
<EXPENSE-OTHER> 2,246 4,639
<INCOME-PRETAX> 2,769 5,523
<INCOME-PRE-EXTRAORDINARY> 2,769 5,523
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,877 3,733
<EPS-PRIMARY> .18 .36
<EPS-DILUTED> .17 .35
<YIELD-ACTUAL> 2.90 2.91
<LOANS-NON> 1,217 1,217
<LOANS-PAST> 275 275
<LOANS-TROUBLED> 330 330
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 0 0
<CHARGE-OFFS> 409 409
<RECOVERIES> 1 2
<ALLOWANCE-CLOSE> 1,576 1,576
<ALLOWANCE-DOMESTIC> 1,576 1,576
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
