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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 for the fiscal year ended December 31, 1999 or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 for the transition period from ____________ to
____________
Commission file number 0-12724
BELMONT BANCORP.
(Exact name of registrant as specified in its charter)
Ohio 34-1376776
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
325 Main Street, Bridgeport, Ohio 43912
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (740) 695-3323
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange on
Title of each class which registered
----------------------------- ------------------------
Common stock, $0.25 par value NASDAQ Small Cap Market
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
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
State the aggregate market value of the voting stock held by nonaffiliates of
the registrant at April 6, 2000: $14,728,000
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 5,236,534 shares
Documents Incorporated by Reference: None.
1
PART I
The data presented herein should be read in conjunction with the audited
Consolidated Financial Statements incorporated by reference.
ITEM 1-BUSINESS
BELMONT BANCORP.
Belmont Bancorp., ("Company"), is a bank holding company which was
organized under the laws of the State of Ohio in 1982. On April 4, 1984, Belmont
Bancorp. acquired all of the outstanding capital stock of Belmont National Bank
(formerly Belmont County National Bank), a banking corporation organized as a
national banking association. Belmont National Bank provides a variety of
financial services. In addition to Belmont National Bank, the Company owns
Belmont Financial Network, Inc., a non-bank subsidiary ("BFN").
BELMONT NATIONAL BANK
Belmont National Bank resulted from the merger on January 2, 1959, of the
First National Bank of St. Clairsville, and the First National Bank of
Bridgeport. Both banks were organized as national associations prior to 1900.
Belmont National Bank operates through a network of thirteen branches located in
Belmont, Harrison and Tuscarawas Counties in Ohio and Ohio County in West
Virginia. The main office is located in the Woodsdale section of Wheeling, West
Virginia. In addition to its main office in West Virginia, the Bank operates a
branch in the Elm Grove section of Wheeling. Branch locations in Belmont County,
Ohio include St. Clairsville, Bridgeport, Lansing, Shadyside, Ohio Valley Mall,
Bellaire and Plaza West, St. Clairsville. The Harrison County branch is located
in Cadiz, Ohio. Branches in Tuscarawas County are located in New Philadelphia,
Ohio. The three New Philadelphia offices were acquired on October 2, 1992, when
Belmont National Bank acquired the deposits and loans of these offices from
Diamond Savings and Loan.
Belmont National Bank provides a wide range of retail banking services to
individuals and small to medium-sized businesses. These services include various
deposit products, business and personal loans, credit cards, residential
mortgage loans, home equity loans, and other consumer oriented financial
services including IRA and Keogh accounts, safe deposit and night depository
facilities. Belmont National Bank also owns automatic teller machines located at
branches in Bellaire, Bridgeport, Woodsdale, Elm Grove, Cadiz, the Ohio Valley
Mall, Plaza West and New Philadelphia providing 24 hour banking service to our
customers. Belmont National Bank belongs to MAC, a nationwide ATM network with
thousands of locations nationwide. Belmont National Bank offers a wide variety
of fiduciary services. The trust department of the Bank administers pension,
profit-sharing, employee benefit plans, personal trusts and estates.
BELMONT FINANCIAL NETWORK
On July 1, 1985, Belmont formed a subsidiary corporation, Belmont Financial
Network, Inc. BFN serves as a community development corporation by investing in
low income housing projects that provide low income and historic tax credits
SUPERVISION AND REGULATION
Belmont is supervised and examined by the Board of Governors of the Federal
Reserve system under the Bank Holding Company Act of 1956, as amended (the "BHC
Act"). The BHC Act requires the prior approval of the Federal Reserve Board for
a bank holding company to acquire or hold more than a 5% voting interest in any
bank, and restricts interstate banking activities. The BHC Act allows interstate
branching by acquisitions and consolidation in those states that have not opted
out by January 1, 1997.
2
The BHC Act restricts Belmont's nonbanking activities to those which are
determined by the Federal Reserve Board to be closely related to banking and a
proper incident thereto. The BHC Act does not place territorial restrictions on
the activities of nonbank subsidiaries of bank holding companies. Belmont's
banking subsidiary is subject to limitations with respect to transactions with
affiliates.
The enactment of the Graham-Leach-Bliley Act of 1999 (the "GLB Act")
represents a pivotal point in the history of the financial services industry.
The GLB Act sweeps away large parts of a regulatory framework that had its
origins in the Depression Era of the 1930s. Effective March 1, 2000, new
opportunities will be available for banks, other depository institutions,
insurance companies and securities firms to enter into combinations that permit
a single financial services organization to offer customers a more complete
array of financial products and services. The GLB Act provides a new regulatory
framework for regulation through the financial holding company which will have
as its umbrella regulator the Federal Reserve Board. Functional regulation of
the financial holding company's separately regulated subsidiaries will be
conducted by their primary functional regulator. The GLB Act makes compliance
with the Community Reinvestment Act by insured depository institutions and their
financial holding companies a condition for them to engage in new financial
activities. The GLB Act provides a federal right to privacy of non-public
personal information of individual customers.
The Bank's deposits are insured by the Federal Deposit Insurance
Corporation ("FDIC"). As a national bank, Belmont National Bank is supervised
and examined by the Office of the Comptroller of the Currency.
A fundamental principle underlying the Federal Reserve's supervision and
regulation of bank holding companies is that bank holding companies should be a
source of managerial and financial strength to their subsidiary banks.
Subsidiary banks in turn are to be operated in a manner that protects the
overall soundness of the institution and the safety of deposits. Bank regulators
can take various remedial measures to deal with banks and bank holding companies
that fail to meet legal and regulatory standards.
The 1989 Financial Reform, Recovery and Enforcement Act expanded federal
regulatory enforcement powers. The Federal Deposit Insurance Corporation
Improvement Act of 1991 created five capital-based supervisory levels for banks
and requires bank holding companies to guarantee compliance with capital
restoration plans of undercapitalized insured depository affiliates.
The monetary policies of regulatory authorities, including the Federal
Reserve Board and the FDIC, have a significant effect on the operating results
of banks and bank holding companies. The nature and future monetary policies and
the effect of such policies on the future business and earnings of Belmont and
its subsidiary bank cannot be predicted.
CONSENT ORDER AND FEDERAL RESERVE BANK AGREEMENT
In August 1999, the Bank received the written report of an examination of
the Bank by the Office of the Comptroller of the Currency, the Bank's principal
federal regulatory agency. At the same time, the Bank entered into a consent
order with the Office of the Comptroller of the Currency which requires, among
other things, that the Bank achieve by March 31, 2000, and thereafter maintain,
Tier 1 capital at least equal to 6% of adjusted total assets. Belmont has also
entered into a written agreement with the Federal Reserve Bank of Cleveland that
requires, among other things, that it maintain an adequate capital position for
the Bank. Management intends to take all appropriate steps to meet the minimum
capital requirement.
The consent order requires the Bank to formulate new plans, policies,
procedures and programs relating to long-term strategy, organizational
structure, management, loans, loan loss reserves, overdrafts, loan interest
accrual and non-accrual loans, loan diversification, internal audit and periodic
loan review by certain dates and then to implement and follow those plans,
policies, procedures and programs. The Bank is also required to review and
evaluate certain groups of loans and correct deficiencies, and going forward to
properly document commercial extensions of credit and comply with law and
regulations relating to lending. Management of the Bank believes it has taken or
is in the process of taking all appropriate steps to comply with those
requirements.
The Federal Reserve Bank agreement requires the Company to submit an
acceptable plan for maintaining adequate capital at the Bank, comply with the
plan, submit annual cash flow projections, ensure that the Bank complies fully
with the consent order with the Comptroller of the Currency, and report
quarterly on progress in complying with the Federal Reserve agreement. Without
prior Federal Reserve Bank approval, the agreement
3
prohibits the Company from paying dividends, incurring debt, redeeming stock,
receiving dividends from the Bank or imposing charges on the Bank, or engaging
in any transaction with the Bank in violation of federal law.
Each of the Company and the Bank has complied with or is taking steps
designed to comply with all of the requirements imposed by the Comptroller of
the Currency and the Federal Reserve Bank, except that the Bank was unable to
achieve the Tier 1 capital level by March 31, 2000 as required under the terms
of the consent order. Tier 1 capital consists principally of shareholders'
equity less goodwill and a portion of deferred tax assets. In an effort to
satisfy this requirement, in February 2000, the Company commenced a rights
offering and a simultaneous ancillary offering of its common stock to existing
stockholders and others to raise up to $10 million. The Company did not conclude
the offerings as originally anticipated on March 28, 2000 but extended the
offerings until April 14, 2000, and intends to continue the ancillary offering
upon the filing and effectiveness of a post-effective amendment to its
registration statement.
To date the Company has received subscriptions to purchase approximately
1,900,000 shares of its Common Stock at $2.00 per share ($3.8 million in the
aggregate). The subscription proceeds are to be released to the Company on or
about April 17, 2000. There can be no assurance that the SEC will declare
effective an amendment to the Company's registration statement to permit a
continuation of the ancillary offering, or, if it does, that the Company will
raise the capital required during the period in which such offering is continued
to enable the Bank to achieve the specified Tier 1 capital level. In order to
achieve a Tier 1 leverage ratio of 6%, the Bank will need approximately $5.2
million in additional capital after taking into account subscriptions for $3.8
million received to date in the offering and $1.65 million invested by its
directors prior to the offering. On March 30, 2000, the Bank advised the
Comptroller of the Currency that it would not achieve the specified Tier 1
capital level by March 31, 2000 and submitted a revised capital restoration plan
which sets forth other means to achieve the objectives, including by seeking to
raise additional capital though an extension of the offering or by selling
additional assets or deposits. To date, the Comptroller of the Currency has not
taken action on the capital restoration plan submitted.
See "Liquidity and Capital Resources" in Item 7 and Notes 2 and 20 to the
Company's consolidated financial statements.
FOREIGN OPERATIONS
Belmont Bancorp. has no foreign operations.
EXECUTIVE OFFICERS
For information concerning executive officers of Belmont Bancorp. and
Belmont National Bank, see Item 10 of this report.
ITEM 2-PROPERTIES
DESCRIPTION OF PROPERTIES
In January 1996, the Bank relocated its corporate headquarters to Wheeling,
West Virginia. The office is located at 980 National Road and consists of a
14,000 square foot, combination one and two story masonry block building.
Approximately half of the space is leased to a tenant. In addition, the Bank
transacts business in the following branch locations:
St. Clairsville Office-This office consists of a two story brick building
owned by the Bank with attached drive-in facilities. The building consists
of 9,216 square feet which houses the commercial bank operations and the
executive and human resources offices.
Ohio Valley Mall Office-This office is located at the Ohio Valley Mall, a
major shopping mall located two miles east of St. Clairsville, Ohio. The
office consists of a 1,400 square foot office located along the perimeter
of the Mall at the main entrance. An automatic teller machine is located at
the drive-in facility.
Lansing Office-This 1,352 square foot office is located in Lansing, Ohio, a
small community approximately six miles east of St. Clairsville on US.
Route 40. The facility is a masonry building with adjoining drive-in
facilities.
Bridgeport Office-This office is located in Bridgeport, Ohio, a community
located on the Ohio/West Virginia border, approximately 10 miles east of
St. Clairsville. This 5,096 square foot facility is a recently remodeled
masonry building with adjoining drive-in facilities and an ATM.
Shadyside Office-This 1,792 square foot office is located in Shadyside, a
village located on Ohio State Route 7. The facility is a masonry building
with accompanying drive-in facilities.
Cadiz Office-This office is located in Cadiz, Ohio in Harrison County,
approximately seventeen miles north of St. Clairsville at the intersection
of State Routes 9 and 22. The brick and tile building contains 1,800 square
feet with an accompanying drive-in facility and an ATM.
4
New Philadelphia Office-This office, located at 152 North Broadway Avenue,
is a 33,792 square foot site improved with two inter-connected, two story
brick office buildings with a total building area of 13,234 square feet.
Part of the office space is leased to other businesses. This location also
has a drive-in facility and an automatic teller machine.
Schoenbrunn Office-This office, located at 2300 East High Avenue, is
comprised of a one story, 1,605 square foot brick structure with a 783
square foot drive-thru canopy.
Wabash Office-This office, located at 525 Wabash Avenue, is comprised of a
14,250 square foot site with a 246 square foot drive-thru banking facility.
Elm Grove Office-This office is located at 2066 National Road in Wheeling,
WV, and includes a drive-thru facility and an ATM.
Bellaire Office - This leased office, located in the Imperial Shopping
Center, is comprised of approximately 1,750 square feet with an adjoining
drive-thru facility and ATM.
Plaza West Solution Center - This office is located at the west end of St.
Clairsville and features a different concept in retail banking. It includes
a drive-thru facility and an ATM.
All offices are owned by the Bank except for the Ohio Valley Mall and
Bellaire offices. The land for the Elm Grove office is also leased. The Ohio
Valley Mall office lease expires in 2003 and contains a five year renewal
option. The Bellaire office lease expires in 2007 and contains a ten year
renewal option. The land lease for the Elm Grove office expires in 2005 and
provides for four, five year renewal options.
ITEM 3-LEGAL PROCEEDINGS
The Company is a defendant in a suit for damages brought in the Court of
Common Pleas for Belmont County, Ohio in April 1999 by George Michael Riley and
others against the Bank and certain former officers, among others, alleging
torts to have occurred in connection with the Bank's denial of a loan to a third
party to finance the sale of a business owned by plaintiffs. In another case
filed in the same Court in May 1999, Charles J. and Rebecca McKeegan, the
beneficial owners of the potential purchaser of the business in the same
transaction claim damages in excess of $500,000 based upon alleged tortious
conduct as to them by defendants. In both cases it is claimed that a former loan
officer of the Bank later purchased the business at a lower price with financial
assistance from the Bank's former chief operating officer. Based on the advice
of counsel, the Company believes its exposure to liability, if any, is minimal
in each case.
In August 1999, the Company's directors unanimously approved and entered
into a consent order with the Office of the Comptroller of the Currency and
entered into a written agreement with the Federal Reserve Bank of Cleveland
under which the Company and the Bank agreed to meet specified conditions
relating to its future operations and capital requirements. The consent order
requires the Bank to, among other things, formulate new plans, policies,
procedures and programs relating to long-term strategy, organizational
structure, management, loans, loan loss reserves, overdrafts, loan interest
accrual and non-accrual loans, loan diversification, internal audit and periodic
loan review by certain dates. The consent order further required that the Bank
retain the services of a qualified independent certified public accounting firm
acceptable to the Comptroller of the Currency, which it has done by engaging
Crowe Chizek and Company LLP as its independent auditors. See also "Liquidity
and Capital Resources" in Item 7 of this Report.
In August 1999, the Company also entered into an agreement with the Federal
Reserve Bank of Cleveland, under authority given it by the Board of Governors of
the Federal Reserve System, the federal regulatory agency for Belmont. As with
the consent order of the Comptroller of the Currency, the Federal Reserve Bank
agreement necessitates certain actions and restrictions. Without prior Federal
Reserve Bank approval, the agreement prohibits the Company from paying
dividends, incurring debt, redeeming stock, receiving dividends from the Bank,
imposing charges on the Bank, and engaging in any transaction with the Bank in
violation of federal law. The Company is required to report quarterly on
progress in complying with the Federal Reserve Bank agreement.
5
In August 1999, the Bank was named as a defendant in a lawsuit filed in the
Belmont County Common Pleas Court by Joseph C. Heinlein, Jr. against his former
secretary, the Bank, other financial institutions and individuals with whom the
secretary did business. The complaint alleges that the secretary embezzled funds
from the plaintiff's account over a period of several years by forging his
signature to checks and alleges negligence on the part of the Bank for honoring
such checks. Damages are sought in the amount of $739,000. The Bank believes
that it has valid defenses against the claim and intends to defend it
vigorously. In addition, the Company believes that any liability on the Bank's
part would be covered under its insurance policy. However, the insurance
carrier, Progressive Casualty Insurance Company, has filed a declaratory
judgment and interpleader action raising issues of coverage and indemnification
on this claim, as more fully discussed below.
The Company filed suit in the Court of Common Pleas of Tuscarawas County,
Ohio, alleging that it had been the victim of an "elaborate fraud" that has
resulted in more than $15 million in losses to the Bank. Following an extensive
internal review of its loan portfolio, the Bank filed claims against Steven D.
Schwartz, President of Schwartz Homes, Inc., the now-closed New Philadelphia
retailer of manufactured homes. At the same time, the Bank filed claims against
three additional people: Linda Reese, Schwartz Homes' Chief Financial Officer;
William Wallace, the Bank's former Executive Vice-President and Chief Operating
Officer; and Christine Wallace, his wife. In addition, as more fully discussed
below, because of Mr. Wallace's alleged conduct as a bank officer and director,
the Bank is seeking to recover from its indemnity bond insurance carrier,
Progressive Casualty Insurance Company, the full amount of its bond. The
Wallaces have filed counterclaims in an indeterminate amount upon various bases,
including invasion of privacy, defamation and failure to distribute moneys
allegedly due them under a deferred and certain other compensation plans. Steven
Schwartz also requested leave to file counterclaims. The Company intends to
vigorously prosecute its case and defend against these claims.
In October 1999, James John Fleagane, a shareholder of the Company, filed
an action against the Company, the Bank and certain of the Company's and the
Bank's current and former officers and directors in the Circuit Court of Ohio
County, West Virginia. The plaintiff alleges, among other things, that the Bank
and its directors and officers negligently transacted and administered various
loans with respect to Schwartz Homes, Inc. and customers of Schwartz. The
plaintiff seeks damages for the loss in value of his stock and other
compensatory and punitive damages in an unspecified amount and requests class
action certification for the common shareholders of the Company. The Company
intends to vigorously defend this action.
Progressive Casualty Insurance Company sold to the Company a directors and
officers liability policy providing for $3 million of coverage and a separate
financial institution fidelity bond in the face amount of $4.75 million. In May
1999, the Company filed a claim under the fidelity bond policy to recover the
losses incurred in connection with the Schwartz Homes loan relationship. The
Company has also claimed coverage under the directors and officers liability
policy.
Progressive declined to honor these claims and, in December 1999, filed an
action in the United States District Court for the Southern District of Ohio,
Eastern Division asking the court to issue a declaratory judgment declaring that
Progressive is not liable under either the directors and officers liability
policy or the fidelity bond policy. Alternatively, Progressive has asked the
court, if it finds Progressive to be liable under these policies, to determine
whether the Bank or other parties who have sued the Bank in separate actions
(including the Heinlein matter discussed above) are entitled to the insurance
proceeds. Progressive has deposited with the court bonds in the aggregate amount
of $7.75 million to satisfy any liabilities it might have with respect to the
pending claims. The Company intends to vigorously seek recoveries under the
insurance policies sold to the Company by Progressive.
The Company is a defendant in litigation brought in October 1999 by Beall
Homes, Inc., John B. Beall, and Peggy F. Beall in the Court of Common Pleas,
Belmont County, Ohio. Plaintiffs seek a declaratory judgment that certain
warrants of attorney which appear on promissory notes evidencing loans between
the Bank and Beall Homes, Inc. (and guaranteed by John B. Beall and Peggy F.
Beall) are invalid. Plaintiffs assert claims of breach of a duty of good faith
in connection with the Bank's grant of three loans to Beall Homes, fraud and
breach of fiduciary duty allegedly through floor plan financing, dominating and
controlling plaintiff's business, wrongful set-off and conversion of the Beall
Homes account, wrongful dishonor of certain customer checks of plaintiff,
wrongful set-off and conversion of the mortgage account of John B. Beall, and
intentional infliction of emotional distress. Plaintiffs seek compensatory and
punitive damages in an amount in excess of $25,000 and a declaration that they
are not in default of any of their loans, that the warrants of attorney are
6
invalid, that the Bank is required to provide plaintiffs with an accounting of
the manner in which payments made by plaintiffs have been applied by the Bank,
and other relief. The Bank has filed a counterclaim for monetary damages and has
filed a petition for involuntary bankruptcy against Beall Homes. The Company
intends to vigorously defend this action and prosecute its own claims.
In January 2000, Eric Cenkner and other persons who purchased or sought to
purchase homes through the Schwartz Homes homebuilder loan program filed a class
action lawsuit against the Bank and its former chief operating officer, William
Wallace, in the United States District Court for the Northern District of Ohio.
The named plaintiffs are purporting to act on behalf of persons who purchased or
sought to purchase homes through the Schwartz homebuilder loan program. The
complaint alleges that the class members have been harmed by the participation
of the Bank and Mr. Wallace in the Schwartz Homes homebuilder loan program. The
suit seeks damages due to alleged violations of federal and state RICO statutes
and federal usury laws, breaches of contract and fiduciary duties, concealment
and nondisclosure. In the complaint, the plaintiffs based their factual
allegations on the Bank's own factual allegations in the separate case brought
by the Bank in the Court of Common Pleas of Tuscarawas County, Ohio against Mr.
Wallace and Steven Schwartz, the president of Schwartz Homes, as described
above. In April 2000, following discussions among the parties and the Company's
payment to the named plaintiffs of nominal consideration to cover certain of
their expenses, the plaintiffs filed a motion to dismiss the case. The Company
does not believe that the named plaintiffs will reinstitute this action
following dismissal.
In September 1999, the Bank filed a lawsuit against Otterbacher
Manufacturing, Inc. ("Manufacturing") and Gary and Karen Otterbacher regarding
default by Manufacturing on a loan guaranteed by the Otterbachers in the amount
of $2.1 million. The Otterbachers filed a counterclaim against the Bank for
lender liability claims relating to the Bank's declaration of default by
Manufacturing and the Bank's refusal to extend additional or renew existing
credit to Manufacturing. The Bank intends to vigorously defend this action and
prosecute its own claims.
ITEM 4-SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
ITEM 5-MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDERS'
MATTERS
The number of shareholders of record for the Company's stock as of April 6,
2000 was 1,300. The closing price of Belmont stock on April 6, 2000 was $2.8125
per share.
Belmont Bancorp.'s common stock has a par value of $0.25 and, since October
1994, has been traded on the Nasdaq SmallCap market.
1999
Dividend
Quarter High Low per Share
- - --------------------------------------------------
1st $23.75 $17.00 $0.120
2nd 19.50 9.06 0.000
3rd 11.50 4.50 0.000
4th 10.00 5.25 0.000
------
Total $0.120
======
1998
Dividend
Quarter High Low per Share
- - --------------------------------------------------
1st $26.00 $20.00 $0.085
2nd 28.44 22.25 0.100
3rd 27.25 19.75 0.100
4th 23.50 18.00 0.100
------
Total $0.385
======
7
High and low market prices and dividend information for the past two years
for Belmont's common stock are depicted in the tables above. Market prices and
cash dividends paid per share have been restated to reflect the effect of a
2-for-1 common stock split effected in the form of a 100% common stock dividend
paid May 22, 1998.
Information regarding the limitations on dividends available to be paid can
be located in Footnote 16 of the Notes to the Consolidated Financial Statements
in the Company's financial statements beginning on page F-1 (Item 8).
Treasury stock is accounted for using the cost method. There were 51,792
shares and 66,174 shares held in treasury on December 31, 1999 and 1998,
respectively.
8
Part II
Item 6. Selected Financial Data
Summarized Quarterly Financial Information
($000's except per share data)
First Second Third Fourth
Quarter Quarter Quarter Quarter
========================================================================================================================
1999
- - ------------------------------------------------------------------------------------------------------------------------
Interest income $ 7,468 $ 6,621 $ 6,274 $ 5,507
Interest expense 4,247 4,099 3,966 3,297
--------------------------------------------------------------------
Net interest income 3,221 2,522 2,308 2,210
Provision for loan losses 5,735 1,871 5,784 2,487
Security gains (losses) 40 (57) (65) (798)
Net overhead (1) 1,792 2,038 2,527 3,732
--------------------------------------------------------------------
Loss before income taxes (4,266) (1,444) (6,068) (4,807)
Income taxes (benefit) (1,657) (499) (2,202) (1,196)
--------------------------------------------------------------------
Net loss $ (2,609) $ (945) $ (3,866) $ (3,611)
Basic loss
per common share $ (0.50) $ (0.18) $ (0.74) $ (0.69)
========================================================================================================================
1998
- - ------------------------------------------------------------------------------------------------------------------------
Interest income $ 7,521 $ 7,440 $ 7,878 $ 7,948
Interest expense 3,820 3,923 4,281 4,456
--------------------------------------------------------------------
Net interest income 3,701 3,517 3,597 3,492
Provision for loan losses 150 125 185 12,422
Security gains 320 266 675 77
Net overhead (1) 1,702 1,737 1,853 1,576
--------------------------------------------------------------------
Income (loss) before income taxes 2,169 1,921 2,234 (10,429)
Income taxes (benefit) 591 494 630 (3,901)
--------------------------------------------------------------------
Net income (loss) $ 1,578 $ 1,427 $ 1,604 $ (6,528)
Basic earnings (loss)
per common share $ 0.30 $ 0.27 $ 0.31 $ (1.25)
(1) Noninterest income exclusive of securities gains (losses) less noninterest
expense.
9
Consolidated Five Year Summary of Operations
For the Years Ending December 31, 1999, 1998, 1997, 1996 and 1995 ($000's except
per share data)
===========================================================================================================================
1999 1998 1997 1996 1995
===========================================================================
Interest income $ 25,870 $ 30,787 $ 28,348 $ 25,501 $ 23,454
Interest expense 15,609 16,480 14,004 12,127 10,927
---------------------------------------------------------------------------
Net interest income 10,261 14,307 14,344 13,374 12,527
Provision for loan losses 15,877 12,882 1,055 465 1,150
---------------------------------------------------------------------------
Net interest income after
provision for loan losses (5,616) 1,425 13,289 12,909 11,377
Securities gains (losses) (880) 1,338 799 396 102
Trading gains (losses) (10) 62 -- -- --
Gain on sale of real estate -- 383 -- -- --
Other operating income 2,563 2,183 2,010 1,861 1,683
Operating expenses 12,642 9,496 8,732 8,388 7,623
---------------------------------------------------------------------------
Income (loss) before income taxes (16,585) (4,105) 7,366 6,778 5,539
Income taxes (benefit) (5,554) (2,186) 1,421 1,776 1,333
Net income (loss) $ (11,031) $ (1,919) $ 5,945 $ 5,002 $ 4,206
---------------------------------------------------------------------------
Basic earnings (loss)
per common share (1) $ (2.11) $ (0.37) $ 1.13 $ 0.94 $ 0.78
---------------------------------------------------------------------------
Cash dividend declared per share (1) $ 0.120 $ 0.385 $ 0.306 $ 0.240 $ 0.190
---------------------------------------------------------------------------
Book value per common share (1) $ 1.83 $ 4.86 $ 6.05 $ 5.17 $ 4.57
---------------------------------------------------------------------------
Total loans $ 166,979 $ 208,186 $ 224,900 $ 188,783 $ 159,957
Total assets 315,767 438,283 388,713 333,903 317,279
Total deposits 255,432 304,351 263,908 261,539 246,850
Long-term debt 20,000 91,401 69,635 19,676 4,802
Total shareholders' equity 11,231 25,364 31,899 27,332 25,164
---------------------------------------------------------------------------
(1) Restated for stock dividends paid during 1995, 1997 and 1998.
10
ITEM 7-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The data presented in this discussion should be read in conjunction with
the audited consolidated financial statements.
RESULTS OF OPERATIONS
The financial results of 1999 and 1998 reflect a period when Belmont faced
one of the most serious challenges in its 153 year history. The resignation of
the Bank's chief operating officer and senior lending officer in March 1999
followed by the closure in April 1999 and subsequent bankruptcy of Schwartz
Homes, Inc., the Bank's largest commercial borrower, marked the beginning of a
tumultuous year. In June 1999, Belmont's chief executive officer resigned, and
the Board of Directors engaged an interim management group to provide executive
management services and to assist in the recruitment of a new chief executive
officer. Throughout 1999, the Bank's staff worked diligently to assess the
magnitude of the losses associated with Schwartz Homes, Inc. and related
consumer loans and to evaluate the entire commercial loan portfolio. New loan
policies and procedures were implemented to augment internal controls and
strengthen underwriting practices.
The performance of the Company during 1999 was severely impacted by loan
losses and additional overhead costs associated with interim management, legal
services, and collection efforts. Loan charge-offs throughout 1999 reflected an
ongoing assessment of a dynamic loan portfolio. The impact of loan charges-offs
and the provision for loan losses for each quarter of 1999 is depicted in the
following table:
(Expressed in thousands) March 31 June 30 September 30 December 31 Total
------------------------------------------------------------------------------
Net loan charge-offs $ 4,528 $ 1,621 $ 2,699 $ 2,802 $11,650
Provision for loan losses 5,735 1,871 5,784 2,487 15,877
Legal expenses for the year ended 1999 totaled $1,671,000 compared to
$52,000 and $63,000 in 1998 and 1997, respectively. Consulting expenses
primarily associated with interim management and collection efforts totaled
$1,442,000 for 1999 compared to $111,000 and $77,000 in 1998 and 1997,
respectively. These unusual expenses coupled with a loan loss provision of
nearly $16 million resulted in a pretax loss in excess of $16 million for 1999.
The net loss after tax benefits was $11 million, or a loss of $2.11 per common
share.
For 1998, the Company recorded a loan loss provision of $12,882,000
resulting in a loss of $1,919,000, or a loss of $0.37 per common share. Of this
loan loss provision, $12,172,000 was recorded in the fourth quarter of 1998 and
related to consumer loans to customers of Schwartz Homes, Inc. In 1997, the loan
loss provision was $1,055,000. Net income for the year ended 1997 was $5,945,000
or $1.13 per common share.
(Expressed in thousands except per share data) 1999 1998 1997
- - ----------------------------------------------------------------------------------------------
Income (loss) before income taxes $(16,585) $ (4,105) $ 7,366
Net income (loss) $(11,031) $ (1,919) $ 5,945
Basic earnings (loss) per common share $ (2.11) $ (0.37) $ 1.13
Return on average assets -2.79% -0.46% 1.62%
Return on average common equity -56.92% -5.76% 20.21%
In December 1999, interim management services were terminated when Wilbur
R. Roat was appointed to serve as the president and chief executive officer of
the Bank and Belmont. Prior to joining the Bank, Mr. Roat served as the
president and chief executive officer of First Lehigh Bank from September 1994
until February 1999.
11
From March 1992 to September 1994, he served as the president and chief
executive officer of St. Edmond's Savings and Loan.
In February 2000, the Company commenced an offering of up to $10 million of
its common stock to existing stockholders through a rights offering and a
simultaneous ancillary offering to its shareholders and others. The offering is
scheduled to be complete by April 14, 2000 subject to extension to May 12, 2000.
See "Liquidity and Capital Resources" in this Item 7.
NET INTEREST REVENUE
A major share of the Company's income results from the spread between
income on interest earning assets and interest expense on the liabilities used
to fund those assets, known as net interest income. Net interest income is
affected by changes in interest rates and amounts and distributions of interest
earning assets and interest bearing liabilities outstanding. Net interest margin
is net interest income divided by the average earning assets outstanding. A
third frequently used measure is net interest rate spread which is the
difference between the average rate earned on assets and the average rate
incurred on liabilities without regard to the amounts outstanding in either
category.
The Consolidated Average Balance Sheets and Analysis of Net Interest Income
Changes compare interest revenue and interest earning assets outstanding with
interest cost and liabilities outstanding for the years ended December 31, 1999,
1998, and 1997, and computes net interest income, net interest margin and net
interest rate spread for each period. All three of these measures are reported
on a taxable equivalent basis.
12
Consolidated Average Balance Sheets
For the Years Ended December 31, 1999, 1998, and 1997 (Fully Taxable Equivalent
Basis) ($000's)
1999 1998 1997
----------------------------------- ------------------------------ -------------------------------
Average Average Average Average Average Average
Out- Revenue/ Yield/ Out- Revenue/ Yield/ Out- Revenue/ Yield/
standing Cost Rate standing Cost Rate standing Cost Rate
- - ------------------------------------------------------------------------------------------------------------------------------------
Assets
Interest Earning Assets
Loans and Leases $ 193,295 $ 16,641 8.61% $ 222,961 $ 21,321 9.56% $ 208,265 $ 19,632 9.43%
Securities:
Taxable 125,314 7,017 5.60% 134,337 8,053 5.99% 110,739 7,515 6.79%
Exempt from income tax 41,276 2,893 7.01% 24,261 1,802 7.43% 24,728 1,861 7.53%
Trading account assets 1,786 86 4.82% 1,193 68 5.70% 0.00% 0.00% 0.00%
Federal funds sold 5,277 269 5.10% 4,194 228 5.44% 1,317 71 5.39%
- - ------------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets 366,948 26,906 7.33% 386,946 31,472 8.13% 345,049 29,079 8.43%
- - ------------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks 11,377 10,972 10,267
Other assets 28,590 20,100 15,648
Market value depreciation
of securities available for (4,486) (597) (546)
sale
Allowance for loan loss (7,204) (4,312) (3,461)
- - ------------------------------------------------------------------------------------------------------------------------------------
Total Assets 395,225 413,109 366,957
- - ------------------------------------------------------------------------------------------------------------------------------------
Liabilities
Interest bearing liabilities
Interest checking 40,649 1,245 3.06% 45,864 1,524 3.32% 43,476 1,444 3.32%
Savings 82,919 2,653 3.20% 82,196 2,709 3.30% 78,636 2,474 3.15%
Other time deposits 133,419 6,996 5.24% 134,485 7,438 5.53% 115,304 6,145 5.33%
13
1999 1998 1997
------------------------------- ------------------------- --------------------------
Average Average Average Average Average Average
Out- Revenue/ Yield/ Out- Revenue/ Yield/ Out- Revenue/ Yield/
standing Cost Rate standing Cost Rate standing Cost Rate
----------------------------------------------------------------------------------------
Other borrowings 87,498 4,715 5.39% 86,084 4,809 5.59% 68,095 3,941 5.79%
- - ----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 344,485 15,609 4.53% 348,629 16,480 4.73% 305,511 14,004 4.58%
- - ----------------------------------------------------------------------------------------------------------------------------------
Demand deposits 28,865 29,910 29,878
- - ----------------------------------------------------------------------------------------------------------------------------------
Other liabilities 2,496 1,256 2,146
- - ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 375,846 379,795 337,535
- - ----------------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity 19,379 33,314 29,422
- - ----------------------------------------------------------------------------------------------------------------------------------
Liabilities & Stockholders' Equity 395,225 413,109 366,957
==================================================================================================================================
Net interest income
margin on a taxable equivalent basis 11,297 3.08% 14,992 3.87% 15,075 4.37%
==================================================================================================================================
Net interest rate spread 2.80% 3.40% 3.85%
==================================================================================================================================
Interest bearing liabilities
to interest earning assets 93.88% 90.10% 88.54%
==================================================================================================================================
Fully taxable equivalent basis computed at effective federal tax rate of 34%.
Average loan balances include nonperforming loans.
14
Analysis of Net Interest Income Changes
For the Years Ended December 31, 1999, 1998, and 1997 (Taxable Equivalent Basis)
($000's)
1999 Compared to 1998 1998 Compared to 1997
--------------------------------------------------------------------------------------
Volume Yield Mix Total Volume Yield Mix Total
- - -----------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in interest
income
Loans and leases ($2,837) ($2,126) $ 283 ($4,680) $ 1,385 $ 284 $ 21 $ 1,690
Securities
Taxable (541) (531) 36 (1,036) 1,601 (877) (187) 537
Exempt from income taxes 1,264 (102) (71) 1,091 (35) (24) 0 (59)
Trading account assets 34 (11) (5) 18 0 0 68 68
Federal funds sold 59 (14) (4) 41 155 1 1 157
- - -----------------------------------------------------------------------------------------------------------------------------------
Total interest income change (2,021) (2,784) 239 (4,566) 3,106 (616) (97) 2,393
- - -----------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in interest expense
Interest checking (173) (119) 13 (279) 79 1 0 80
Savings 24 (79) (1) (56) 112 118 5 235
Other time deposits (59) (386) 3 (442) 1,022 232 39 1,293
Short term borrowings 79 (170) (3) (94) 1,041 (137) (36) 868
- - -----------------------------------------------------------------------------------------------------------------------------------
Total interest expense change (129) (754) 12 (871) 2,254 214 8 2,476
- - -----------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net interest
Income on a taxable equivalent basis ($1,892) ($2,030) $ 227 ($3,695) $ 852 ($ 830) ($ 105) ($ 83)
====================================================================================================================================
(Increase) decrease in taxable equivalent
adjustment (351) 46
- - -----------------------------------------------------------------------------------------------------------------------------------
Net interest income change ($4,046) ($ 37)
====================================================================================================================================
15
The Company's net interest income declined by 24.6%, or $3,695,000, on a
taxable equivalent basis during 1999 compared to 1998. During 1999, the
Company's average interest-earning assets fell by approximately $20.0 million,
down 5.2% from 1998. Most of the downsizing of the Company occurred during the
fourth quarter of 1999 as part of a plan to reduce the amount of capital
required to achieve a 6% Tier 1 leverage ratio. Further asset reductions
occurred during the first quarter of 2000.
The yield on interest earning assets was down 80 basis points (a basis
point is equal to .01%) from 8.13% in 1998 to 7.33% in 1999. The cost of
interest bearing liabilities declined 20 basis points from 1998 to 1999. The net
interest rate spread decreased from 3.40% during 1998 to 2.80% during 1999. The
taxable equivalent net interest margin was 3.08% during 1999 compared to 3.87%
for 1998 and 4.37% during 1997.
The Analysis of Net Interest Income Changes, separates the dollar change in
the Company's net interest income into three components: changes caused by (1)
an increase or decrease in the average assets and liability balances outstanding
(volume); (2) the changes in average yields on interest earning assets and
average rates for interest bearing liabilities (yield/rate); and (3) combined
volume and yield/rate effects (mix).
This table shows that the decrease in the Company's net interest income
during the year-to-date periods presented from 1998 to 1999 was generated by a
decline in yields and volume on earning assets. This was partially offset by a
decline in the cost of interest bearing liabilities.
OTHER OPERATING INCOME
Other operating income excluding securities transactions and a gain on sale
of real estate, increased 13.7% and totaled $2,553,000 in 1999, compared to
$2,245,000 in 1998 and $2,010,000 in 1997. The table below shows the dollar
amounts and growth rates of the components of other operating income:
1999 1998 1997
(Expressed in thousands) Total Change Total Change Total
- - ----------------------------------------------------------------------------------------------------------
Trust income $484 4.5% $463 -0.6% $466
Service charges on deposits 921 22.5% 752 6.4% 707
Gain on sale of loans 341 136.8% 144 58.2% 91
Trading profits (losses) (10) -116.1% 62 na --
Recovery on class action lawsuit -- na -- na --
Other income 817 -0.8% 824 10.5% 746
--------------------------------------------------------------
Subtotal 2,553 13.7% 2,245 11.7% 2,010
Investment securities gains (losses) (1) na -- 100.0% (3)
Gains (losses) on securities
available for sale (879) -165.7% 1,338 66.8% 802
Gain on sale of real estate -- -100.0% 383 na --
--------------------------------------------------------------
Total $1,673 -57.8% $3,966 41.2% $2,809
==============================================================
Service charges on deposits increased 22.5% from $752,000 in 1998 to
$921,000 due to higher overdrafts and return check fee income and an increase in
the fee schedule for commercial checking accounts. Net gains on sales of loans
increased from $144,000 in 1998 to $341,000 in 1999.
Securities losses were realized during the fourth quarter of 1999 as part
of a plan to reduce the asset size of the Bank. In October 1999, the Bank sold
approximately $38 million in investment securities for a loss of $788,000 and
used approximately $33 million of the proceeds to repay borrowings from the
Federal Home Loan Bank of Cincinnati. Prepayment penalties associated with the
repayment of borrowings totaled $342,000 and are included in operating expenses.
16
OPERATING EXPENSES
The table below details the dollar amounts of and percentage changes in
various categories of expense for the three years ended 1999, 1998, and 1997:
(Expressed in thousands) 1999 % change 1998 % change 1997
---------------------------------------------------------------
Taxes other than payroll and real estate $ 254 -48.8% $ 496 16.4% $ 426
Supplies and printing 233 -22.1% 299 6.8% 280
Insurance, including federal deposit insurance 169 33.1% 127 1.6% 125
Amortization of intangibles 439 124.0% 196 -52.8% 415
Legal fees 1,671 3113.5% 52 -17.5% 63
Consulting expense 1,442 1199.1% 111 44.2% 77
Examinations and audits 385 80.8% 213 -1.4% 216
Prepayment penalties on Federal Home Loan
Bank advances 342 na -- na --
Legal settlements 295 na -- na --
Other (individually less than 1% of total income) 1,798 11.5% 1,612 11.0% 1,452
------ ------ ------
Total $7,028 126.3% $3,106 1.7% $3,054
====== ====== ======
Taxes (other than payroll and real estate taxes) were down $242,000 from
1998 to 1999. This reduction was primarily the result of refunds for state
corporate net income and franchise taxes previously paid which totaled $225,000
due to reductions in income and equity.
Insurance expense was impacted by higher premium rates for federal deposit
insurance from the FDIC. Deposit premiums for the year 2000 are anticipated to
be substantially higher due to the Bank's risk classification assigned by the
FDIC.
The balance of intangible assets associated with branches acquired in the
early 1990's were written off during the fourth quarter of 1999. The write-off
resulted in the recognition of an additional $300,000 in amortization expense
for the period. These intangible assets were primarily associated with the
deposits acquired in the New Philadelphia market. Given the negative publicity
surrounding the Schwartz commercial and consumer loans centered in this
marketplace and the resulting decline in deposits, the Bank reevaluated the
remaining intangible assets and determined that it would write-off the balance.
Consulting expenses totaled $1,442,000 for the year ended 1999. The cost of
interim management services charged to consulting expenses totaled $1,180,000.
Consulting expenses of $194,000 were related to accounting and other services
associated with the Schwartz Homes, Inc. loan collection.
Examination and audit expense increased 80.8% from 1998 to 1999 primarily
as the result of a change in external auditors, the contract internal auditor,
and the additional loan review and extended scopes of the engagements as a
result of lending related issues.
Legal settlement expense for 1999 totaled $295,000. This expense was
related to the Schwartz Homes, Inc. litigation.
Travel and entertainment expenses included in Other expense included
$121,000 for expenses associated with interim management services.
FINANCIAL CONDITION
SECURITIES
The Company uses securities to generate interest and dividend revenue, to
manage interest rate risk and to provide liquidity to meet operating cash needs.
The securities portfolio yield at December 31, 1999 was 6.98%. Net
17
unrealized losses in the securities portfolio at December 31, 1999 totaled
$8,489,000, compared to net unrealized losses of $1,519,000 at December 31,
1998. The unrealized losses resulted from the increase in interest rates during
1999. As interest rates increase, bond prices decline. Management believes the
current declines in fair value are temporary.
18
The maturities and yields of securities available for sale
(excluding equity securities) are detailed in the following table:
Securities Available for Sale
(excluding Equity Securities)
December 31, 1999
1-5 6-10
Maturity Year Year >10 Year
<1 year Maturity Maturity Maturity Total
(Expressed in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- - ------------------------------------------------------------------------------------------------------------------------------------
U. S. Treasury securities $1,299 5.32% $ 98 5.04% $ $ 2,549 5.96% $ 3,946 5.73%
U.S. Government agencies
and corporations (b) 1,988 5.70% 3,664 5.40% 1,742 8.00% 7,394 6.09%
States and political
subdivisions (a) 46 10.06% 118 10.24% 389 10.66% 37,615 7.33% 38,168 7.38%
Corporate debt -- 2,863 8.60% 2,863 8.60%
Agency mortgage-backed
securities (b) 282 3.83% 15,823 6.51% 13,883 6.65% 6,607 8.24% 36,595 6.85%
Collateralized mortgage obligations 217 6.93% 6,521 6.99% 866 10.49% 7,996 6.44% 15,600 6.90%
- - ------------------------------------------------------------------------------------------------------------------------------------
Total fair value $3,832 5.56% $26,224 6.48% $16,880 7.06% $ 57,630 7.27% $104,566 6.98%
====================================================================================================================================
Amortized cost $3,835 $26,716 $17,406 $ 65,059 $113,016
====================================================================================================================================
(a) Taxable equivalent yields
(b) Maturities of mortgage-backed securities and agency loan pools are based on
estimated average life.
19
The Company elected to transfer the balance of securities previously
classified as Held to Maturity to the Available for Sale portfolio effective
April 1, 1999 in accordance with Statement of Financial Accounting Standard No.
133, Accounting for Derivative Instruments and Hedging Activities.
Privately issued collateralized mortgage obligations included in the table
above have a book value of $7,917,000 and an estimated market value of
$7,544,000. Credit risk on privately issued bonds is evaluated based upon
independent rating agencies and on the underlying collateral of the obligation.
At December 31, 1999, the Company owned various investments in a single
issuer, the book value of which exceeded 10% of total shareholders' equity.
These concentrations occurred primarily as a result of the decline in the
Company's shareholders' equity. The following table details the issuer, book
value and market value of these investments.
(Expressed in thousands)
Market
Issuer Book Value Value
Privately Issued Collateralized Mortgage Obligations:
Country Wide Home Loans $ 1,749 $ 1,662
Norwest Asset Securities Corporation 3,617 3,462
Residential Funding Mortgage Securities Corp. 1,672 1,580
General Obligations:
Hampton Township, PA School District 4,337 3,764
Harrison County, OH Courthouse Renovation 1,191 1,185
Hopkins, MI Public Schools 1,904 1,609
Mayfield, OH City School District 1,471 1,276
Mercedes, TX 1,307 1,120
Mundelein, IL 1,128 954
Whisman, CA School District 2,300 1,930
Revenue Bonds:
Grant County KY Public Properties Corp. 1,958 1,666
Guadalupe-Blanco River Authority,
City of San Marcos, TX 1,755 1,469
McCracken County KY School District 1,371 1,176
Northern Tipton IN School District 1,612 1,361
Plainfield, IN Sewer Works 1,160 1,028
Suburban Lancaster PA Sewer Authority 2,833 2,344
Equity Securities:
Federal Home Loan Bank stock
5,363 5,363
------------------
Total $36,728 $32,949
==================
20
LOANS AND LEASES
The following table shows the history of commercial and consumer loans and
leases, including loans held for sale, by major category at December 31:
(Expressed in thousands) 1999 1998 1997 1996 1995
- - -------------------------------------------------------------------------------------------------------------------
Commercial loans:
Real estate construction $ 108 $ 135 $ 1,418 $ 1,327 $ 1,530
Real estate mortgage 9,033 14,719 19,984 25,954 28,744
Commercial, financial
and agricultural 99,911 119,730 109,618 80,554 50,532
Direct financing leases 0 0 0 0 3
------------------------------------------------------------------------
Total commercial loans $109,052 $134,584 $131,020 $107,835 $ 80,809
------------------------------------------------------------------------
Consumer loans:
Residential mortgage $ 47,789 $ 58,099 $ 77,995 $ 71,715 $ 69,999
Installment loans 9,315 14,483 14,435 7,626 6,959
Credit card and other consumer 823 1,020 1,450 1,607 2,190
------------------------------------------------------------------------
Total consumer loans $ 57,927 $ 73,602 $ 93,880 $ 80,948 $ 79,148
------------------------------------------------------------------------
Total loans and leases $166,979 $208,186 $224,900 $188,783 $159,957
========================================================================
An analysis of maturity and interest rate sensitivity of business loans at the
end of 1999 follows:
Under 1 to 5 Over 5
(Expressed in thousands) 1 Year Years Years Total
- - ----------------------------------------------------------------------------------------------------------------------
Domestic loans:
Real estate construction $ 0 $ 0 $ 108 $ 108
Real estate mortgage 4,402 1,894 2,690 8,986
Commercial, financial
and agricultural 51,770 28,290 11,507 91,567
--------------------------------------------------------
Total business loans (a) $ 56,172 $ 30,184 $ 14,305 $100,661
========================================================
Rate sensitivity:
Predetermined rate $ 3,614 $ 11,437 $ 13,391 $ 28,442
Floating or adjustable rate 52,558 18,747 914 72,219
--------------------------------------------------------
Total domestic business loans $ 56,172 $ 30,184 $ 14,305 $100,661
========================================================
Foreign loans 0 0 0 0
========================================================
(a) does not include nonaccrual loans
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The Company, as part of its philosophy of risk management, has established
various credit policies and procedures intended to minimize the Company's
exposure to undue credit risk. Credit evaluations of borrowers are performed to
ensure that loans are granted on a sound basis. In addition, care is taken to
minimize risk by
21
diversifying specific industry. However, due to the decline in the Bank's
capital level, the Bank has several concentrations of credit which are more
fully described in Footnote 15 of the Company's financial statements beginning
on page F-1. Management continuously monitors credit risk through the periodic
review of individual credits to ensure compliance with policies and procedures.
Adequate collateralization, contractual guarantees, and compensating balances
are also utilized by Management to mitigate risk.
Management determines the appropriate level of the allowance for possible
loan losses by continually evaluating the quality of the loan portfolio. The
reserve is allocated to specific loans that exhibit above average credit loss
potential based upon their payment history and the borrowers' financial
conditions. The adequacy of the allowance for possible loan losses is evaluated
based on an assessment of the losses inherent in the loan portfolio. This
assessment results in an allowance consisting of two components, allocated and
unallocated. The allocations are made for analytical purposes. The total
allowance is available to absorb losses from any segment of the portfolio.
Management maintains a watch list of substandard loans for monthly review.
Although these loans may not be delinquent and may be adequately secured,
management believes that due to location, size, or past payment history, it is
necessary to monitor these loans monthly.
The allowance for possible loan losses totaled $9,702,000, or 5.81% of
total loans and leases at December 31, 1999. At the end of the previous year,
the allowance for possible loan losses was $5,475,000, or 2.63% of total loans
and leases. The provision for loan losses charged to expense during 1999 was
$15,877,000 compared to $12,882,000 in the year ago period.
As previously disclosed, the Bank has taken charge-offs beginning with the
fourth quarter of 1998 due principally to its relationship with Schwartz Homes,
Inc., a retailer of mobile homes based in New Philadelphia, Ohio and retail
customers of Schwartz Homes. The Bank made loans to Schwartz Home's retail
customers under recourse agreements with Schwartz Homes. Under these recourse
agreements, Schwartz Homes agreed to repay any loans not repaid by retail
customers. Schwartz Homes apparently used the funds advanced by the Bank to fund
its own operations or for other improper purposes, without the knowledge of the
Bank's board. In many instances, Schwartz Homes failed to perform on the retail
sales contracts it entered into with its customers even though the Bank had
provided the funds to Schwartz Homes for this purpose. In addition, Schwartz
Homes often failed to repay the floor-plan lenders on homes purchased, which
further impacted the Bank's collateral position with respect to the homes. On
April 26, 1999, Schwartz Homes unexpectedly ceased operations and on June 2,
1999 other creditors of Schwartz Homes placed it in involuntary bankruptcy.
Of the $11.6 million in net charge-offs for the year ended December 31,
1999, $7.5 million were related to Schwartz Homes loans. Of this $7.5 million
amount, $3.4 million in net charge-offs were related to the indirect consumer
loans to Schwartz Homes customers, and $4.1 million in net charge-offs were
related to commercial loans made directly to Schwartz Homes. The following table
depicts the net charge-offs for the Schwartz Homes loans for each quarter of
1999 (net recoveries are expressed parenthetically):
Consumer Commercial
Net Net
(Expressed in thousands) Charge Offs Charge Offs Total
-------------------------------------
1st quarter $ 2,460 $ 1,955 $ 4,415
2nd quarter (53) 696 643
3rd quarter 816 1,766 2,582
4th quarter 156 (248) (92)
Charge-offs during the first quarter of 1999 for the Schwartz consumer and
commercial loan relationship were based on an analysis prepared by the Office of
the Comptroller of the Currency with the assistance of management. Net
charge-offs during the first quarter of 1999 were $2,460,000 for the Schwartz
indirect consumer homebuilder loans and $1,955,000 for the commercial loan
relationship.
During the third quarter of 1999, the Bank released or was in the process
of releasing approximately half of the nearly 300 consumer borrowers from any or
part of their obligation to the Bank. In addition, ongoing work to obtain better
collateral valuations and to determine collateral position was progressing. As a
22
result, $816,000 in net charge-offs on the Schwartz consumer homebuilder loans
were recognized during the third quarter of 1999. Also, the specific allocation
of the loan loss reserve was increased from $2,291,000 at June 30, 1999 to
$3,557,000 at September 30, 1999, principally as a result of this ongoing
analysis. For the reserve allocation, management assumed a more conservative
approach giving a higher probability that the floorplan lenders would receive
funding from the bankruptcy trustee on the consumer closed loans prior to the
Bank due to the increasing complexity of the overall legal issues surrounding
the matter.
The charge-off of $696,000 for the second quarter of 1999 associated with
the Schwartz commercial loans was recorded when the bankruptcy court determined
that the floor plan lenders had perfected first and second lien positions on new
inventory securing the loans.
Charge-offs for the Schwartz commercial loan relationship totaling
$1,766,000 for the third quarter of 1999 occurred when the Bank obtained a
current appraisal on the real estate for Schwartz Homes, Inc. The Bank charged
off a total of $941,000 to reduce the loan balance to 80% of the appraised
value. Also, the bankruptcy court granted one of the floor plan lenders a motion
for relief from the automatic stay to repossess units that were non-consumer
claimed and were not floor planned. The Bank's attorneys also confirmed that the
floor plan lenders had a valid first and second lien position on equipment and
fixtures. As a result, the Bank charged-off an additional $825,000.
The real estate for Schwartz Homes, Inc. was sold during the fourth quarter
of 1999. The sale resulted in a modest recovery.
Charge-offs for the fourth quarter of 1999 included $2,234,000 in loans
related to the amusement industry; $2 million for a manufacturer and $234,000
for an operator in the amusement industry.
There are no indirect lending programs in the current loan portfolio that
are structured in the same manner as the Schwartz homebuilder program. In
addition, management believes that all industry and borrower concentrations have
been adequately identified.
Management's allocation of the allowance for loan losses based on estimates
of incurred loan losses is set forth in the table below:
Allocation of the Allowance for Loan Losses
(Expressed in thousands) 1999 1998 1997 1996 1995
- - ----------------------------------------------------------------------------------------------------------
Domestic:
Commercial, financial and agricultural $ 4,692 $ 2,254 $ 2,564 $ 1,823 $ 1,523
Commercial real estate
1,154 507 313 269 152
Residential mortgage
371 295 358 338 335
Consumer
3,485 2,329 370 313 148
Foreign
- - - - -
Unallocated
-- 90 529 410 545
--------------------------------------------------------
Total $ 9,702 $ 5,475 $ 4,134 $ 3,153 $ 2,703
========================================================
Loans outstanding as a percentage of each loan category are depicted in the
following table:
1999 1998 1997 1996 1995
---------------------------------------------------------
Commercial, financial and agricultural 58.6% 56.5% 47.6% 40.3% 28.7%
Real estate-construction 0.1% 0.1% 0.6% 0.7% 1.0%
Real estate-mortgage 27.8% 27.3% 34.4% 38.0% 43.8%
Commercial real estate 5.5% 7.1% 8.9% 13.7% 18.0%
Installment loans to individuals 6.1% 7.5% 7.1% 4.9% 5.7%
Obligations of political subdivisions in th e 1.9% 1.5% 1.4% 2.4% 2.8%
U.S.
Lease financing 0.0% 0.0% 0.0% 0.0% 0.0%
---------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
=========================================================
23
The following table sets forth the five year historical information on the
allowance for possible loan losses:
(Expressed in thousands) 1999 1998 1997 1996 1995
===================================================================================================================================
Balance as of January 1 $ 5,475 $ 4,134 $ 3,153 $ 2,703 $ 1,537
Provision for loan losses 15,877 12,882 1,055 465 1,150
Loans charged off:
Real estate 151 133 24 30 25
Commercial 8,435 178 23 0 0
Consumer 3,831 11,245 43 32 26
Direct financing leases 0 0 0 0 0
---------------------------------------------------------------------
Total loans charged-off 12,417 11,556 90 62 51
Recoveries of loans previously charged-off:
Real estate 282 11 2 2 3
Commercial 73 1 1 0 1
Consumer 412 3 13 45 18
Direct financing leases 0 0 0 0 45
---------------------------------------------------------------------
Total recoveries 767 15 16 47 67
---------------------------------------------------------------------
Net charge-offs (recoveries) 11,650 11,541 74 15 (16)
---------------------------------------------------------------------
Balance at December 31 $ 9,702 $ 5,475 $ 4,134 $ 3,153 $ 2,703
=====================================================================
(Expressed in thousands) 1999 1998 1997 1996 1995
===================================================================================================================================
Loans and leases outstanding
at December 31 $ 166,979 $ 208,186 $ 224,899 $ 188,783 $ 159,957
Allowance as a percent of loans
and leases outstanding 5.81% 2.63% 1.84% 1.67% 1.69%
Average loans and leases $ 193,295 $ 222,961 $ 208,265 $ 174,445 $ 152,502
Net charge-offs as a percent of
average loans and leases 6.03% 5.18% 0.04% 0.01% -0.01%
The following schedule shows the five year history of non-performing
assets.
Non-performing assets
(Expressed in thousands) 1999 1998 1997 1996 1995
===================================================================================================================================
Nonaccrual loans and leases $ 13,769 $ 8,569 $ 1,515 $ 143 $ 162
Loans 90 days or more past due
but accruing interest 541 4 44 74 14
Other real estate owned -- -- 20 66 579
---------------------------------------------------------------------
Total $ 14,310 $ 8,573 $ 1,579 $ 283 $ 755
=====================================================================
Restructured loans in compliance with modified terms totaled $1,046,000 at
December 31, 1999 and $1,633,000 at December 31, 1998.
In addition to the above schedule of non-performing assets, Management
prepares a watch list consisting of loans which management has determined
require closer monitoring to further protect the Company against loss. The
balance of loans classified by management as substandard due to delinquency and
a change in financial position at the end of 1999 and not included in the table
above was $19,246,000.
DEPOSITS
Primarily, core deposits are used to fund interest-earning assets. The
Company has a lower volume of interest-free checking accounts than its national
peer group which is typical for its market area. This results in an
24
overall higher cost of funds than national peer average. The accompanying tables
show the relative composition of the Company's average deposits and the change
in average deposit sources during the last three years:
(Expressed in thousands)
AVERAGE DEPOSITS 1999 1998 1997
=====================================================================================================
Demand $ 28,865 $ 29,910 $ 29,878
Interest bearing checking 40,649 45,864 43,476
Savings 82,919 82,196 78,636
Other time 106,599 107,398 101,405
Certificates-$100,000 and over 26,820 27,087 13,899
--------------------------------------------------------
Total average deposits $ 285,852 $ 292,455 $ 267,294
========================================================
DISTRIBUTION OF AVERAGE
DEPOSITS 1998 1998 1997
---------------------------------------------------------
Demand 10.10% 10.23% 11.18%
Interest bearing checking 14.22% 15.68% 16.27%
Savings 29.01% 28.11% 29.42%
Other time 37.29% 36.72% 37.94%
Certificates-$100,000 and over 9.38% 9.26% 5.20%
--------------------------------------------------------
Total 100.00% 100.00% 100.00%
========================================================
CHANGE IN AVERAGE 1998 1997 1996
DEPOSIT SOURCES to 1999 to 1998 To 1997
=====================================================================================================
Demand ($ 1,045) $ 32 $ 2,000
Interest bearing checking (5,215) 2,388 4,900
Savings 723 3,560 (705)
Other time (799) 5,993 1,756
Certificates-$100,000 and over (267) 13,188 1,891
--------------------------------------------------------
Total ($ 6,603) $ 25,161 $ 9,842
========================================================
BORROWINGS
Other sources of funds for the Company include short-term repurchase
agreements and Federal Home Loan Bank borrowings.
LIQUIDITY AND CAPITAL RESOURCES
The Company meets its liability-based needs through the operation of the
Bank's branch banking network that gathers demand and retail time deposits. The
Bank also acquires funds through repurchase agreements and overnight federal
funds that provide additional sources of liquidity. Total deposits decreased by
$48.9 million, or 16.1%, from the end of 1998 to 1999. Approximately $11 million
of this decline can be attributed to a reduction in account balances for a
single public depository. In addition, in January 1999, deposits of the Jewett,
Ohio branch office totaling $10.3 million were sold. Average deposits decreased
$6.6 million, or 2.3%, during 1999 compared to 1998. During 1999, the Bank did
not aggressively price deposits in an effort to reduce the size of the Bank to
assist in capital planning.
The Bank also has lines of credit with various correspondent banks totaling
$5,100,000 which may be used as an alternative funding source; none of these
lines were drawn upon at December 31, 1999. In addition, the Bank has a
repurchase agreement based line of credit with the Federal Home Loan Bank of
Cincinnati for $30 million; at December 31, 1999, the outstanding balance of
this line was $15 million. In February 2000, the Federal Home Loan Bank reduced
the maximum amount the Bank could borrow on the line to $20 million with an
additional line of $2 million on a temporary basis not to exceed three
consecutive days. All borrowings at the Federal Home Loan Bank are subject to
eligible collateral requirements.
25
Liquidity may be impacted by the ability of the Company to generate
earnings in the future and to raise additional capital as discussed below.
At December 31, 1999, shareholders' equity was $11,231,000 compared to
$25,364,000 at December 31, 1998, a decrease of $14,133,000. The decrease in
capital during 1999 was due to the losses incurred by the Company as previously
described. In addition, the market value of securities available for sale, net
of tax, declined by approximately $4.4 million from the year ago period due
principally to the increase in interest rates during 1999.
The Federal Reserve Board has adopted risk-based capital guidelines that
assign risk weightings to assets and off-balance sheet items. The guidelines
also define and set minimum capital requirements (risk-based capital ratios).
Bank holding companies are required to have core capital (Tier 1) of at least
4.0% of risk-weighted assets and total capital of 8.0% of risk-weighted assets.
Tier 1 capital consists principally of shareholders' equity less goodwill, and a
portion of deferred tax assets. Total capital consists of Tier I capital, plus
certain debt instruments and a portion of the reserve for loan losses.
The following table shows several capital and liquidity ratios for the
Company for the last two years:
December 31 1999 1998
- - --------------------------------------------------------------------
Average shareholders' equity to :
Average assets 4.9% 8.1%
Average deposits 6.8% 11.4%
Average loans and leases 10.0% 14.9%
Primary capital 6.6% 7.0%
Risk-based capital ratio:
Tier 1 5.6% 9.5%
Total 6.9% 10.8%
Leverage ratio 3.5% 5.9%
The Bank's capital ratios are detailed in Footnote 20 of the Notes to the
Consolidated Statements in the Company's financial statements beginning on page
F-1.
As previously described under Item 1, "Business-Consent Order and Federal
Reserve Bank Agreement," and Regulation", the Company has entered into an
agreement with the Federal Reserve Bank and the Office of the Comptroller of the
Currency to restore the Bank's capital by March 31, 2000 and thereafter maintain
a Tier 1 leverage ratio of at least 6.0%. As part of the plan to improve its
capital ratios, management has reduced the assets of the Bank and has offered
stock for sale through a shareholders' rights offering and simultaneous
ancillary offering to other interested investors. Both offerings are scheduled
to terminate April 14, 2000, subject to potential extension of the ancillary
offering to May 12, 2000.
The Comptroller of the Currency has required the Bank to limit the amount
of deferred tax assets that the Bank includes in Tier 1 capital. As a result of
this limitation and the loss incurred for the fourth quarter of 1999, the Bank's
Tier 1 capital at December 31, 1999 was $9.1 million and its Tier 1 leverage
ratio was 2.8%. At this level of capitalization, the Bank is currently regarded
as "significantly undercapitalized" under regulatory Prompt Corrective Action
requirements.
The Bank was unable to achieve the Tier 1 capital level by March 31, 2000
as required under the terms of the consent order. In an effort to satisfy this
requirement, in February 2000, the Company commenced a rights offering and a
simultaneous ancillary offering of its common stock to existing stockholders and
others to raise up to $10 million. The Company did not conclude the offerings as
originally anticipated on March 28, 2000 but extended the offerings until April
14, 2000, and intends to continue the ancillary offering upon the filing and
effectiveness of a post-effective amendment to its registration statement. To
date the Company has received subscriptions to purchase approximately 1,900,000
shares of its Common Stock at $2.00 per share ($3.8 million in the aggregate).
The subscription proceeds are to be released to the Company on or about April
17, 2000. There can be no assurance that the SEC will declare effective an
amendment to the Company's registration statement to permit a continuation of
the ancillary offering, or, if it does, that the Company will raise the capital
required during the period in which such offering is continued to enable the
Bank to achieve the specified Tier 1 capital level.
In order to achieve a Tier 1 leverage ratio of 6%, the Bank will need
approximately $5.2 million in additional capital after taking into account the
subscriptions for $3.8 million received to date in the offering and $1.65
million invested by the directors prior to the offering. At March 31, 2000, the
Bank's unaudited Tier 1 leverage ratio was 3.1%. At April 13, 2000, its
estimated Tier 1 leverage ratio, including the proceeds from the offering, was
4.3%. While this does not meet the 6% Tier 1 leverage ratio required under the
consent order, the ratio achieved would satisfy the 4% adequately capitalized
required under regulatory Prompt Corrective Action (if determined independently
of the consent order).
On March 30, 2000, the Bank advised the Comptroller of the Currency that it
would not achieve the specified Tier 1 capital level by March 31, 2000 and
submitted a revised capital restoration plan which sets forth other means to
achieve the objectives, including by seeking to raise additional capital though
an extension of the offering or by selling additional assets or deposits. To
date, the Comptroller of the Currency has not taken action on the capital
restoration plan submitted.
26
If Belmont does not raise sufficient capital, the Comptroller of the
Currency could take various actions or mandate that the Bank take specified
actions, including the following:
1. It could continue to monitor the Bank's operations as it is
currently doing and allow the Bank more time to improve its
capital position.
2. It could assume a more active supervisory role and require the
Bank to implement changes in its business model or management.
3. It could assume complete control of the management of the Bank
and seek to identify a strategic buyer to purchase its assets or
liquidate its assets.
The Federal Reserve Bank of Cleveland could take similar actions under its
agreement with Belmont. If the Comptroller of the Currency and Federal Reserve
Bank of Cleveland assume complete or significantly greater control of the Bank's
or Belmont's operations or mandate a sale of all of their assets, it is likely
that such actions could have an adverse effect on the value of Belmont's shares.
See Notes 2 and 20 to the Company's consolidated financial statements.
DIVIDENDS
The following table presents dividend payout ratios for the past three
years:
1999 1998 1997
--------------------------
Total dividends declared
as a percentage of net income N/A N/A 27.17%
Common dividends declared
as a percentage of earnings per
common share N/A N/A 27.20%
Cash dividends were declared and paid in the amount of $0.12 per share in 1999
prior to the Company's determination that it would not realize positive earnings
for the year. Dividends of $0.385 per share were paid in 1998. Future dividends
will require approval of the Company's regulators.
The subsidiary Bank is the primary source of funds to pay dividends to the
shareholders of Belmont . The approval of the Comptroller of the Currency will
be required for future dividends from the Bank to Belmont because previously
paid dividends have exceeded the total of the Bank's retained net profits for
the current and preceding two years. The Board of Governors of the Federal
Reserve Bank has issued a policy statement stating that a bank holding company
generally should not maintain its existing rate of cash dividends on common
stock unless (1) the organization's net income available to common shareholders
over the past year has been sufficient to fully fund the dividends and (2) the
prospective rate of earnings retention appears consistent with the
organization's capital needs, asset quality, and overall financial condition.
Belmont has ceased payment of a cash dividend until the it achieves a certain
level of profitability and capital.
YEAR 2000
As described in the Company's annual report on Form 10-K/A for the year
ended December 31, 1998 and its quarterly reports on Form 10-Q or 10-Q/A for the
quarters ended March 31, 1999, June 30, 1999 and September 30, 1999, during
1999, Belmont examined its operating systems for Year 2000 compliance. Since
entering the year 2000, Belmont has not experienced any significant disruptions
to its business by reason of any Year 2000 problems. Belmont will continue to
monitor its critical systems over the next several months, but does not
anticipate any significant Year 2000 impact on its business. Belmont did not
incur significant incremental costs in seeking to become Year 2000 compliant.
27
RECENT ACCOUNTING PRONOUNCEMENTS
Currently, there are no recent accounting pronouncements that, if adopted,
would have a material effect on the Company's financial position.
FORWARD-LOOKING STATEMENTS
Various statements made in Item 1 and elsewhere in this Report concerning
the manner in which the Company intends to conduct its future operations, and
potential trends that may impact future results of operations, are
forward-looking statements. The Company may be unable to realize its plans and
objectives due to various important factors, including, but not limited to, the
following factors:
o the Company's inability to raise or maintain adequate levels of
capital, as required by the Office of the Comptroller of the
Currency or the Federal Reserve Bank of Cleveland.
o the Company's need to further reduce its total assets through the
sale of assets and the repayment of funding sources, which could
impair its ability to generate earnings in future periods.
o the Company's need to recognize loan losses or create additional
loan loss reserves due to additional problem loans.
o unforeseen adverse conditions in the Company's borrowers'
businesses or financial condition.
o changes in general economic and business conditions and in the
banking industry in particular.
o changes in banking regulations.
o other factors discussed under "Risk Factors" in Amendment No. 4
to the Company's Registration Statement on Form S-2, as amended,
filed on February 4, 2000 (Registration No. 333-91035). This
disclosure may be accessed through the Website maintained by the
SEC at "http://www.sec.gov" or, upon request made to Shareholder
Relations, Belmont National Bank, at 980 National Road, Wheeling,
WV 26003, telephone (304) 233-1206, the Company will provide a
copy of this disclosure without charge.
ITEM 7A-QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in the fair
value of financial instruments due to changes in interest rates, exchange rates
and equity prices. The Company's market risk is composed primarily of interest
rate risk. Interest rate risk results from timing differences in the repricing
of assets, liabilities and off-balance sheet instruments, changes in
relationships between rate indices and the potential exercise of explicit or
embedded options. The Asset/Liability Management Committee ("ALCO") meets
regularly to review the interest rate sensitivity position of the Company and to
monitor and limit exposure to interest rate risk. The goal of asset/liability
management is to maximize net interest income and the net value of the Company's
future cash flows within the interest rate risk limits established by the Board
of Directors.
Interest rate risk is monitored primarily through the use of two
complementary measures: earnings simulation modeling and net present value
estimation. While each of these interest rate risk measurements has limitations,
taken together they represent a reasonably comprehensive view of the magnitude
of interest rate risk in the Company. The key assumptions underlying these
measures are periodically reviewed by ALCO.
28
Based on the earnings simulation model at December 31, 1999, changes in net
interest income were projected as follows given a parallel shift in the yield
curve:
Change in % Change
Net Interest in Net Interest
(Expressed in thousands) Income Income
- - ------------------------------------------------------------
Down 200 basis points $(173) -1.9%
Down 100 basis points 7 0.1%
Up 100 basis points (70) -0.8%
Up 200 basis points (153) -1.7%
The change in the estimated present value of equity as a percentage of the
total market value of equity was 22.0% given a 200 basis point increase in
interest rates.
ITEM 8 - FINANCIAL STATEMENTS & SUPPLEMENTARY DATA
The financial statements and schedules are set forth beginning on page F-1.
On October 18, 1999, the Company filed a current report on Form 8-K to
disclose its dismissal of S.R. Snodgrass A.C. as its independent auditors. and
it appointment of Crowe Chizek and Company LLP to serve as its new independent
auditors. On October 20, 1999, the Company filed an amendment to this report to
disclose that S.R. Snodgrass A.C. had advised the Company that it agreed with
the Company's disclosure in such 8-K concerning the dismissal of S.R. Snodgrass
A.C.
ITEM 9 - CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON FINANCIAL DISCLOSURE
On October 18, 1999, the Company filed a current report on Form 8-K to
disclose its dismissal of S.R. Snodgrass A.C. as its independent auditors and
its appointment of Crowe Chizek and Company LLP to serve as its new independent
auditors. On October 20, 1999, the Company filed an amendment to this report to
disclose that S.R. Snodgrass A.C. had advised the Company that it agreed with
the Company's disclosure in such 8-K concerning the dismissal of S.R. Snodgrass
A.C.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Executive Officers, Key Employees and Directors
The following table sets forth certain information concerning each
individual who currently serves as an executive officer, key employee or
director of the Company, including such person's business experience during at
least the past five years, positions held with the Company and certain
directorships held by such person. Each director holds office for a staggered,
three-year term and until his successor has been duly elected and qualified. All
directors are currently directors of the Company and its principal subsidiary,
Belmont National Bank. Executive officers are appointed by the Board of
Directors and serve at the pleasure of the Board. There are no family
relationships among the executive officers and/or directors, nor are there any
arrangements or understandings between any director or officer and another
person pursuant to which he was selected as a director or officer except as may
be hereinafter described.
Name Age Position
Directors
W. Quay Mull, II 57 Chairman of the Board
Wilbur R. Roat 52 President, Chief Executive Officer and
Director
J. Vincent Ciroli, Jr. 54 Director
John H. Goodman, II 55 Director
Mary L. Holloway Haning 44 Director
Charles J. Kaiser, Jr. 50 Director
Terrence A. Lee 50 Director
Dana J. Lewis 56 Director
James R. Miller 57 Director
Thomas P. Olszowy 53 Director
Keith A. Sommer 59 Director
Charles A. Wilson, Jr. 57 Director
29
Other Executive Officers
Jane R. Marsh 38 Senior Vice President, Controller and
Cashier
Stephen K. Kilpatick 41 Senior Vice President and Senior Lending
Officer, Belmont National Bank
Directors
W. Quay Mull, II has served as Chairman of the Board of Directors of the
Company and the Bank since 1998 and was first elected to its Board of Directors
in 1984. Mr. Mull has been employed at a management company, Mull Industries,
Inc., since 1964, where he now serves as its Chairman of the Board of Directors.
Wilbur R. Roat has served as a director and the President and Chief
Executive Officer of the Company and the Bank since December 1999. Prior to
accepting this appointment, Mr. Roat served as the president and chief executive
officer of First Lehigh Bank from September 1994 until February 1999. From March
1992 to September 1994, Mr. Roat served as the president and chief executive
officer of St. Edmond's Savings and Loan.
J. Vincent Ciroli, Jr. has served as a director of the Company since 1984.
From 1984 until his resignation in July 1999, he served as a director of the
Bank. Mr. Ciroli also served as the President and Chief Executive Officer of the
Company from 1984 until June 1999 and served as President and Chief Executive
Officer of the Bank from 1986 until June 1999.
John H. Goodman, II has served as a member of the Board of Directors of the
Company and the Bank since 1974. Since 1969, he also has served as the president
of Goodman Group, Inc. Mr. Goodman has been the owner of Harvey Goodman Realtor
since 1975.
Mary L. Holloway Haning has served as a member of the Board of Directors of
the Company and the Bank since 1993. Since September 1996, she has been a
teacher at Mount de Chantal School. From September 1995 to September 1996, Ms.
Haning was the special projects coordinator at Plastic Surgery, Inc. From 1987
until 1995, Ms. Haning held the position of Director of Admissions at Wheeling
Country Day School.
Charles J. Kaiser, Jr. has served as a member of the Board of Directors of
the Company and the Bank since 1979. Mr. Kaiser has been an attorney at the law
firm, Phillips, Gardill, Kaiser & Altmeyer since 1979, where he is now a
partner.
Terrence A. Lee has served as a member of the Board of Directors of the
Company and the Bank since 1987. He also has been the owner of the accounting
firm, Lee & Associates, since January 1996. Mr. Lee previously was a partner in
the accounting firm, Lee, O'Connor & Associates, in 1995. From 1989 until 1995,
Mr. Lee was the owner of the accounting firm, Lee & Associates.
Dana J. Lewis has served as a member of the Board of Directors of the
Company and the Bank since 1994. Mr. Lewis has served as the President of Zanco
Enterprises, Inc., an owner and operator of McDonald's restaurants, since 1977.
James R. Miller has served as a member of the Board of Directors of the
Company and the Bank since 1995. He also has served as the president and chief
executive officer of Howden Buffalo, Inc. since November 1998. From April 1992
until November 1998, Mr. Miller was the president of New Philadelphia Fan Co., a
subsidiary of Howden Buffalo, Inc.
Thomas P. Olszowy has served as a member of the Board of Directors of the
Company and the Bank since 1993. Mr. Olszowy is an independent insurance agent
and has owned the Tom Olszowy Insurance Agency since 1976.
Keith A. Sommer has served as a member of the Board of Directors of the
Company and the Bank since 1995. He also is president of the law firm, Sommer &
Liberati Co., LPA. Mr. Sommer has been an attorney at Sommer & Liberati Co., LPA
since 1968.
30
Charles A. Wilson, Jr. has served as a member of the Board of Directors of
the Company and the Bank since 1973. He currently is an Ohio State
Representative. Mr. Wilson has been the president and owner of Wilson Funeral &
Furniture Co., Inc. since 1967.
John A. Belot, who served as a director of the Company and the Bank
throughout 1999, resigned from the Board in March 2000.
Other Executive Officers
Jane R. Marsh has held various responsible accounting positions with the
Bank and the Company since 1987, most recently as the Senior Vice President,
Controller and Cashier.
Stephen K. Kilpatrick joined the Bank in March 1999 and was subsequently
appointed Senior Vice President and Senior Lending Officer. From 1994 until
joining the Bank, Mr. Kilpatrick served as Vice President of Commercial Lending
at the First National Bank of Zanesville.
ITEM 11. EXECUTIVE COMPENSATION
Summary of Executive Officer Compensation
The following table shows all compensation paid by the Company and its
subsidiaries for the fiscal years ended December 31, 1999, 1998 and 1997 to each
person who has served as the chief executive officer of the Company at any time
since the beginning of the last completed fiscal year and to the Company's most
highly compensated executive officers who served as executive officers during
the last fiscal year, whose income exceeded $100,000 (the "Named Executive
Officers"). No other executive officers of the Company received compensation in
excess of $100,000 in 1999.
Summary Compensation Table
Annual Compensation All Other
------------------- ------------
Name and Principal Position Year Salary ($) Bonus ($) Compensation
--------------------------- ---- ---------- --------- ------------
J. Vincent Ciroli, Jr., formerly President & Chief 1999 82,357 21,735 3,845
Executive Officer
1998 161,000 48,300(1) 23,199
1997 152,000 57,200(1) 15,708
W. Quay Mull, II, formerly Interim Chief Executive 1999 0(2) 0 0
Officer
1998 -- -- --
1997 -- -- --
Wilbur R. Roat, President and Chief Executive 1999 6,154
Officer
1998 -- -- --
1997 -- -- --
1. These bonuses include amounts credited to the Company's deferred
compensation plan (described below under "Other Compensation Plans and
Arrangements").
2. Mr. Mull served as Interim Chief Executive Officer without compensation.
Other Compensation Plans and Arrangements
Annual Bonus Incentives for executive officers are intended to reflect the
Company's belief that management's contribution to corporate performance comes,
in part, from maximizing the Company's return on common shareholders' equity.
Accordingly, since 1989 the Board of Directors has had in place an Executive
31
Incentive Compensation Plan to provide incentive compensation based upon the
earnings of the Bank. Amounts paid under the Plan are included in the "Bonus"
column in the Summary Compensation Table above. The individuals currently
covered by the Plan are Wilbur R. Roat and Jane R. Marsh.
In 1997, the Compensation Committee retained Bank Compensation Strategies
Group of Dublin, Ohio to advise the Committee and the Board on changes to the
Executive Compensation Plan, which should (1) allow additional senior executives
to be added to the Executive Incentive Compensation Plan without disrupting the
formula; and (ii) require half of each year's bonus to be deferred and held as
phantom stock of the Company, which is hoped will enhance the senior executives'
interest in the long-term appreciation of the Company's stock.
The revised Senior Executive Incentive Plan adopted in 1997 pays an
incentive bonus calculated as a percentage of salary varying between 10% and 80%
when the Company's return on equity exceeds the average return on equity of a
peer group. No award is made unless the Company's return on equity is at least
10% greater than the peer group average. Half of any bonus is paid to the
executive in cash and the other half is credited to a non-qualified deferred
compensation plan. This portion of the bonus is determined based on the
appreciation or depreciation of the Company's common stock. Upon termination of
employment for reasons of death, disability, retirement or any other reason, the
executive will be paid his benefit in cash over a period of years. The Committee
believes that the program, as revised, provides an appropriate link between the
Company's short-term performance and long-term performance (as measured by the
appreciation of its stock) and the incentives paid to the executive officers.
The return on equity goal is established by the Committee annually.
Other compensation is provided so that the Company's overall benefits are
comparable with other similar organizations so as to attract and retain
competent management.
The Bank has a Defined Contributed 401(k) Savings Plan, which allows
employees who work over 1,000 hours per year to defer up to 10% of their pre-tax
salary to the Plan. The Bank matches fifty percent (50%) of the first four
percent (4%) deferred. The Bank may also make voluntary contributions to the
Plan. In 1999, the Bank paid $39,925 in matching funds and no voluntary
contribution was made. In 1999, the matching funds contribution for Mr. Ciroli
was $1,647.
No options were awarded to any of the Named Executive Officers in 1999.
None of the Named Executive Officers currently hold any stock options. However,
the Company entered into an employment agreement with Wilbur R. Roat in December
1999, under which the Company agreed to grant to Mr. Roat options to purchase
between 50,000 and 75,000 shares of Common Stock under the Belmont Bancorp. 1999
Stock Option Plan for Wilbur Roat proposed to be adopted by the Board.
Employment Contracts
The Bank and Belmont entered into an employment agreement with Mr. Roat in
December 1999 which provides for his engagement as the president and chief
executive officer for a term of three years, subject to renewal, at an annual
base salary of $160,000. The agreement contemplates that a bonus of from $20,000
to $25,000 will be paid in 2001 if Mr. Roat is successful in improving the
Bank's loan portfolio. The parties have also agreed to adopt a mutually
acceptable bonus plan, which provides for the payment of an annual bonus to Mr.
Roat in subsequent years based on specified criteria. The agreement also
provides that options to purchase from between 50,000 and 75,000 shares of
Belmont's common stock will be issued to him at an exercise price equal to the
market price of Belmont's stock when granted with vesting over a four year
period, subject to acceleration upon a change of control. If, prior to a change
of control, Belmont terminates or fails to renew the agreement without cause,
Mr. Roat will be entitled to continuation of his compensation and benefits for
the remaining term, if any, and for a six month severance period. If Belmont
terminates or fails to renew the agreement without cause within two years
following a change of control or if Mr. Roat voluntarily terminates his
employment within six months following a change of control, he will be entitled
to receive payment of an amount equal to 299% of his annualized base salary and
most recent bonus.
32
Compensation of Directors
Directors who are not employees of the Company or the Bank receive an
annual retainer fee of $3,000.00, payable quarterly in arrears, plus an
attendance fee of $300.00 for each Bank or Committee Meeting attended. During
1999, a total of $58,581.08 was paid to Directors.
Compensation Committee Interlocks and Insider Participation
John H. Goodman, II, Charles J. Kaiser, Jr., Terrence A. Lee, James R.
Miller, W. Quay Mull, II, Thomas P. Olszowy, Keith A. Sommer and Charles A.
Wilson, Jr. serve on the Company's Compensation Committee. There are no
interlocking relationships, as defined in the regulations of the Securities and
Exchange Commission, involving any of these individuals. Mr. Mull serves as the
Company's Chairman.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares and percentage of
Common Stock beneficially owned as of April 14, 2000 by (i) each person who is
known by the Company to own beneficially more than 5% of the shares of Common
Stock, (ii) each director and executive officer of the Company, and (iii) all
directors and executive officers of the Company as a group. The address of each
individual listed below is 154 West Main Street, St. Clairsville, Ohio 43950,
except as otherwise noted. Unless stated otherwise, each person so named
exercises sole voting and investment power as to the shares of Common Stock so
indicated. There were 5,236,534 shares of Common Stock issued and outstanding as
of April 14, 2000.
Security Ownership Table (1)
Name and Address of Beneficial Owner Amount Percent (%)
- - ------------------------------------ ------------
W.Quay Mull, II 244,388(2) 4.5
Terrence A. Lee 29,462(3) *
John H. Goodman, II 269,525(4) 5.0
Keith A. Sommer 74,008(5) 1.4
James R. Miller 16,000(6) *
Mary L. Holloway Haning 8,966(7) *
Charles J. Kaiser, Jr 46,370(8) 2.3
Thomas P. Olszowy 94,057(9) 1.8
Charles A. Wilson, Jr 153,556(10) 2.9
Wilbur R. Roat 15,000 *
J. Vincent Ciroli, Jr 31,980 *
Dana J. Lewis 117,064(11) 2.2
Directors and Named Executives as a Group 1,100,376 21.0
- - ----------
1. The above table assumes conversion of the Company's Series A Preferred
Stock, issued at a price of $100.00 per share, which is currently convertible
into Common Stock at the election of either the Company or the holder based upon
the $2.00 price per share of Common Stock in the rights and ancillary offerings
(at which price 50 shares of Common Stock would be issued for each share of
Series A Preferred Stock upon conversion). On April 13, 2000 the Board adopted a
resolution authorizing and directing the Company to conert the Series A
Preferred Stock into Common Stock. Following is information concerning the
beneficial ownership of the Series A Preferred Stock:
Beneficial Owner Amount Percent (%)
-----------
W. Quay Mull, II 4,200 25.4
Terrence A. Lee 500 3.0
John H. Goodman, II 3,200 19.4
Keith A. Sommer 1,200 7.3
James R. Miller 300 1.8
Mary L. Holloway Haning 100 0.6
Charles J. Kaiser, Jr 2,500 15.2
33
Thomas P. Olszowy 1,000 6.1
Charles A. Wilson, Jr 2,000 12.1
Dana J. Lewis 1,500 9.1
Total: 16,500 100.0
2. This amount includes (i) 20,100 shares held in the name of Mull Machine
Company, of which Mr. Mull is President and in which Mr. Mull holds a
substantial ownership interest; and (ii) 50,000 shares of Common Stock issuable
to Barbara P. Mull and 160,000 shares issuable to Mr. Mull upon conversion of
the Company's currently outstanding Series A Preferred Stock, assuming
conversion at the current conversion rate of $2.00 per share (see Note 1).
3. This amount includes 32 shares each held in the names of: Terrence A. Lee,
Custodian for Katherine M. Lee, UOTMA, Terrence A. Lee, Custodian for Natalie A.
Lee, UOTMA, and Terrence A. Lee, Custodian for Tara N. Lee, UOTMA; Katherine,
Natalie and Tara are Mr. Lee's minor daughters. This amount also includes 25,000
shares of Common Stock issuable to Terrence A. and Cathy C. Lee JTWROS upon
conversion of the Company's currently outstanding Series A Preferred Stock,
assuming conversion at the current conversion rate of $2.00 per share (see Note
1). This amount does not include 52,704 shares held in the name of John H.
Goodman, II and Terrence A. Lee, Trustees for a trust dated February 2, 1991, to
which Mr. Lee disclaims any beneficial interest.
4. This amount includes (i) 7,134 shares held in the name of Marylouise Goodman
IRA and 1,436 shares held in the name of Marylouise Goodman, wife of Mr.
Goodman, to which Mr. Goodman disclaims any beneficial interest; (ii) 1,892
shares held in the name of John H. Goodman, Custodian for Emily Goodman, UOTMA,
Mr. Goodman's minor child; (iii) 52,704 shares held in the name of John H.
Goodman, II and Terrence A. Lee, Trustees under a trust dated February 2, 1991,
to which Mr. Goodman disclaims any beneficial interest; (iv) 7,601 shares held
by J. Harvey Goodman and John H. Goodman, II, Trustees under a trust dated April
26, 1995; and (v) 60,000 shares of Common Stock issuable to Mrs. Goodman and
100,000 shares issuable to the John H. Goodman, II IRA upon conversion of the
Company's currently outstanding Series A Preferred Stock, assuming conversion at
the current conversion rate of $2.00 per share (see Note 1).
5. This amount includes 60,000 shares of Common Stock issuable to Keith A.
Sommer SEP IRA upon conversion of the Company's currently outstanding Series A
Preferred Stock, assuming conversion at the current conversion rate of $2.00 per
share (see Note 1).
6. This amount includes 15,000 shares of Common Stock issuable to James R.
Miller IRA upon conversion of the Company's currently outstanding Series A
Preferred Stock, assuming conversion at the current conversion rate of $2.00 per
share (see Note 1).
7. This amount includes (i) 2,560 shares held for the benefit of Ms. Haning in
trust in which Wesbanco Bank Wheeling is trustee; and (ii) 5,000 shares of
Common Stock issuable to Ms. Haning upon conversion of the Company's currently
outstanding Series A Preferred Stock, assuming conversion at the current
conversion rate of $2.00 per share (see Note 1).
8. This amount includes (i) 180 shares held in the name of Deborah P. Kaiser,
IRA, wife of Mr. Kaiser, to which Mr. Kaiser disclaims any beneficial interest;
(ii) 1,500 shares held in the name of Marchak Investment Co., a partnership, in
which Mr. Kaiser is a general partner and holds a substantial beneficial
interest; and (iii) 20,000 shares of Common Stock issuable to Wesbanco Trust and
Investment Services, Trustee for Phillips, Gardill, Kaiser & Altmeyer P.S. Plan
f/b/o Charles J. Kaiser, Jr. and 105,000 100 shares issuable to Wesbanco Trust
and Investment Services, Custodian for Charles J. Kaiser, Jr. IRA. upon
conversion of the Company's currently outstanding Series A Preferred Stock,
assuming conversion at the current conversion rate of $2.00 per share (see Note
1).
9. This amount includes (i) 30,254 shares held in the names of Tom and Diana
Olszowy joint tenants with right of survivorship in which Mr. Olszowy shares
voting and investment power; (ii) 754 shares held in the name of Tom Olszowy,
custodian for Dana Paul Olszowy; (iii) 2,204 shares held in the name of Tom
Olszowy, custodian for Jonathan T. Olszowy, to which Mr. Olszowy disclaims any
beneficial interest; (iv) 10,845 shares held in the name of Thomas P. Olszowy
SEP IRA; and (v) 14,250 shares issuable to Thomas P. and Diana L. Olszowy JTWROS
and
34
35,750 shares issuable to Thomas P. Olszowy SEP IRA upon conversion of the
Company's currently outstanding Series A Preferred Stock, assuming conversion at
the current conversion rate of $2.00 per share (see Note 1).
10. This amount includes (i) 7,804 shares held in the name of Wilson Funeral and
Furniture Company, of which Mr. Wilson is President, and in which Mr. Wilson
holds a substantial stock interest and has voting power; and (ii) 16,300 shares
issuable to Mr. Wilson and 83,700 shares issuable to Charles A. Wilson, Jr. IRA
upon conversion of the Company's currently outstanding Series A Preferred Stock,
assuming conversion at the current conversion rate of $2.00 per share (see Note
1).
11. This amount includes 36,500 shares issuable to Mr. Lewis and 38,500 shares
issuable to Dana Lewis IRA upon conversion of the Company's currently
outstanding Series A Preferred Stock, assuming conversion at the current
conversion rate of $2.00 per share (see Note 1).
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, certain of its officers and persons who own more than 10% of the
Company's common stock to file reports of ownership and changes in ownership
with the SEC. Such persons are required by SEC regulation to furnish the Company
with copies of all Section 16(a) forms they file.
Based solely on review of the copies of such forms furnished to the
Company, the Company believes that all Section 16(a) filing requirements
applicable to persons who are officers or directors of the Company or holders of
10% of the Company's common stock were complied with in 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain Directors and Executive Officers and their associates were
customers of and had transactions with the Bank in the ordinary course of the
Bank's business during 1998 and 1999. From time to time the law firms of
Phillips, Gardill, Kaiser & Altmeyer, of which Charles J. Kaiser, Jr. is a
partner, Sommer, Liberati & Co., LPA, of which Keith A. Sommer is a partner, and
Doepken Keevican & Weiss Professional Corporation, of which James F. Bauerle is
a member, have rendered legal services to the Company and the Bank. Messrs.
Kaiser and Sommer are directors of both Belmont and the Bank. Mr. Bauerle served
as senior vice president of the Bank from June 1999 to December 1999. It is
contemplated that these firms will be retained to perform additional legal
services during the current year. Mr. Bauerle and David G. Brewick, who served
as interim president of Belmont and the Bank from June 1999 to December 1999,
are principals of FiCap Strategic Partners LLC, which has served as the Bank's
advisor. During 1999, the Company paid advisory fees of $1,127,000 plus expenses
of $90,000 to FiCap. The Company also agreed to grant to FiCap, for its
services, two year options to purchase 50,000 shares of our Common Stock at
$10.84, the average daily price for the Company's shares during June and July
1999. In addition, Doepken Keevican & Weiss received legal fees of $878,000 for
legal services rendered during 1999.
See "Employment Contracts" in Item 11 of this Report for a description of
the employment agreement entered into among the Company, the Bank and Mr. Roat.
35
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements as listed on page F-1.
2. Financial Statement Schedules as listed on page F-1.
3. Exhibits as listed on page E-1.
(b) Reports on Form 8-K.
On October 14, 1999, the Company filed a current report on Form 8-K to
disclose that it had filed a suit in the Court of Common Pleas of
Tuscarawas County, Ohio against Steven D. Schwartz, President of
Schwartz Homes, Inc., and had entered claims against three additional
people, including William Wallace, the Bank's former Executive
Vice-President and Chief Operating Officer.
On October 18, 1999, the Company filed a current report on Form 8-K to
disclose its dismissal of S.R. Snodgrass A.C. as its independent
auditors and its appointment of Crowe Chizek and Company LLP to serve
as its new independent auditors. On October 20, 1999, the Company
filed an amendment to this report to disclose that S.R. Snodgrass A.C.
had advised the Company that it agreed with the Company's disclosure
in such 8-K concerning the dismissal of S.R. Snodgrass A.C.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on April 13, 2000.
By s/ Wilbur R. Roat BELMONT BANCORP.
--------------------------------
President & Chief Executive Officer (Registrant)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the date indicated.
SIGNATURE TITLE DATE
s/W. Quay Mull II Chairman of the Board and Director April 13, 2000
- - ------------------------------------------------------------------------------------------
s/Wilbur R. Roat Director, President & Chief Executive Officer April 13, 2000
- - ------------------------------------------------------------------------------------------
s/Jane R. Marsh Secretary (principal financial and
accounting officer) April 13, 2000
- - ------------------------------------------------------------------------------------------
s/Charles J. Kaiser, Jr. Director April 13, 2000
- - ------------------------------------------------------------------------------------------
s/John H. Goodman, II Director April 13, 2000
- - ------------------------------------------------------------------------------------------
s/James R. Miller Director April 13, 2000
- - ------------------------------------------------------------------------------------------
s/Terrence A. Lee Director April 13, 2000
- - ------------------------------------------------------------------------------------------
s/Thomas P. Olszowy Director April 13, 2000
- - ------------------------------------------------------------------------------------------
s/Keith A. Sommer Director April 13 , 2000
- - ------------------------------------------------------------------------------------------
36
INDEX TO FINANCIAL STATEMENTS
Consolidated Balance Sheets at December 31, 1999 and 1998 F-1
Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997 F-2
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997 F-3
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 F-4
Notes to Financial Statements F-5
Report on Management's Responsibilities F-19
Report of Crowe, Chizek and Company LLP F-20
Report of S.R. Snodgrass A.C. F-21
Belmont Bancorp. and Subsidiaries
Consolidated Balance Sheets
($000's) [LOGO]
================================================================================
December 31,
Assets 1999 1998
-----------------------------
Cash and due from banks $ 15,439 $ 9,439
Federal funds sold 2,025 --
Loans held for sale 1,845 1,734
Trading assets -- 2,281
Securities available for sale (at fair value) 110,692 184,995
Securities held to maturity (fair value $12,814 - 1998) -- 12,516
Loans 165,134 206,452
Less allowance for loan losses (9,702) (5,475)
-----------------------------
Net loans 155,432 200,977
Premises and equipment, net 7,263 7,377
Deferred federal tax assets 8,823 1,887
Cash surrender value of life insurance 4,196 5,635
Federal taxes receivable 5,411 4,533
Accrued income receivable 1,751 2,731
Other assets 2,890 4,178
-----------------------------
Total Assets $ 315,767 $ 438,283
=============================
Liabilities and Shareholders' Equity
Liabilities
Noninterest bearing deposits:
Demand $ 28,685 30,219
Interest bearing deposits:
Demand 28,456 42,437
Savings 77,403 88,265
Time 120,888 143,430
-----------------------------
Total deposits 255,432 304,351
Securities sold under repurchase agreements 6,093 6,239
Federal funds purchased and other short-term borrowings 19,740 3,950
Long-term borrowings 20,000 91,401
Accrued interest on deposits and other borrowings 747 896
Other liabilities 2,524 6,082
-----------------------------
Total liabilities 304,536 412,919
-----------------------------
Shareholders' Equity
Preferred stock - authorized 90,000 shares with
no par value; issued and outstanding, 16,500 shares
of Series A convertible preferred stock at 12/31/99 1,650 --
Common stock - $0.25 par value, 17,800,000 shares authorized,
5,288,326 issued at 12/31/99 and 12/31/98 1,321 1,321
Additional paid-in-capital 7,904 7,854
Treasury stock at cost
(51,792 shares at 12/31/99; 66,174 shares at 12/31/98) (1,170) (1,400)
Retained earnings 7,129 18,788
Accumulated other comprehensive loss (5,603) (1,199)
-----------------------------
Total shareholders' equity 11,231 25,364
-----------------------------
Total liabilities and shareholders' equity $ 315,767 $ 438,283
=============================
The accompanying notes are an integral part of the financial statements.
F-1
Belmont Bancorp. and Subsidiaries
Consolidated Statements of Income
For the Years Ended December 31, 1999, 1998 and 1997 ($000's) [LOGO]
================================================================================
Interest Income 1999 1998 1997
-------------------------------------------------------
Loans:
Taxable $ 16,223 $ 20,923 $ 19,141
Tax-exempt 284 271 334
Securities:
Taxable 6,642 7,720 7,238
Tax-exempt 1,985 1,241 1,284
Dividends 381 336 280
Interest on trading securities 86 68 --
Interest on federal funds sold 269 228 71
-------------------------------------------------------
Total interest income 25,870 30,787 28,348
-------------------------------------------------------
Interest Expense
Deposits 10,894 11,671 10,063
Other borrowings 4,715 4,809 3,941
-------------------------------------------------------
Total interest expense 15,609 16,480 14,004
-------------------------------------------------------
Net interest income 10,261 14,307 14,344
Provision for Loan Losses 15,877 12,882 1,055
-------------------------------------------------------
Net interest income (loss) after
provision for loan losses (5,616) 1,425 13,289
-------------------------------------------------------
Noninterest Income
Trust fees 484 463 466
Service charges on deposits 921 752 707
Other operating income 817 824 746
Trading gains (losses) (10) 62 --
Investment securities gains (losses) (880) 1,338 799
Gain on sale of loans 341 144 91
Gain on sale of real estate -- 383 --
-------------------------------------------------------
Total noninterest income 1,673 3,966 2,809
-------------------------------------------------------
Noninterest Expense
Salary and employee benefits 3,826 4,633 3,948
Net occupancy expense of premises 898 824 783
Equipment expenses 891 933 947
Other operating expenses 7,027 3,106 3,054
-------------------------------------------------------
Total noninterest expense 12,642 9,496 8,732
-------------------------------------------------------
Income (loss) before income taxes (16,585) (4,105) 7,366
Income Taxes (Benefit) (5,554) (2,186) 1,421
-------------------------------------------------------
Net income (loss) $ (11,031) $ (1,919) $ 5,945
=======================================================
Weighted Average Number of Shares Outstanding 5,235,431 5,252,161 5,278,152
=======================================================
Basic Earnings Per Common Share $ (2.11) $ (0.37) $ 1.13
=======================================================
The accompanying notes are an integral part of the financial statements.
F-2
Belmont Bancorp. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
For the Years Ended December 31, 1999, 1998 and 1997 ($000's) [LOGO]
================================================================================
Accumulated
Other
Additional Compre- Compre-
Preferred Common Paid-in- Retained Treasury hensive hensive
Stock Stock Capital Earnings Stock Income Income (Loss)
--------------------------------------------------------------------------------------
Balance, December 31, 1996 $ -- $ 1,057 $ 7,781 $ 18,670 $ (8) $ (168)
Comprehensive income
Net income 5,945 $ 5,945
Other comprehensive income, net of tax
Unrealized loss on securities
net of reclassification 367 367
--------
Comprehensive income $ 6,312
========
Cash dividends declared:
Common stock (per share $.306) (1,615)
Five-for-four stock split effected
in the form of a stock dividend 264 (264)
Cash paid in lieu of fractional
shares on stock split (7)
Purchase of treasury stock (123)
----------------------------------------------------------------------
Balance, December 31, 1997 $ -- $ 1,321 $ 7,781 $ 22,729 $ (131) $ 199
Comprehensive income
Net loss (1,919) $ (1,919)
Other comprehensive income, net of tax
Unrealized loss on securities
net of reclassification (1,398) (1,398)
--------
Comprehensive income (loss) $ (3,317)
========
Cash dividends declared:
Common stock (per share $.385) (2,022)
Purchase of treasury stock (1,308)
Issuance of treasury stock 73 39
----------------------------------------------------------------------
Balance, December 31, 1998 $ -- $ 1,321 $ 7,854 $ 18,788 $ (1,400) $ (1,199)
Comprehensive income
Net loss (11,031) $(11,031)
Other comprehensive income, net of tax
Unrealized loss on securities
net of reclassification
adjustment (See disclosure) (4,404) (4,404)
--------
Comprehensive income (loss) $(15,435)
========
Cash dividends declared:
Common stock ($.12 per share) (628)
Issuance of Series A convertible
preferred stock 1,650
Issuance of treasury stock 50 230
----------------------------------------------------------------------
Balance, December 31, 1999 $ 1,650 $ 1,321 $ 7,904 $ 7,129 $ (1,170) $ (5,603)
======================================================================
The accompanying notes are an integral part of the financial statements.
F-3
Belmont Bancorp. and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1999, 1998 and 1997 ($000's) [LOGO]
================================================================================
1999 1998 1997
---------------------------------------
Operating Activities
Net income (loss) $ (11,031) $ (1,919) $ 5,945
Adjustments to reconcile net income (loss) to net cash flows
provided by (used in) operating activities:
Provision for loan losses 15,877 12,882 1,055
Depreciation and amortization expense 710 743 818
Amortization of investment security premiums 2,419 2,403 1,278
Accretion of investment security discounts (648) (302) (230)
Amortization of intangibles 439 196 415
Investment securities (gains) losses 880 (1,338) (799)
Trading (gains) losses 10 (63) --
Deferred taxes (4,668) 83 (289)
Proceeds from sale of trading securities 13,592 12,893 --
Purchase of securities for trading account (15,516) (14,865) --
Gain on sale of fixed assets -- (384) (1)
Gain on sale of loans (341) (144) (91)
Gain on sale of other real estate owned -- -- (7)
Changes in:
Interest receivable 980 (144) (665)
Interest payable (149) 165 67
Loans held for sale (111) (850) (642)
Others, net (3,478) (1,382) (6,672)
---------------------------------------
Cash from operating activities (1,035) 7,974 182
---------------------------------------
Investing Activities
Proceeds from:
Maturities and calls of securities 6,237 4,370 3,575
Sale of securities available for sale 73,846 87,580 105,407
Principal collected on mortgage-backed securities 40,897 37,964 16,545
Sale of loans 9,008 20,144 13,361
Redemption of life insurance contracts 1,741 -- --
Sales of other real estate owned 155 39 111
Sales of premises and equipment -- 612 20
Purchases of:
Securities available for sale (39,289) (193,441) (164,305)
Loans -- -- (9,124)
Life insurance contracts (81) (413) (2,365)
Premises and equipment (596) (947) (979)
Changes in:
Federal funds sold (2,025) -- 24,450
Loans, net 20,516 (13,998) (39,755)
---------------------------------------
Cash from investing activities 110,409 (58,090) (53,059)
---------------------------------------
Financing Activities
Proceeds from:
Advances of long-term debt -- 35,000 52,950
Issuance of preferred stock 1,650 -- --
Issuance of treasury stock 280 112 --
Payments on long-term debt (71,401) (13,233) (2,991)
Dividends paid on common stock (628) (2,022) (1,622)
Purchase of treasury stock -- (1,308) (123)
Sale of branch deposits (10,311) -- --
Changes in:
Deposits (38,608) 40,443 2,369
Repurchase agreements (146) 983 (3,024)
Short-term borrowings 15,790 (10,685) 4,635
---------------------------------------
Cash from financing activities (103,374) 49,290 52,194
---------------------------------------
Increase (Decrease) in Cash and Cash Equivalents 6,000 (826) (683)
Cash and Cash Equivalents, Beginning of Year 9,439 10,265 10,948
Cash and Cash Equivalents, End of Year $ 15,439 $ 9,439 $ 10,265
=======================================
The accompanying notes are an integral part of the financial statements.
F-4
Belmont Bancorp. and Subsidiaries
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 1999, 1998 and 1997 [LOGO]
================================================================================
1. Summary of Significant Accounting Policies
The accounting and reporting policies and practices of Belmont Bancorp. (the
"Company") and its subsidiaries are in accordance with generally accepted
accounting principles and conform to general practices within the banking
industry. The more significant of these policies and practices are summarized
below.
Nature of Operations: Belmont Bancorp. provides a variety of banking services to
individuals and businesses through the branch network of its wholly-owned
subsidiary, Belmont National Bank (BNB). BNB operates twelve full-service
banking facilities located in Belmont, Harrison, and Tuscarawas Counties in
Ohio, and Wheeling, West Virginia.
Principles of Consolidation: The consolidated financial statements include the
accounts of Belmont Bancorp. and its wholly-owned subsidiaries, Belmont National
Bank and Belmont Financial Network, Inc. Material intercompany accounts and
transactions have been eliminated.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Estimates
particularly subject to change would include the allowance for loan losses,
deferred taxes, fair values of financial instruments, and loss contingencies.
Held to Maturity Securities: These securities are purchased with the original
intent to hold to maturity. Events which may be reasonably anticipated are
considered when determining the Company's intent and ability to hold to
maturity. Securities meeting such criteria at date of purchase and as of the
balance sheet date are carried at cost, adjusted for amortization of premiums
and accretion of discounts.
Available for Sale Securities: Debt and equity securities to be held for
indefinite periods of time and not intended to be held to maturity are
classified as available for sale and carried at fair value with net unrealized
gains and losses, net of tax, reflected as a component of other comprehensive
income until realized. Securities held for indefinite periods of time include
securities that may be sold to meet liquidity needs or in response to
significant changes in interest rates or prepayment risks as part of the
Company's overall asset/liability management strategy.
Trading Securities: Trading securities are held for resale within a short period
of time and are stated at fair value. Trading gains and losses include the net
realized gain or loss and market value adjustments of the trading account
portfolio.
The Financial Accounting Standards Board (FASB) issued the Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities in June 1998. The Company adopted SFAS No.
133 as of April 1, 1999. As permitted in SFAS No. 133, on April 1 1999, the
Company transferred securities with an amortized cost of $11,861,000 and a fair
value of $12,085,000 from the Held to Maturity portfolio to the Available for
Sale portfolio. The Company does not have any derivative instruments nor does
the Company have any hedging activities.
Loans Held for Sale: Residential mortgage loans which management does not intend
to hold to maturity or for which sales are pending are reported as loans held
for sale. Such loans are carried at the lower of aggregate cost or market.
Income Recognition: Income earned by the Company and its subsidiaries is
recognized principally on the accrual basis of accounting. Certain fees,
principally service, are recognized as income when billed. The subsidiary bank
suspends the accrual of interest on loans when, in management's opinion, the
collection of all or a portion of interest has become doubtful. Generally, when
a loan is placed on nonaccrual, the Bank charges all previously accrued and
unpaid interest against income. In future periods, interest will be included in
income to the extent received only if complete principal recovery is reasonably
assured.
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 114 and No. 118, "Accounting for Creditors for Impairment of a
Loan." It is the Company's policy not to recognize interest income on specific
impaired loans unless the likelihood of future loss is remote. Interest payments
received on such loans are applied as a reduction of the loan principal balance.
The Company defers and amortizes loan fees and related origination costs. These
fees and costs are amortized into interest or other income over the estimated
life of the loan using a method which approximates the interest method.
For securities, interest income includes amortization of purchase premium or
discount. Gains and losses on sales are based on the amortized cost of the
security sold. Securities are written down to fair value when a decline in fair
value is not temporary.
Allowance For Loan Losses: The allowance for loan losses is maintained at a
level which, in management's judgment, is adequate to absorb credit losses
inherent in the loan portfolio. The amount of the allowance is based on
management's evaluation of the collectibility of the loan portfolio, including
the nature of the portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans, and economic conditions. Allowances for
impaired loans are generally determined based on collateral values or the
present value of estimated cash flows.
F-5
Belmont Bancorp. and Subsidiaries
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 1999, 1998 and 1997 [LOGO]
================================================================================
1. Summary of Significant Accounting Policies (continued)
A loan is impaired when, based on current information and events, it is probable
that all scheduled payments of principal and interest will not be collected.
Factors in determining impairment include payment status, collateral value, and
the probability of collecting scheduled payments. Insignificant payment delays
and payment shortfalls generally do not result in impairment. Impairment for
individual commercial and construction loans is measured by either the present
value of expected future cash flows discounted at the loan's effective rate or
the fair value of the collateral if repayment is expected solely from the
collateral. Large groups of smaller balance homogeneous loans, such as
residential mortgage, credit card, and consumer loans, are collectively
evaluated for impairment.
The allowance is increased by a provision for loan losses, which is charged to
expense and reduced by charge-offs, net of recoveries. Changes in the allowance
relating to impaired loans are charged or credited to the provision for loan
losses. Because of uncertainties inherent in the estimation process,
management's estimate of credit losses inherent in the loan portfolio and the
related allowance may change in the near term.
Premises and Equipment: Premises and equipment are stated at cost, less
accumulated depreciation and amortization. Provisions for depreciation and
amortization are computed generally using the straight line method over the
estimated useful lives of the assets. Leasehold improvements are amortized on
the straight line basis over the lease period.
When units of property are disposed of, the premises and equipment accounts are
relieved of the cost and the accumulated depreciation related to such units. Any
resulting gains or losses are credited to or charged against income. Costs of
repairs and maintenance are charged to expense as incurred. Major renewals and
betterments are capitalized at cost.
Foreclosed Assets: Assets acquired through or instead of loan foreclosure are
initially recorded at fair value when acquired, establishing a new cost basis.
If fair value declines, a valuation allowance is recorded through expense. Costs
after acquisition are expensed.
Servicing Rights: Servicing rights are recognized as assets for purchased rights
and for the allocated value of retained servicing rights on loans sold.
Servicing rights are expensed in proportion to, and over the period of,
estimated net servicing revenues. Impairment is evaluated based on the fair
value of the rights, using groupings of the underlying loans as to interest
rates and then, secondarily, as to geographic and prepayment characteristics.
Fair value is determined using prices for similar assets with similar
characteristics, when available, or based upon discounted cash flows using
market-based assumptions. Any impairment of a grouping is reported as a
valuation allowance.
Long-term Assets: Premises and equipment and other long-term assets are reviewed
for impairment when events indicate their carrying amount may not be recoverable
from future undiscounted cash flows. If impaired, the assets are recorded at
discounted amounts.
Repurchase Agreements: Substantially all repurchase agreement liabilities
represent amounts advanced by various customers. Securities are pledged to cover
these liabilities, which are not covered by federal deposit insurance.
Benefit Plans: Profit-sharing and 401k plan expense is the amount contributed
determined by formula and by board decision. Deferred compensation plan expense
allocates the benefits over years of service.
Income Taxes: Income tax expense is the total of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax amounts for the temporary
differences between carrying amounts and tax bases of assets and liabilities,
computed using enacted tax rates. A valuation allowance, if needed, reduces
deferred tax assets to the amount expected to be realized.
Financial Instruments: Financial instruments include off-balance sheet credit
instruments, such as commitments to make loans and standby letters of credit,
issued to meet customer financing needs. The face amount for these items
represents the exposure to loss, before considering customer collateral or
ability to repay. Such financial instruments are recorded when they are funded.
Loss Contingencies: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated.
Dividend Restriction: Banking regulations require maintaining certain capital
levels and may limit the dividends paid by the Bank to the holding company or by
the holding company to shareholders. Neither the Company nor the Bank can
currently pay dividends without regulatory approval. See notes 16 and 20.
Fair Value of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed in a separate note. Fair value estimates involve uncertainties and
matters of significant judgement regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates.
Business Segments: Internal financial information is primarily reported and
aggregated in the banking line of business.
F-6
Belmont Bancorp. and Subsidiaries
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 1999, 1998 and 1997 [LOGO]
================================================================================
1. Summary of Significant Accounting Policies (continued)
Earnings Per Common Share: Earnings per common share are calculated based on net
income after preferred dividend requirements and the weighted average number of
shares of common stock outstanding during the year. The Company's preferred
stock was not dilutive for 1999 but could qualify as dilutive in future periods.
Excess of Cost Over Net Assets Acquired: In 1999, the Company wrote off the
remaining balance of intangible assets associated with branches purchased in
1991 and 1992 due to the sale of one of the branches and an evaluation of the
Bank's position within the marketplace for the remaining branches. Amortization
charged to expense was $439,000 in the period ended December 31, 1999, $196,000
in the period ended December 31, 1998, and $415,000 for the period ended
December 31, 1997.
Reclassifications: Certain prior year amounts have been reclassified to conform
with current year presentation.
2. Financial Results and Management's Plan
For the five years ending December 31, 1997, the Company's reported average
return on assets was 1.31%, resulting in average net income of $4.2 million.
During this same period, the reported provision for loan losses averaged
$810,000 per year. During 1998 and 1999, the Corporation recorded provisions for
loan losses of $12.9 million and $15.9 million respectively, resulting in a net
loss of $1.9 million in 1998 and $11.0 million in 1999.
These recent results were in large part the result of substantial loan losses
relating to the bankruptcy of a large commercial borrower of the Bank, an
indirect consumer lending program through the now-bankrupt borrower, other loan
losses including loans to companies in the amusement industry, and the legal and
collection expenses associated with such losses. In addition, the Company
incurred additional expenses associated with the retention of interim senior
management, consulting work performed in connection with detailed loan analyses,
increased federal deposit insurance premiums and other expenses.
Management believes that it has made significant progress in identifying the
losses in the loan portfolio and taking appropriate action to improve future
credit quality. During 1999, management initiated a process of loan review which
covers all commercial loans greater than $50,000. Some loans which had been
considered performing credits were adversely classified as part of this process.
In addition, certain loans were found to have incomplete underwriting
documentation. Addressing these problems has been a high priority for Bank
management.
The Company continues to meet its obligations on a continuing basis, and there
remains available credit in the event that additional funding is needed. As of
April 12, 2000, the Bank has unused short-term lines of credit with the Federal
Home Loan Bank and other correspondent banks of approximately $10 million to
meet its liquidity requirements.
As described in Note 20, formal regulatory action by the Federal Reserve Bank
and the Office of the Comptroller of the Currency (OCC) has required, among
other items, a capital restoration plan to identify courses of action which may
be undertaken. The Bank has outlined several options for capital restoration,
including downsizing or the sale of assets or liabilities. The Bank has not yet
received approval of its capital restoration plan which was submitted on March
30, 2000. The OCC has up to 60 days to approve the plan.
On April 13, 2000, the Board approved the closing of the outstanding securities
offering (see Notes 3 and 20) which will result in an increase to the Bank's
capital of approximately $3.6 million. The Board of Directors and management are
considering which of the other alternatives mentioned above will be pursued
pending formal approval of the capital restoration plan.
3. Shareholders' Equity
In November 1999, certain members of the Board of Directors purchased 16,500
shares of Series A Convertible Preferred Stock. This stock has no preferential
dividend rights or other preferences except for a nominal liquidation preference
of $0.0001 per share, representing less than $10.00 in the aggregate for all
$1.65 million of preferred stock. The convertible stock has no special voting
rights. All of this stock will be converted into common stock as part of a
securities offering as filed in a registration statement with the Securities and
Exchange Commission and further described below. The conversion price will be
equivalent to the offering price for the common stock offering. The shares of
common stock issued upon conversion of the Series A Convertible Preferred Stock
will be treated as "restricted securities" as that term is defined in Rule 144
under the Securities Act of 1933. On April 13, 2000, the Board adopted a
resolution authorizing and directing that the Series A Preferred Stock be
converted into Common Stock. Upon conversion, 825,000 shares of the Common Stock
will be issued for the Series A Preferred Stock.
On February 27, 1998, the Company declared a two-for-one stock split to
shareholders of record on March 16, 1998. As a result of the split, the par
value of each share was reduced to $0.25.
On June 16, 1997, the Company declared a five-for-four stock split, which was
effected in the form of a 25% stock dividend to shareholders of record on June
16, 1997, and paid on July 1, 1997.
All references in the accompanying financial statements to the number of common
shares and per-share amounts in prior years, have been restated to reflect the
stock splits.
F-7
Belmont Bancorp. and Subsidiaries
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 1999, 1998 and 1997 [LOGO]
================================================================================
3. Shareholders' Equity (continued)
At various times during 1997 and 1998, the Company repurchased shares of its
common stock in open market transactions. The following table represents the
change in the Company's outstanding shares:
Preferred Common
Stock Stock
------------------------
Shares outstanding, December 31, 1997 -- 2,637,498
Two-for-one stock split -- 2,644,163
Treasury shares reissued -- 5,000
Shares repurchased -- (64,509)
------------------------
Shares outstanding, December 31, 1998 -- 5,222,152
Shares issued 16,500 --
Treasury shares reissued -- 14,382
------------------------
Shares outstanding, December 31, 1999 16,500 5,236,534
========================
Securities Offerings: On February 4, 2000, the Company opened a securities
offering for up to 5,000,000 shares at a price of $2.00 per share. The offering
is first provided to current shareholders at an amount of .95 shares for each
share owned. In addition, the Company is offering common shares to existing
shareholders, depositors, and other persons, subject to availability at the
conclusion of the rights offering.
4. Investment Securities
The estimated fair value of investment securities as of December 31 are depicted
in the following tables.
Securities Available for Sale 1999
-------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(Expressed in thousands) Cost Gains Losses Value
-------------------------------------------
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $ 12,130 $ -- $ (790) $ 11,340
Obligations of states and
political subdivisions 44,246 54 (6,132) 38,168
Mortgage-backed securities 37,403 52 (860) 36,595
Collateralized mortgage obligations 16,130 32 (562) 15,600
Corporate debt 3,107 -- (244) 2,863
------------------------------------------
Total debt securities 113,016 138 (8,588) 104,566
Marketable equity securities 6,165 101 (140) 6,126
------------------------------------------
Total available for sale $119,181 $ 239 $ (8,728) $110,692
===========================================
1998
------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(Expressed in thousands) Cost Gains Losses Value
------------------------------------------
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $ 10,653 $ 1 $ (97) $ 10,557
Obligations of
political subdivisions 29,509 63 (515) 29,057
Mortgage-backed securities 94,623 324 (1,246) 93,701
Corporate debt 7,530 1 (191) 7,340
Collateralized mortgage obligations 38,797 124 (282) 38,639
------------------------------------------
Total debt securities 181,112 513 (2,331) 179,294
Marketable equity securities 5,700 134 (133) 5,701
------------------------------------------
Total available for sale $186,812 $ 647 $ (2,464) $184,995
===========================================
Securities Held to Maturity 1998
-----------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(Expressed in thousands) Cost Gains Losses Value
--------------------------------------------
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $ 2,255 $ -- $ (26) $ 2,229
Obligations of
political subdivisions 3,823 273 (3) 4,093
Mortgage-backed securities 6,438 84 (30) 6,492
--------------------------------------------
Total held to maturity 12,516 357 (59) 12,814
============================================
There were no investment securities classified as held to maturity at December
31, 1999.
The amortized cost and estimated fair value of investment securities at December
31, 1999, by contractual maturity, follow. Expected maturities will differ from
contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Securities
Available for Sale
------------------------
Estimated
Amortized Fair
(Expressed in thousands) Cost Value
------------------------
Due in one year or less $ 3,333 $ 3,333
Due after one year
through five years 211 216
Due after five years
through ten years 2,272 2,131
Due after ten years 53,667 46,691
Mortgage-backed securities 37,403 36,595
Collateralized mortgage obligations 16,130 15,600
Equity securities 6,165 6,126
------------------------
Total $119,181 $110,692
========================
Sales and write-downs of investment securities resulted in the following:
(Expressed in thousands) 1999 1998 1997
- - ------------------------ --------- --------- ---------
Proceeds from sales $ 73,846 $ 87,580 $ 105,407
Gross gains 118 1,355 869
Gross losses (992) (18) (67)
Losses on securities called (7) (1) (3)
Gains on securities called 1 1 --
Gross trading gains 69 101 --
Gross trading losses (79) (39) --
All securities sold were classified as available for sale at the time of sale.
Securities with an amortized cost of $11,861,000 and a fair value of $12,085,000
were transferred from the Held to Maturity portfolio to the Available for Sale
portfolio during 1999 when SFAS No. 133 was adopted. Securities with a fair
value of $3,998,000 were transferred from the Trading portfolio to the Available
for Sale portfolio during 1999. There were no transfers of securities between
classifications in 1998 or 1997.
F-8
Belmont Bancorp. and Subsidiaries
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 1999, 1998 and 1997 [LOGO]
================================================================================
4. Investment Securities (continued)
Assets carried at $20,654,000 and $34,847,000 at December 31, 1999 and 1998,
respectively, were pledged to secure United States Government and other public
funds, and for other purposes as required or permitted by law. Certain other
securities were pledged to secure Federal Home Loan Bank advances as disclosed
below under the caption "Borrowings."
5. Loans and Allowance for Possible Loan Losses
Loans outstanding at December 31 are as follows:
(Expressed in thousands) 1999 1998
--------------------
Real estate-construction $ 108 $ 135
Real estate-mortgage 45,944 56,364
Real estate-secured by nonfarm,
nonresidential property 9,033 14,719
Commercial, financial and agricultural 96,730 116,539
Obligations of political subdivisions in the U.S 3,181 3,191
Installment and credit card loans to individuals 10,138 15,504
--------------------
Loans receivable $165,134 $206,452
====================
Mortgage loans serviced for others approximated $38,558,000, $38,230,000, and
$31,301,000 at December 31, 1999, 1998, and 1997, respectively.
Non-accruing loans and leases amounted to $13,769,000 and $8,569,000 at December
31, 1999 and 1998, respectively. The after-tax effect of the interest that would
have been accrued on these loans was $992,000 in 1999 and $67,000 in 1998. Loans
past due 90 days and still accruing interest were $541,000 and $4,000 at
year-end 1999 and 1998.
At December 31, 1999, impaired loans were as follows:
(Expressed in thousands) 1999
-------
Year-end loans with no allocated
allowance for loan losses $ 352
Year-end loans with allocated
allowance for loan losses 13,930
-------
Total $14,282
Amount of the allowance
for loan losses allocated $ 5,157
Interest income recognized during impairment --
Cash-basis interest income recognized --
At December 31, 1998, Company management believed that no loans were impaired
based on information available at that time. Information that became available
during 1999 resulted in the recognition of impaired status for loans that had
been classified as nonaccrual or substandard. These loans have been included in
the average balance of impaired loans from the date of such recognition. Average
impaired loans for 1999 were $12,839,000.
Activity in the allowance for loan losses is summarized as follows:
December 31
(Expressed in thousands) 1999 1998 1997
----------------------------------
Balance at beginning of year $ 5,475 $ 4,134 $ 3,153
Additions charged to operating expense 15,877 12,882 1,055
Recoveries on loans previously
charged-off 767 15 16
Loans charged-off (12,417) (11,556) (90)
----------------------------------
Balance at end of year $ 9,702 $ 5,475 4,134
==================================
The entire allowance represents a valuation reserve which is available for
future charge-offs.
6. Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation and
amortization, as follows:
Original
December 31 Useful Life
(Expressed in thousands) 1999 1998 Years
---------------------------------
Land and land improvements $ 1,187 $ 1,186 0
Buildings 5,855 5,843 30 - 50
Furniture, fixtures and equipment 6,260 5,972 5 - 12
Leasehold improvements 787 492 5 - 20
---------------------------------
Total 14,089 13,493
Less accumulated depreciation
and amortization 6,826 6,116
---------------------------------
Premises and equipment, net $ 7,263 $ 7,377
=================================
Charges to operations for depreciation and amortization approximate $710,000,
$743,000, and $818,000 for 1999, 1998, and 1997, respectively.
7. Deposits
At December 31, 1999, the aggregate maturities of time deposits are summarized
as follows:
(Expressed in thousands)
2000 $ 80,541
2001 16,738
2002 3,327
2003 1,940
2004 1,787
Thereafter 16,555
--------
Total $120,888
========
Time deposits include certificates of deposit issued in denominations of
$100,000 or more which amounted to $20,794,000 at December 1999, and $27,245,000
at December 31, 1998. A maturity distribution of time certificates of deposit of
$100,000 or more follows:
(Expressed in thousands) 1999 1998
------------------------
Due in three months or less $ 6,677 $ 3,687
Due after three months through six months 6,135 5,482
Due after six months through twelve months 2,791 10,392
Due after one year through five years 2,127 3,987
Due after five years 3,064 3,697
------------------------
Total $20,794 $27,245
========================
Related party deposits totaled $579,000 at December 31, 1999.
F-9
Belmont Bancorp. and Subsidiaries
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 1999, 1998 and 1997 [LOGO]
================================================================================
8. Securities Sold Under Repurchase Agreements
Securities sold under agreements to repurchase represent primarily overnight
borrowings except for one agreement for $2,200,000 that matures in March 2000.
For all repurchase agreements, the securities underlying the agreements were
under the subsidiary bank's control. Information related to these borrowings is
summarized below:
(Expressed in thousands) 1999 1998
-------------------------
Balance at year-end $6,093 $6,239
Average during the year $5,877 $6,733
Maximum month-end balance $6,093 $7,807
Weighted average rate during the year 5.00% 5.65%
Weighted average rate at December 31 4.77% 5.36%
9. Borrowings
The Company uses both short and long-term borrowings to meet its liquidity and
funding needs consisting primarily of federal funds purchased and advances from
the Federal Home Loan Bank (FHLB). All FHLB advances, including short and
long-term borrowings, are secured by collateral consisting of a blanket pledge
of residential mortgage loans, securities, and shares of stock of the FHLB. The
carrying value of residential mortgage loans available as collateral for FHLB
advances was $34,613,000 and $44,356,000 at December 31, 1999 and 1998,
respectively. The carrying value of FHLB stock and securities that secure the
FHLB debt was $29,496,000 and $84,427,000 at December 31, 1999 and 1998,
respectively. FHLB advances are made under agreements which allow for maximum
borrowings of $80 million subject to collateral requirements. Advances can be
made at fixed or variable rates of interest.
Information related to these borrowings at December 31, 1999 and 1998, is
summarized below.
Short-term borrowings
(Expressed in thousands)
FHLB Advances 1999 1998
--------------------------
Balance at year-end $19,740 $ --
Average balance during the year $ 1,712 $ 2,709
Maximum month-end balance $19,740 $22,047
Weighted average rate during the year 5.41% 5.63%
Interest rate at December 31 5.24% --
Federal Funds Purchased 1999 1998
--------------------------
Balance at year-end $ -- $ 3,950
Average during the year $ 693 $ 843
Maximum month-end balance $ 4,200 $11,000
Weighted average rate during the year 5.15% 5.35%
Weighted average rate at December 31 -- 5.25%
Long-term borrowings
Fixed-rate, single payment loans with the FHLB totaled $20,000,000 at December
31, 1999 and mature in 2008 with interest rates ranging between 4.53% and 4.78%.
These loans contain conversion options that allow the FHLB to convert the
interest rate to a floating rate in 2001. At December 31, 1998, fixed-rate,
single payment loans totaled $85,000,000 and were scheduled to mature in 1999
through 2008 with interest rates ranging from 4.53% to 6.56%. During 1999,
$60,000,000 of long term debt was paid off prior to the scheduled maturity date,
and penalties of $342,000 were required to be paid.
Fixed-rate, amortizing loans outstanding at December 31, 1998 totaled $6,401,000
with scheduled final maturity dates ranging from 2001 through 2017 and interest
rates ranging from 5.50% to 6.95%. All of the amortizing loans were paid off
during 1999.
Scheduled principal payments on long-term debt in each of the five years
subsequent to December 31, 1999, are as follows:
(Expressed in thousands)
2000 $ 0
2001 0
2002 0
2003 0
2004 0
Thereafter 20,000
10. Income Tax
The components of income taxes are as follows:
(Expressed in thousands) 1999 1998 1997
-------------------------------------------
Current payable (refundable) $ (886) $(2,269) $ 1,710
Deferred (5,668) 83 (289)
Change in valuation allowance 1,000 -- --
-------------------------------------------
Income tax (benefit) $(5,554) $(2,186) $ 1,421
===========================================
The following temporary differences gave rise to the deferred tax asset at
December 31, 1999 and 1998:
(Expressed in thousands) 1999 1998
---------------------------
Deferred tax assets:
Allowance for loan losses $ 1,792 $ 1,020
Interest on non-accrual loans 511 18
Deferred compensation liability
for future employees' benefits 323 295
Intangible assets 422 342
Unrealized losses on investments 2,887 619
Other deferred tax asset 97 15
Net operating loss carryforward 3,179 --
Tax credit carryforwards 1,263 148
---------------------------
Total deferred tax assets 10,474 2,457
Valuation allowance (1,000) --
---------------------------
Total deferred tax assets,
net of valuation allowance 9,474 2,457
---------------------------
Deferred tax liabilities:
Federal Home Loan Bank stock dividends (471) (347)
Other deferred tax liabilities (180) (223)
---------------------------
Total deferred tax liabilities (651) (570)
---------------------------
Net deferred tax asset $ 8,823 $ 1,887
===========================
F-10
Belmont Bancorp. and Subsidiaries
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 1999, 1998 and 1997 [LOGO]
================================================================================
10. Income Tax (continued)
A reconciliation between the amount of reported income tax expense and the
amount computed by applying the statutory federal income tax rate to income
before income taxes is as follows:
1999 1998 1997
---------------------------------------------------------------
(Expressed in thousands) Amount Percent Amount Percent Amount Percent
---------------------------------------------------------------
Tax at statutory rate $(5,639) (34.0) $(1,396) (34.0) $ 2,504 34.0
Tax exempt interest
on investments
and loans (794) (4.8) (450) (11.0) (482) (6.5)
Tax credits (169) (1.0) (74) (1.8) (482) (6.5)
Earnings on life
insurance policies (24) -- (93) (2.3) (43) (0.7)
Others - net 72 -- (173) (4.1) (76) (1.0)
Change in valuation
allowance 1,000 6.3 -- -- -- --
---------------------------------------------------------------
Actual tax expense (benefit) $(5,554) (33.5) $(2,186) (53.2) $ 1,421 19.3
===============================================================
During 1998 and 1999, the Company generated taxable losses aggregating
approximately $22,063,000 which were carried back to prior years. The taxable
income in all open taxable years has been eliminated and the remaining net
operating loss of approximately $9,349,000 is being carried forward. The
carryforward expires in 2019. The Company also has a low income housing credit
carryforward of $753,000 and an alternative minimum tax carryforward of
$509,000. The low income housing credit expires $485,000 in 2017, $99,000 in
2018 and $169,000 in 2019. The alternative minimum tax credit can be carried
forward indefinitely. A valuation allowance has been established reducing the
Company's deferred tax asset to reflect management's estimate of that portion of
the asset that may not be realized.
Tax expense (benefit) related to securities gains and losses were $(303,000),
$476,000 and $272,000 for 1999, 1998 and 1997.
11. Employee Benefit Plans
The Company has a profit-sharing retirement plan which includes all full-time
employees who have reached the age of twenty-one and have completed at least one
year of service. Each participant can elect to contribute to the plan an amount
not to exceed 10% of their salary. The plan provides for an employer matching
contribution on the first 4% of the participant's elective contribution. In
addition to the matching contribution, the plan provides for a discretionary
contribution to be determined by the Bank's Board of Directors.
Total profit-sharing expense for 1999, 1998, and 1997 was $55,000, $295,000, and
$277,000, respectively.
In addition to providing the profit-sharing plan, the Company sponsors two
defined benefit post-retirement plans that cover both salaried and nonsalaried
employees. Employees must be fifty-five years old and have ten years of service
to qualify for both plans. One plan provides medical and dental benefits, and
the other provides life insurance benefits. The post-retirement health care plan
is contributory, with retiree contributions adjusted annually; the life
insurance plan is noncontributory. The expense, liability, and contributions
under the plans are not material in any period presented.
12. Leases
The subsidiary bank utilized certain bank premises and equipment under long-term
leases expiring at various dates. In certain cases, these leases contain renewal
options and generally provide that the Company will pay for insurance, taxes and
maintenance.
As of December 31, 1999, the future minimum rental payments required under
noncancelable operating leases with initial terms in excess of one year are as
follows:
(Expressed in thousands)
Operating Leases
----------------
Year ending December 31,
2000 $120
2001 123
2002 124
2003 121
2004 70
Thereafter 94
----
Total minimum lease payments $652
====
Rental expense under operating leases approximated $139,000 in 1999, $139,000 in
1998, and $132,000 in 1997.
13. Related Party Transactions
Certain directors and executive officers and their associates were customers of,
and had other transactions with, the subsidiary bank in the ordinary course of
business in 1999 and 1998. In management's opinion, all loans and commitments
included in such transactions were made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with others and did not involve more than the normal
risk of collectibility or present other unfavorable features.
The following is an analysis of loan activity to directors, executive officers,
and their associates:
(Expressed in thousands) 1999 1998
--------------------
Balance previously reported $ 6,235 $ 6,906
New loans during the year 877 474
--------------------
Total 7,112 7,380
Less repayments during the year (1,575) (1,145)
Effect of changes in related parties (78) --
--------------------
Balance, December 31 $ 5,459 $ 6,235
====================
F-11
Belmont Bancorp. and Subsidiaries
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 1999, 1998 and 1997 [LOGO]
================================================================================
14. Commitments and Contingencies
The subsidiary bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and
standby letters of credit. These instruments involve, to varying degrees,
elements of credit risk in excess of the amount recognized in the balance sheet.
The contract amounts of those instruments reflect the extent of involvement the
Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
The following represents financial instruments whose contract amounts represent
credit risk at December 31:
Contract Amount
-------------------
(Expressed in thousands) 1999 1998
-------------------
Commitments to extend credit $16,444 $30,297
Standby letters of credit 686 2,414
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the counter party. Collateral held varies, but
may include accounts receivable, inventory, property, plant, and equipment, and
income-producing properties.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. Of the
standby letters of credit, $332,000 expire in 2000, while the remaining $354,000
expire in various years through 2027. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers.
15. Concentrations of Credit Risk
The subsidiary bank extends commercial, consumer, and real estate loans to
customers primarily located in Belmont, Harrison, Jefferson, and Tuscarawas
Counties in Ohio and Ohio and Marshall Counties in West Virginia. While the loan
portfolios are diversified, the ability of the borrowers to meet their
contractual obligations partially depends upon the general economic condition of
Southeastern Ohio and the Northern Panhandle of West Virginia.
The subsidiary bank measures concentration of credit based on categorizing loans
by the Standard Industry Classification codes. Loans and commitments equal to or
exceeding 25% of Tier 1 capital are considered concentrations of credit. At
December 31, 1999, the bank had concentrations of credit in the following
industries:
(Expressed in thousands)
Loan balance and Percent of
Industry available credit Tier 1 Capital
- - --------------------------------------------------------------------------
Amusement industry $14,551 159.6%
Commercial apartments and rentals 6,582 72.2%
Commercial office
buildings and rentals 5,466 60.0%
Contracting-general building 5,324 58.4%
Contractors-commercial construction 4,908 53.8%
Services-hotel/motel 4,448 48.8%
Miscellaneous fabricated
metal products 3,695 40.5%
Services-physicians 3,422 37.5%
Bituminous coal mining 3,419 37.5%
Services-car washes 3,200 35.1%
Tire recycling 2,480 27.2%
Retailers-fast food 2,396 26.3%
16. Limitations on Dividends
The approval of the Comptroller of the Currency is required to pay dividends if
the total of all dividends declared by a national bank in any calendar year
exceeds the total of its retained net profits for the current year plus the two
preceding years. Under this formula, the bank cannot declare dividends in 2000
without approval of the Comptroller of the Currency. The subsidiary bank is the
primary source of funds to pay dividends to the shareholders of Belmont Bancorp.
As discussed later, the Company is prohibited from paying dividends without
regulatory approval.
F-12
Belmont Bancorp. and Subsidiaries
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 1999, 1998 and 1997 [LOGO]
================================================================================
17. Other Operating Expenses
Other operating expenses include the following:
(Expressed in thousands) 1999 1998 1997
----------------------------
Taxes other than payroll
and real estate $ 254 $ 496 $ 426
Supplies and printing 233 299 280
Insurance, including
federal deposit insurance 169 127 125
Amortization of intangibles 439 196 415
Legal fees 1,671 52 63
Consulting expense 1,442 111 77
Examinations and audits 385 213 216
Prepayment penalties on Federal
Home Loan Bank advances 342 -- --
Legal settlements 295 -- --
Other (individually less than
1% of total income) 1,797 1,612 1,452
----------------------------
Total $7,027 $3,106 $3,054
============================
18. Restrictions on Cash
The subsidiary bank is required to maintain a reserve balance with the Federal
Reserve Bank. The amounts of the reserve balance at December 31, 1999 and 1998,
were $3,290,000 and $4,443,000, respectively.
19. Cash Flows Information
The Company's policy is to include cash on hand and amounts due from banks in
the definition of cash and cash equivalents.
Cash payments for interest in 1999, 1998, and 1997 were $15,758,000,
$16,316,000, and $13,937,000, respectively. Cash payments for income taxes for
1999, 1998, and 1997, were $383,000, $2,168,000, and $2,074,000, respectively.
20. Regulatory Matters
The Company and Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Company's and Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and Bank must meet specific capital guidelines that involve
quantitative measures of the Company's and Bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Company's and Bank's capital amounts and classifications are also
subject to qualitative judgments by the regulators about components, risk,
weighting, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and Bank to maintain minimum amounts and ratios (set forth
in the table below) of total and Tier I capital (as defined in the regulations)
to risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined).
Under the Federal Deposit Insurance Corporation (FDIC) Improvement Act of 1991,
the federal banking regulators are required to take prompt corrective action if
an insured depository institution fails to satisfy certain minimum capital
requirements. An institution that fails to meet the minimum level to be
considered adequately capitalized (an "undercapitalized institution") may be:
(i) subject to increased monitoring by the appropriate federal banking
regulator; (ii) required to submit an acceptable capital restoration plan within
45 days; (iii) subject to asset growth limits; and (iv) required to obtain prior
regulatory approval for acquisitions, branching and new lines of businesses. In
addition, the federal banking regulators may impose discretionary actions
including, but not limited to, requiring recapitalization, restricting
transactions with affiliates, restricting asset growth and interest rates paid,
and divestiture of the insured institution by any company having control of the
institution.
The capital restoration plan required in item (ii) above must include a
guarantee by the institution's holding company that the institution will comply
with the plan until it has been adequately capitalized on average for four
consecutive quarters, under which the holding company would be liable up to the
lesser of 5% of the institution's total assets or the amount necessary to bring
the institution into capital compliance as of the date it failed to comply with
its capital restoration plan.
The capital ratios for the Bank and the regulatory framework for adequately
capitalized and well capitalized institutions are depicted as set forth in the
following table:
To Be Adequately
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------------------------------------
(Expressed in thousands) Amount Ratio Amount Ratio Amount Ratio
------------------------------------------------------
As of December 31, 1999:
Total risk based capital
to risk weighted assets:
Consolidated $14,090 6.9% $16,428 8.0% $16,428 8.0%
Bank 11,738 5.8% 16,220 8.0% 16,220 8.0%
Tier I capital
to risk weighted assets:
Consolidated 11,435 5.6% 8,214 4.0% 8,214 4.0%
Bank 9,115 4.5% 8,110 4.0% 8,110 4.0%
Tier I capital
to average assets:
Consolidated 11,435 3.5% 13,118 4.0% 13,118 4.0%
Bank 9,115 2.8% 13,012 4.0% 13,012 4.0%
F-13
Belmont Bancorp. and Subsidiaries
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 1999, 1998 and 1997 [LOGO]
================================================================================
20. Regulatory Matters (continued)
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------------------------------------
(Expressed in thousands) Amount Ratio Amount Ratio Amount Ratio
------------------------------------------------------
As of December 31, 1998:
Total risk based capital
to risk weighted assets:
Consolidated 29,624 10.8% 21,961 8.0% 27,451 10.0%
Bank 27,246 10.0% 21,827 8.0% 27,284 10.0%
Tier I capital
to risk weighted assets:
Consolidated 26,167 9.5% 10,981 4.0% 16,471 6.0%
Bank 23,810 8.7% 10,913 4.0% 16,370 6.0%
Tier I capital
to average assets:
Consolidated 26,167 5.9% 17,776 4.0% 22,220 5.0%
Bank 23,810 5.4% 17,671 4.0% 22,088 5.0%
Consent Order: In August, 1999, the Bank received the written report of an
examination of the Bank by the OCC, the Bank's principal federal regulatory
agency. At the same time, the Bank entered into a consent order with the OCC
relating to the results of the examination, which contains certain required
actions and certain restrictions.
The consent order requires the bank to formulate new plans, policies, procedures
and programs relating to long-term strategy, organizational structure,
management, loans, loan loss reserves, overdrafts, loan interest accrual and
non-accrual loans, loan diversification, internal audit and periodic loan review
by certain dates and then to implement and follow those plans, policies, and
procedures and programs. The Bank is also required to review and evaluate
certain groups of loans and correct deficiencies, and going forward to properly
document commercial extensions of credit and comply with law and regulations
relating to lending.
In addition, the consent order mandates that the Bank must achieve a 6% Tier 1
leverage ratio by March 31, 2000 and thereafter maintain it. Management intends
to take all appropriate steps to meet the minimum capital requirement, but was
unable to do so by March 31, 2000. The Company intends to continue the ancillary
offering upon the filing and effectiveness of a post-effective amendment to the
registration statement.
Under the terms of the consent order, the board of directors of the Bank is
responsible for the proper and sound management of the Bank, must appoint a
compliance committee from among their independent members, and report monthly to
the OCC on progress in complying with the consent order. The board has appointed
a compliance committee and has filed its monthly reports with the OCC.
Federal Reserve Bank Agreement: In August 1999, the board of directors also
entered into an agreement with the Federal Reserve Bank of Cleveland, under
authority given it by the Board of Governors of the Federal Reserve System, the
federal regulatory agency for the Company. As with the consent agreement of the
OCC, the Federal Reserve agreement necessitates certain actions and
restrictions.
Without prior Federal Reserve approval, the agreement prohibits the Company from
paying dividends, incurring debt, redeeming stock, receiving dividends from the
Bank, imposing charges on the Bank, and engaging in any transaction with the
bank in violation of federal law. To date, the Company has taken, and intends to
continue to take, all appropriate steps to comply with the Federal Reserve
requirements.
Subsequent Notification: Under prompt correction action, a "significantly
undercapitalized" institution is subject to at least one of the following
regulatory actions, including, but not limited to, demands for recapitalization,
broader application of restrictions on transactions with affiliates, limitations
on interest rates paid on deposits, limitations on asset growth and other
activities, possible replacement of directors and officers, and restrictions on
capital distributions by any bank holding company controlling the institution.
Any company controlling the institution could also be required to divest the
institution or the institution could be required to divest subsidiaries. The
senior executive officers of a significantly undercapitalized institution may
not receive bonuses or increases in compensation without prior approval.
In February 2000, the Bank was notified by the OCC that its capital category at
December 31, 1999 under prompt corrective action was significantly
undercapitalized. The Bank was required to prepare a capital restoration plan to
be submitted to the OCC, Federal Reserve and the FDIC for approval.
As part of the prompt corrective action notification, the holding company
executed a capital restoration plan guaranty agreement. The holding company has
unconditionally guaranteed the Bank's compliance with the capital restoration
until such further notification. The holding company, among other guarantees,
agrees to take any actions necessary to enable the Bank to follow the capital
restoration plan's requirements and ensure competent management at the Bank.
Further, the holding company may be required to pay amounts to the Bank if the
Bank is notified by the OCC of failure to comply with the capital restoration
plan. The holding company's total payment is limited to five percent of the
Bank's total assets at the time of OCC notification. In addition, a security
interest has been executed which pledges all of the assets of the holding
company.
The OCC has notified the Bank that it cannot pay dividends to shareholders or
pay management fees to the holding company. Asset growth is restricted so that
average assets measured for a quarter may not increase. Expansion of activities
is generally prohibited unless approved. In addition, bonuses and raises to
senior executive officers are prohibited without prior approval. The Bank may
not accept new brokered deposits. Further, interest rates on deposits may not
exceed the prevailing rates in the local region. The OCC is also required to
impose at least one additional supervisory action. The Bank will be notified by
the OCC when it has determined which such action will be taken. As of April 13,
2000, the Bank has not received any further notification. At April 13, the
unaudited ratio is estimated to be 4.3% including the proceeds from the
securities offering. While this does not meet the required level of 6% under the
consent order, the ratio does exceed the 4% adequately capitalized requirement
under regulatory Prompt Corrective Action (if determined independently of the
consent order).
F-14
Belmont Bancorp. and Subsidiaries
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 1999, 1998 and 1997 [LOGO]
================================================================================
20. Regulatory Matters (continued)
Management believes that the capital restoration plan complies with the above
restrictions and prohibitions, while working to increase capital ratios.
Potential Further Action: Federal banking regulators may also impose the
sanctions applicable to significantly undercapitalized institutions on an
undercapitalized institution if the regulators determine that such actions are
necessary to carry out the purposes of the prompt corrective action provisions.
Hence, the achievement of capital at the undercapitalized versus significantly
undercapitalized level will not assure that the possible actions above will no
longer be available to the regulatory agencies.
If an institution's ratio of tangible capital to total assets falls below a
"critical capital level" (i.e. a leverage ratio of less than 2%), the
institution will be subject to conservatorship or receivership within 90 days
unless periodic determinations are made by the federal regulatory agencies that
forbearance from such action would better protect the deposit insurance fund.
Further, a critically undercapitalized institution must also be placed in
receivership if it remains critically undercapitalized on average during the
calendar quarter beginning 270 days after the date it became critically
undercapitalized unless certain conditions are met and such extension is agreed
to by the FDIC. The Bank's leverage ratio at December 31, 1999 was 2.8%. At
March 31, 2000, the same ratio (unaudited) was 3.1%.
Management's Plan: Management's capital restoration plan submitted to the
regulators outlines several courses of action to increase capital ratios to an
acceptable level, including raising additional capital. As described more fully
in Note 3, the Company has an open securities registration which includes both a
shareholder rights offering and an ancillary offering. On April 13, 2000, the
Board of Directors approved a motion, effective April 14, 2000, to accept the
subscriptions received to date under both offerings and to close the shareholder
rights offering. As a result, approximately 1.9 million new common shares will
be issued for an aggregate offering price of approximately $3.8 million. This
amount, less offering costs of approximately $200,000, will be contributed by
the Company to its banking subsidiary as additional paid-in capital. On April
13, 2000, the Board adopted a resolution authorizing and directing that the
Series A Preferred Stock be converted into Common Stock. Upon conversion,
825,000 shares of the Common Stock will be issued for the Series A Preferred
Stock. The Company intends to continue the ancillary offering upon the filing
and effectiveness of a post-effective amendment to its registration statement.
The Board plans to use such other means as outlined in the revised capital
restoration plan approved by the Board and submitted to its regulators on March
30, 2000 to meet the capital requirements of the OCC's consent order or such
other level of capital approved or required by the OCC. Other alternatives cited
in the capital restoration plan include downsizing, or sale of assets or
liabilities. The estimated impacts of the alternatives would result in either a
neutral impact or a modest gain to the Bank.
21. Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet. In
cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlements of the instruments.
Statement 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. The fair value of off-balance
sheet instruments is not considered material. In addition, the value of
long-term relationships with depositors and other customers is not reflected.
The value of these items is significant. Accordingly, the aggregate fair value
amounts presented do not represent the underlying value of the Company.
The following methods and assumptions were used in estimating fair values of
financial instruments as disclosed herein:
Cash and Cash Equivalents: For those short-term instruments, the carrying amount
is a reasonable estimate of fair value.
Securities: For debt securities, derivative instruments and marketable equity
securities, fair values are based on quoted market prices or dealer quotes. If a
quoted market price is not available, fair value is estimated using quoted
market prices for similar securities.
Loans: For certain homogeneous categories of loans, such as some residential
mortgages, fair value is estimated using the quoted market prices for securities
backed by similar loans. The fair value of other types of loans is estimated by
discounting the future cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings and for the same
remaining maturities. The fair value of impaired loans was estimated at book
value, net of related reserves.
Cash Surrender Value: The fair value of the Company's investment in life
insurance assets is the amount that would be received if the policies were
redeemed at year-end.
Deposit Liabilities: The fair value of demand deposits, savings accounts, and
certain money market deposits is the amount payable on demand at the reporting
date. The fair value of fixed-maturity certificates of deposit is estimated
using the rates currently offered for deposits of similar remaining maturities.
Short-Term Borrowings: These liabilities represent primarily overnight
borrowings and debt maturing within ninety days of issuance with interest rates
adjusted daily or weekly. Accordingly, the carrying amount is a reasonable
estimate of fair value.
F-15
Belmont Bancorp. and Subsidiaries
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 1999, 1998 and 1997 [LOGO]
================================================================================
21. Fair Value of Financial Instruments (continued)
Long-Term Borrowings: The fair values of long-term borrowings are estimated
using discounted cash flow analyses based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements.
The estimated fair values of the Company's financial instruments are as follows:
1999 1998
----------------------------------------------
Carrying Estimated Carrying Estimated
(Expressed in thousands) Amount Fair Value Amount Fair Value
----------------------------------------------
Financial assets:
Cash due from banks $ 15,439 $ 15,439 $ 9,439 $ 9,439
Federal funds sold 2,025 2,025 -- --
Trading securities -- -- 2,281 2,281
Securities available for sale 110,692 110,692 184,995 184,995
Securities held to maturity -- -- 12,516 12,814
Loans, net 157,277 157,004 202,711 215,559
Cash surrender value
of life insurance 4,196 4,196 5,635 5,675
Accrued interest receivable 1,751 1,751 2,731 2,731
Financial liabilities:
Deposits 255,432 257,184 304,351 307,079
Repurchase agreements 6,093 6,096 6,239 6,239
Accrued interest payable 747 747 896 896
Short-term borrowings 19,740 19,740 3,950 3,950
Long-term borrowings 20,000 19,445 91,401 93,975
22. Condensed Parent Company Financial Statements
Presented below are the condensed balance sheets, statements of income, and
statements of cash flows for Belmont Bancorp.
Balance Sheets
(Expressed in thousands)
December 31,
1999 1998
-------------------
Assets
Cash $ 1,141 $ 307
Investment in subsidiaries
(at equity in net assets) 8,950 23,366
Equity securities 473 513
Advances to subsidiaries 271 1,006
Prepaid expenses 509 155
Other assets 762 660
-------------------
Total assets $12,106 $26,007
===================
Liabilities
Payable to subsidiary $ 348 $ 149
Deferred compensation 527 494
-------------------
Total liabilities 875 643
Shareholders' Equity 11,231 25,364
-------------------
Total liabilities and shareholder's equity $12,106 $26,007
===================
Statements of Income
1999 1998 1997
------------------------------------
Operating income
Dividends from subsidiaries $ 628 $ 3,921 $ 2,207
Gain on sale of securities -- -- 126
Other income 51 108 27
------------------------------------
Total income 679 4,029 2,360
Operating expenses 79 143 113
------------------------------------
Income before income tax
and equity in undistributed
income of subsidiaries 600 3,886 2,247
Income tax (benefit) (57) (41) 12
Equity in undistributed income (loss)
of subsidiaries (11,688) (5,846) 3,710
------------------------------------
Net income (loss) $(11,031) $ (1,919) $ 5,945
====================================
Statements of Cash Flows
1999 1998 1997
------------------------------------
Operating activities
Net income (loss) $(11,031) $ (1,919) $ 5,945
Adjustments to reconcile net income to
net cash provided by operating activities:
Gain on sale of securities -- -- (126)
Undistributed (earnings) loss of affiliates 11,688 5,846 (3,710)
Changes in operating assets and liabilities:
Prepaid expenses (354) 92 (242)
Accrued expenses and dividends 33 94 121
Other (88) (95) (143)
------------------------------------
Cash from operating activities 248 4,018 1,845
------------------------------------
Investing activities
Proceeds from sale of securities -- -- 180
Payments from subsidiaries 1,083 -- --
Payments to subsidiaries (149) (274) (154)
Additional investment in subsidiary (1,650) -- --
Investment purchases -- (446) --
------------------------------------
Cash from investing activities (716) (720) 26
------------------------------------
Financing activities
Issuance of preferred stock 1,650 -- --
Cash paid for fractional shares -- -- (7)
Purchase of treasury stock -- (1,308) (123)
Issuance of treasury stock 280 112 --
Dividends (628) (2,022) (1,615)
------------------------------------
Cash from financing activities 1,302 (3,218) (1,745)
------------------------------------
Increase (decrease) in cash & cash equivalents 834 80 126
Cash and cash equivalents at beginning of year 307 227 101
------------------------------------
Cash and cash equivalents at end of year $ 1,141 $ 307 $ 227
====================================
F-16
Belmont Bancorp. and Subsidiaries
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 1999, 1998 and 1997 [LOGO]
================================================================================
23. Comprehensive Income
The components of other comprehensive income were as follows:
(Expressed in thousands) 1999 1998 1997
---------------------------------
Unrealized holding gains/losses
arising during the period $(7,776) $ (780) $ 1,355
Adoption of SFAS No. 133 224 -- --
Reclassification adjustment 880 (1,338) (799)
---------------------------------
Net gains/losses
arising during the period (6,672) (2,118) 556
Tax effect 2,268 720 (189)
---------------------------------
Other comprehensive income (loss) $(4,404) $(1,398) $ 367
=================================
24. Litigation
The Company and its subsidiaries have been named as defendants in legal actions.
Management believes, based on the advice of counsel, that no accrual for loss is
necessary.
The Company is a defendant in a suit for damages brought in the Court of Common
Pleas for Belmont County, Ohio in April 1999 by George Michael Riley and others
against the Bank and certain former officers, among others, alleging torts to
have occurred in connection with the Bank's denial of a loan to a third party to
finance the sale of a business owned by plaintiffs. In another case filed in the
same Court in May 1999, Charles J. and Rebecca McKeegan, the beneficial owners
of the potential purchaser of the business in the same transaction claim damages
in excess of $500,000 based upon alleged tortious conduct as to them by
defendants. In both cases it is claimed that a former loan officer of the Bank
later purchased the business at a lower price with financial assistance from the
Bank's former chief operating officer. Based on the advice of counsel, the
Company believes its exposure to liability, if any, is minimal in each case.
In August 1999, the Company's directors unanimously approved and entered into a
consent order with the Office of the Comptroller of the Currency and entered
into a written agreement with the Federal Reserve Bank of Cleveland under which
the Company and the Bank agreed to meet specified conditions relating to its
future operations and capital requirements. The consent order requires the Bank
to, among other things, formulate new plans, policies, procedures and programs
relating to long-term strategy, organizational structure, management, loans,
loan loss reserves, overdrafts, loan interest accrual and non-accrual loans,
loan diversification, internal audit and periodic loan review by certain dates.
The consent order further required that the Bank retain the services of a
qualified independent certified public accounting firm acceptable to the
Comptroller of the Currency, which it has done by engaging Crowe Chizek and
Company LLP as it independent auditors.
In August 1999, the Company also entered into an agreement with the Federal
Reserve Bank of Cleveland, under authority given it by the Board of Governors of
the Federal Reserve System, the federal regulatory agency for Belmont. As with
the consent order of the Comptroller of the Currency, the Federal Reserve Bank
agreement necessitates certain actions and restrictions. Without prior Federal
Reserve Bank approval, the agreement prohibits the Company from paying
dividends, incurring debt, redeeming stock, receiving dividends from the Bank,
imposing charges on the Bank, and engaging in any transaction with the Bank in
violation of federal law. The Company is required to report quarterly on
progress in complying with the Federal Reserve Bank agreement.
In August 1999, the Bank was named as a defendant in a lawsuit filed in the
Belmont County Common Pleas Court by Joseph C. Heinlein, Jr. against his former
secretary, the Bank, other financial institutions and individuals with whom the
secretary did business. The complaint alleges that the secretary embezzled funds
from the plaintiff's account over a period of several years by forging his
signature to checks and alleges negligence on the part of the Bank for honoring
such checks. Damages are sought in the amount of $739,000. The Bank believes
that it has valid defenses against the claim and intends to defend it
vigorously. In addition, the Company believes that any liability on the Bank's
part would be covered under its insurance policy. However, the insurance
carrier, Progressive Casualty Insurance Company, has filed a declaratory
judgment and interpleader action raising issues of coverage and indemnification
on this claim, as more fully discussed below.
The Company filed suit in the Court of Common Pleas of Tuscarawas County, Ohio,
alleging that it had been the victim of an "elaborate fraud" that has resulted
in more than $15 million in losses to the Bank. Following an extensive internal
review of its loan portfolio, the Bank filed claims against Steven D. Schwartz,
President of Schwartz Homes, Inc., the now-closed New Philadelphia retailer of
manufactured homes. At the same time, the Bank filed claims against three
additional people: Linda Reese, Schwartz Homes' Chief Financial Officer; William
Wallace, the Bank's former Executive Vice-President and Chief Operating Officer;
and Christine Wallace, his wife. In addition, as more fully discussed below,
because of Mr. Wallace's alleged conduct as a bank officer and director, the
Bank is seeking to recover from its indemnity bond insurance carrier,
Progressive Casualty Insurance Company, the full amount of its bond. The
Wallaces have filed counterclaims in an indeterminate amount upon various bases,
including invasion of privacy, defamation and failure to distribute moneys
allegedly due them under a deferred and certain other compensation plans. Steven
Schwartz also requested leave to file counterclaims. The Company intends to
vigorously prosecute its case and defend against these claims.
F-17
Belmont Bancorp. and Subsidiaries
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 1999, 1998 and 1997 [LOGO]
================================================================================
24. Litigation (continued)
In October 1999, James John Fleagane, a shareholder of the Company, filed an
action against the Company, the Bank and certain of the Company's and the Bank's
current and former officers and directors in the Circuit Court of Ohio County,
West Virginia. The plaintiff alleges, among other things, that the Bank and its
directors and officers negligently transacted and administered various loans
with respect to Schwartz Homes, Inc. and customers of Schwartz. The plaintiff
seeks damages for the loss in value of his stock and other compensatory and
punitive damages in an unspecified amount and requests class action
certification for the common shareholders of the Company. The Company intends to
vigorously defend this action.
Progressive Casualty Insurance Company sold to the Company a directors and
officers liability policy providing for $3 million of coverage and a separate
financial institution fidelity bond in the face amount of $4.75 million. In May
1999, the Company filed a claim under the fidelity bond policy to recover the
losses incurred in connection with the Schwartz Homes loan relationship. The
Company has also claimed coverage under the directors and officers liability
policy.
Progressive declined to honor these claims and, in December 1999, filed an
action in the United States District Court for the Southern District of Ohio,
Eastern Division asking the court to issue a declaratory judgment declaring that
Progressive is not liable under either the directors and officers liability
policy or the fidelity bond policy. Alternatively, Progressive has asked the
court, if it finds Progressive to be liable under these policies, to determine
whether the Bank or other parties who have sued the Bank in separate actions
(including the Heinlein matter discussed above) are entitled to the insurance
proceeds. Progressive has deposited with the court bonds in the aggregate amount
of $7.75 million to satisfy any liabilities it might have with respect to the
pending claims. The Company intends to vigorously seek recoveries under the
insurance policies sold to the Company by Progressive.
The Company is a defendant in litigation brought in October 1999 by Beall Homes,
Inc., John B. Beall, and Peggy F. Beall in the Court of Common Pleas, Belmont
County, Ohio. Plaintiffs seek a declaratory judgment that certain warrants of
attorney which appear on promissory notes evidencing loans between the Bank and
Beall Homes, Inc. (and guaranteed by John B. Beall and Peggy F. Beall) are
invalid. Plaintiffs assert claims of breach of a duty of good faith in
connection with the Bank's grant of three loans to Beall Homes, fraud and breach
of fiduciary duty allegedly through floor plan financing, dominating and
controlling plaintiff's business, wrongful set-off and conversion of the Beall
Homes account, wrongful dishonor of certain customer checks of plaintiff,
wrongful set-off and conversion of the mortgage account of John B. Beall, and
intentional infliction of emotional distress. Plaintiffs seek compensatory and
punitive damages in an amount in excess of $25,000 and a declaration that they
are not in default of any of their loans, that the warrants of attorney are
invalid, that the Bank is required to provide plaintiffs with an accounting of
the manner in which payments made by plaintiffs have been applied by the Bank,
and other relief. The Bank has filed a counterclaim for monetary damages and has
filed a petition for involuntary bankruptcy against Beall Homes. The Company
intends to vigorously defend this action and prosecute its own claims.
In January 2000, Eric Cenkner and other persons who purchased or sought to
purchase homes through the Schwartz Homes homebuilder loan program filed a class
action lawsuit against the Bank and its former chief operating officer, William
Wallace, in the United States District Court for the Northern District of Ohio.
The named plaintiffs are purporting to act on behalf of persons who purchased or
sought to purchase homes through the Schwartz homebuilder loan program. The
complaint alleges that the class members have been harmed by the participation
of the Bank and Mr. Wallace in the Schwartz Homes homebuilder loan program. The
suit seeks damages due to alleged violations of federal and state RICO statutes
and federal usury laws, breaches of contract and fiduciary duties, concealment
and nondisclosure. In the complaint, the plaintiffs based their factual
allegations on the Bank's own factual allegations in the separate case brought
by the Bank in the Court of Common Pleas of Tuscarawas County, Ohio against Mr.
Wallace and Steven Schwartz, the president of Schwartz Homes, as described
above. In April 2000, following discussions among the parties and the Company's
payment to the named plaintiffs of nominal consideration to cover certain of
their expenses, the plaintiffs filed a motion to dismiss the case. The Company
does not believe that the named plaintiffs will reinstitute this action
following dismissal.
In September 1999, the Bank filed a lawsuit against Otterbacher Manufacturing,
Inc. ("Manufacturing") and Gary and Karen Otterbacher regarding default by
Manufacturing on a loan guaranteed by the Otterbachers in the amount of $2.1
million. The Otterbachers filed a counterclaim against the Bank for lender
liability claims relating to the Bank's declaration of default by Manufacturing
and the Bank's refusal to extend additional or renew existing credit to
Manufacturing. The Bank intends to vigorously defend this action and prosecute
its own claims.
F-18
Belmont Bancorp. and Subsidiaries
Management's Report
================================================================================
Management of Belmont Bancorp. is responsible for the accurate and objective
preparation of the consolidated financial statements and the estimates and
judgements upon which certain financial statements are based. Management is also
responsible for preparing the other financial information included in this
annual report. In our opinion, the financial statements on the preceding pages
have been prepared in conformity with generally accepted accounting principles
and other financial information in this annual report is consistent with the
financial statements.
Management is also responsible for establishing and maintaining an adequate
internal control system which encompasses policies, procedures and controls
directly related to, and designed to provide reasonable assurance as to the
integrity and reliability of the financial reporting process and the financial
statements generated therefrom. The concept of reasonable assurance is based on
the recognition that there are inherent limitations in all systems of internal
control, and that the cost of such systems should not exceed the benefits to be
derived therefrom. The systems and controls and compliance therewith are
reviewed by an extensive program of internal audits and by our independent
auditors. Their activities are coordinated to obtain maximum audit coverage with
a minimum of duplicate effort and cost. Management believes the system of
internal control effectively meets its objectives of reliable financial
reporting.
The Board of Directors pursues its responsibility for the quality of the
Company's financial reporting primarily through its Audit Committee which is
comprised solely of outside directors. The Audit Committee meets regularly with
management, personnel responsible for the contract internal audit function, and
the independent auditors to ensure that each is meeting its responsibilities and
to discuss matters concerning internal controls, accounting and financial
reporting. The above parties have full and free access to the Audit Committee.
/s/ W. Quay Mull, II /s/ Wilbur R. Roat
W. Quay Mull, II Wilbur R. Roat
Chairman President and
Belmont Bancorp. Chief Executive Officer
Belmont National Bank Belmont Bancorp.
Belmont National Bank
/s/ Jane R. Marsh
Jane R. Marsh
Secretary, Belmont Bancorp.
Senior Vice President
Controller and Cashier
Belmont National Bank
F-19
Independent Auditor's Report
[LOGO]
================================================================================
To the Shareholders and Board of Directors of
Belmont Bancorp.
We have audited the accompanying consolidated balance sheet of Belmont Bancorp.
and subsidiaries as of December 31, 1999, and the related consolidated
statements of income, changes in shareholders' equity, and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The financial statements of Belmont
Bancorp. and subsidiaries as of December 31, 1998 and for the two years then
ended, were audited by other auditors whose report dated May 19, 1999, expressed
an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Belmont Bancorp. and
subsidiaries at December 31, 1999, and the results of its operations and its
cash flows, for the year then ended in conformity with generally accepted
accounting principles.
As described in Note 1, the Company changed its method of accounting for
derivative instruments and hedging activities to comply with new accounting
guidance.
As discussed in Note 20, the Company is subject to the terms of an agreement
with regulators to increase capital.
Crowe, Chizek and Company LLP
Columbus, Ohio
March 2, 2000, Except for Notes 2, 3, 20, and 24 which date is
April 13, 2000.
F-20
Opinion of Independent Certified Public Accountants
Board of Directors
Belmont Bancorp.
St. Clairsville, Ohio
We have audited the accompanying consolidated balance sheet of Belmont Bancorp.
and subsidiaries as of December 31, 1998, and the related consolidated
statements of income, changes in shareholders' equity, and cash flows, for each
of the two years in the period ended December 31, 1998. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Belmont Bancorp.
and subsidiaries at December 31, 1998, and the consolidated results of its
operations, and cash flows, for each of the two years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
s/S.R.Snodgrass A.C.
S.R. Snodgrass A.C.
Wheeling, West Virginia
May 19, 1999
F-21
EXHIBIT INDEX
Exhibit
Number Description
4.1 -- Charter (1)
4.2 -- Charter Amendment regarding Series A Preferred Stock (2)
4.3 -- Bylaws as currently in effect (1)
10.1 -- Letter Agreements with FiCap Strategic Partners, LLC (1)
10.2 -- Deferred Compensation Plan and Trust for J. Vincent Ciroli,
Jr., William Wallace and Jane R. Marsh (1)
10.3 -- Executive Incentive Cash Agreement for J. Vincent Ciroli,
Jr., William Wallace and Jane R. Marsh (1)
10.4 -- Executive Phantom Stock Agreement for J. Vincent Ciroli,
Jr., William Wallace and Jane R. Marsh (1)
10.5 -- Supplemental Retirement Plan for J. Vincent Ciroli, Jr.,
William Wallace and Jane R. Marsh (1)
10.6 -- Employment Agreement dated December 15, 1999 between Wilbur
R. Roat, Belmont Bancorp. and Belmont National Bank (3)
23.1 -- Consent of Crowe Chizek and Company LLP (3)
23.2 -- Consent of S.R. Snodgrass A.C. (3)
27 -- Financial Data Schedule(3)
- - ----------
(1) Filed as an exhibit to the Company's Registration Statement on Form S-2
filed with the Securities and Exchange Commission (Registration No.
333-91035) on November 16, 1999.
(2) Filed as an exhibit to Amendment No. 1 to the Company's Registration
Statement on Form S-2 filed with the Securities and Exchange Commission
(Registration No. 333-91035) on January 12, 2000.
(3) Filed herewith.
E-1