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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, 2000 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
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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
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(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
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State the aggregate market value of the voting stock held by nonaffiliates of
the registrant at March 16, 2001: $47,181,000
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 11,101,403 shares
Documents Incorporated by Reference:
Documents Incorporated by Reference: Portions of the Registrant's proxy
statement to be filed by April 30, 2001 are incorporated herein by reference in
Items 10, 11, 12 and 13.
PART I
ITEM 1-BUSINESS
BELMONT BANCORP.
Belmont Bancorp., (the "Company" or "Belmont"), 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 (the "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 the 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 Bank's St. Clairsville facility
serves as the location for the Company's and the Bank's executive,
administrative, finance and operations functions. 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 anywhere in the country and
acquisition and consolidation in those states that had not opted out by January
1, 1997.
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
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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")
represented a pivotal point in the history of the financial services industry.
The GLB Act swept away large parts of a regulatory framework that had its
origins in the Depression Era of the 1930s. Effective March 11, 2000, new
opportunities became 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 has 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 requires "satisfactory" or
higher Community Reinvestment Act compliance for insured depository institutions
and their financial holding companies in order 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 substantial portion of the Company's cash revenue is derived from
dividends paid by its subsidiary bank. These dividends are subject to various
legal and regulatory restrictions as summarized in Notes 16 and 20 of the
Company's Consolidated Financial Statements.
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 Financial Reform, Recovery and Enforcement Act of 1989 provides that a
holding company's controlled insured depository institutions are liable for any
loss incurred by the FDIC in connection with the default of any FDIC-assisted
transaction involving an affiliated insured bank or savings association. 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.
In August 1999, Belmont and the Bank entered into consent agreements with
the Federal Reserve Bank of Cleveland and the Office of the Comptroller of the
Currency under which Belmont and the Bank agreed to take specified actions and
adhere to specified operational procedures, as more fully described under Item
3.
FOREIGN OPERATIONS
Belmont Bancorp. has no foreign operations.
ITEM 2-PROPERTIES
DESCRIPTION OF PROPERTIES
In January 1996, the Bank relocated its 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.
3
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 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.
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 Office - This office is located at the west end of St.
Clairsville and 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
4
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 tortuous 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. Management believes that it has satisfied or is
in the process of satisfying all of the conditions of the order. 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. Management
believes that it has satisfied or is in the process of satisfying all of the
terms of the 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. The complaint has been amended to claim damages of $1,250,000.
This secretary has entered into a pleas agreement under which she has paid
$500,000 in restitution and received a prison sentence. The Bank believes that
it has valid defenses against the claim and intends to defend it vigorously. The
Bank has also filed cross-claims against the secretary and a third party it
believes benefited from the misappropriation of funds. 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.
In October 1999, 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 case has been scheduled for trial in May 2001. 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
5
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 court denied the
Company's motion to dismiss this case in July 2000. In August 2000, the
plaintiff filed an amended complaint, as to which the Company has filed an
answer, affirmative defenses and cross-claims against the Company's former
accountants, S.R. Snodgrass, A.C. and a principal thereof, and against J.
Vincent Ciroli, Jr., formerly the Company's President and Chief Executive
Officer. In February 2000, the court granted leave to the plaintiff to file a
second amended complaint. The second amended complaint eliminates the direct
claims against the Company and the Bank and the request for class action
certification. Accordingly, as amended, this action constitutes a derivative
suit against current and former officers and directors of the Company and the
Bank, which is being defended by the Company and the Bank on their behalf. The
parties are currently in the discovery phase of this case. 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. In September 2000, the court granted the
Company's motion to dismiss the declaratory judgment action. Progressive had
also asked this court, if Progressive is found to be liable under these
policies, to determine whether the Bank or other parties who have sued the Bank
in separate actions are entitled to the insurance proceeds. Progressive has
deposited with the court bonds in the aggregate amount of $7.75 million, which
amount Progressive believes is sufficient to satisfy any liabilities under the
policies in respect of this interpleader claim. This interpleader claim remains
before the court. 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
foreclosure of collateral securing indebtedness in the amount of $765,000 and
has filed a petition for involuntary bankruptcy against Beall Homes. In February
2001, the bankruptcy court lifted the stay it had placed on the Bank's
counterclaims against Beall Homes, thereby permitting the proceeding in the
Court of Common Pleas, Belmont County, Ohio to continue. The Bank intends to
vigorously defend this action and prosecute its own claims.
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. 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. In
January 2001, the Bank entered into a settlement agreement with the Otterbachers
under which they agreed to pay $200,000 to the Bank, $100,000 of which was paid
in January 2001, $60,000 of which is required to be paid in 2001 and the balance
of which is required to be paid in five equal annual installments beginning in
2002. Under the terms of settlement, the Otterbachers agreed to dismiss all
claims they had asserted against the Bank, including all lender liability
claims.
6
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.
PART II
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 February
28, 2001 was 3,380. The closing price of Belmont stock on March 16, 2001 was
$4.25 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.
High and low market prices and dividend information for the past two years
for Belmont's common stock are depicted in the following tables.
2000 1999
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Dividend Dividend
Quarter High Low per Share Quarter High Low per Share
- --------------------------------------------------------- ---------------------------------------------------------
1st $6.500 $2.063 $0.000 1st $23.75 $17.00 $0.120
2nd $3.250 $1.625 0.000 2nd 19.50 9.06 0.000
3rd $4.750 $2.250 0.000 3rd 11.50 4.50 0.000
4th $6.000 $2.625 0.000 4th 10.00 5.25 0.000
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Total $0.000 Total $0.120
================= ================
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 held in treasury on December 31, 2000 and 1999.
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ITEM 6 - SELECTED FINANCIAL DATA
The data presented herein should be read in conjunction with the audited
Consolidated Financial Statements incorporated by reference.
Consolidated Five Year Summary of Operations
For the Years Ended December 31, 2000, 1999, 1998, 1997 and 1996
($000s except per share data)
2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
Interest income $ 19,137 $ 25,870 $ 30,787 $ 28,348 $ 25,501
Interest expense 10,702 15,609 16,480 14,004 12,127
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income 8,435 10,261 14,307 14,344 13,374
Provision for loan losses 242 15,877 12,882 1,055 465
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 8,193 (5,616) 1,425 13,289 12,909
Securities gains (losses) 4 (880) 1,338 799 396
Trading gains (losses) - (10) 62 - -
Gain on sale of real estate - - 383 - -
Interest on federal tax refund 256 - - - -
Other operating income 2,123 2,563 2,183 2,010 1,861
Operating expenses 9,870 12,642 9,496 8,732 8,388
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 706 (16,585) (4,105) 7,366 6,778
Income taxes (benefit) (680) (5,554) (2,186) 1,421 1,776
- ------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1,386 ($11,031) ($1,919) $ 5,945 $ 5,002
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per common share (1) $ 0.16 ($2.11) ($0.37) $ 1.13 $ 0.94
- ------------------------------------------------------------------------------------------------------------------------------
Cash dividend declared per share (1) - $ 0.120 $0.385 $ 0.306 $ 0.240
Book value per common share (1) $ 2.31 $ 1.83 $4.86 $ 6.05 $ 5.17
- ------------------------------------------------------------------------------------------------------------------------------
Total loans $129,876 $ 166,979 $208,186 $224,900 $188,783
Total assets 281,788 315,767 438,283 388,713 333,903
Total deposits 231,686 255,432 304,351 263,908 261,539
Long term borrowings 20,000 20,000 91,401 69,635 19,676
Total shareholders' equity 25,602 11,231 25,364 31,899 27,332
- ------------------------------------------------------------------------------------------------------------------------------
(1) Restated for stock dividends paid during 1997 and 1998.
8
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 Year 2000 marked the beginning of the recovery of Belmont Bancorp. from
substantial loan losses incurred during 1999 and 1998. During 2000, the Company
successfully completed equity offerings that began in November 1999 and
concluded in June 2000 with a total of $11 million in new capital and 5,039,869
shares of common stock issued. Support from its shareholders and depositors has
enabled the Company to return to profitability and potentially allow for future
growth.
The following table depicts the performance of the Company over the past
three years.
($000s) except per share data 2000 1999 1998
----------------------------------------------------------------------------------------------------------
Income (loss) before income taxes $ 706 ($16,585) ($4,105)
Net income (loss) $1,386 ($11,031) ($1,919)
Basic earnings (loss) per common share $ 0.16 ($2.11) ($0.37)
Return on average assets 0.49% -2.79% -0.46%
Return on average total equity 7.77% -56.92% -5.76%
For the year ended 2000, the Company reported net income of $1,386,000, or
$0.16 per common share compared to a loss of $11,031,000 or a loss of $2.11 per
common share for the year ended 1999. For 1998, the Company had reported a loss
of $1,919,000, or a loss of $0.37 per share.
Income before federal income tax benefits was $706,000 for the year ended
2000 compared to pretax losses of $16,585,000 and $4,105,000 for the years ended
1999 and 1998, respectively.
The financial results of 1999 and 1998 reflect a period when Belmont faced
one of the most serious challenges in its 154 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., formerly the Bank's largest commercial borrower, precipitated the
recognition of large loan losses. 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. 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 during 1999 totaled
$11,650,000 and the loan loss provision was $15,877,000. New loan policies and
procedures were implemented to augment internal controls and strengthen
underwriting practices. In December 1999, a new chief executive officer was
recruited and costs associated with interim executive management were
eliminated.
In March 2000, a confirmation order was approved by the court in the
Schwartz Homes, Inc. bankruptcy. For the year ended December 31, 2000, the Bank
received settlement proceeds of $3.2 million of which $1.2 million was applied
to the remaining credit exposure for the Schwartz homebuilder loans, $1.8
million was recorded as recoveries in the allowance for loan losses, and the
remaining funds were recorded as recovery of legal expenses.
The Company continued to face unusually high operating expenses for the
year ended 2000. In particular, large legal expenses, deposit insurance costs,
and other insurance costs hindered profitability. Legal expenses were
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in excess of $1.1 million for the year, and FDIC deposit insurance and other
insurance costs increased by over $600,000 from the previous year.
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.
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, 2000,
1999, and 1998, and compute 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.
10
Consolidated Average Balance Sheets
For the Years Ended December 31, 2000, 1999, and 1998 (Fully Taxable Equivalent
Basis) ($000's)
2000 1999 1998
------------------------------------------------------------------------------------------
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 $143,012 $12,240 8.56% $193,295 $16,641 8.61% $222,961 $21,321 9.56%
Securities:
Taxable 66,038 4,479 6.78% 125,314 7,017 5.60% 134,337 8,053 5.99%
Exempt from income tax 44,581 3,090 6.93% 41,276 2,893 7.01% 24,261 1,802 7.43%
Trading account assets - - na 1,786 86 4.82% 1,193 68 5.70%
Federal funds sold 6,122 391 6.39% 5,277 269 5.10% 4,194 228 5.44%
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets 259,753 $20,200 7.78% 366,948 $26,906 7.33% 386,946 $31,472 8.13%
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks 9,483 11,377 10,972
Other assets 26,255 28,590 20,100
Market value depreciation
of securities available for sale (7,382) (4,486) (597)
Allowance for loan loss (8,046) (7,204) (4,312)
- ---------------------------------------------------------------------------------------------------------------------------------
Total Assets $280,063 $395,225 $413,109
=================================================================================================================================
11
2000 1999 1998
------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Out- Revenue/ Yield/ Out- Revenue/ Yield/ Out- Revenue/ Yield/
standing Cost Rate standing Cost Rate standing Cost Rate
- ---------------------------------------------------------------------------------------------------------------------------------
Liabilities
Interest bearing liabilities
Interest checking $ 24,464 $ 623 2.55% $ 40,649 $ 1,245 3.06% $ 45,864 $ 1,524 3.32%
Savings 68,652 2,231 3.25% 82,919 2,653 3.20% 82,196 2,709 3.30%
Other time deposits 112,605 6,311 5.60% 133,419 6,996 5.24% 134,485 7,438 5.53%
Other borrowings 29,682 1,537 5.18% 87,498 4,715 5.39% 86,084 4,809 5.59%
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 235,403 10,702 4.55% 344,485 15,609 4.53% 348,629 16,480 4.73%
- ---------------------------------------------------------------------------------------------------------------------------------
Demand deposits 24,749 28,865 29,910
Other liabilities 2,084 2,496 1,256
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 262,236 375,846 379,795
- ---------------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity 17,827 19,379 33,314
- ---------------------------------------------------------------------------------------------------------------------------------
Liabilities & Stockholders' Equity $280,063 $395,225 $413,109
=================================================================================================================================
Net interest income
margin on a taxable equivalent basis $ 9,498 3.66% $11,297 3.08% $14,992 3.87%
=================================================================================================================================
Net interest rate spread 3.23% 2.80% 3.41%
=================================================================================================================================
Interest bearing liabilities
to interest earning assets 90.63% 93.88% 90.10%
=================================================================================================================================
Fully taxable equivalent basis computed at effective federal tax rate of 34%.
Average loan balances include nonperforming loans.
12
Analysis of Net Interest Income Changes
For the Years Ended December 31, 2000, 1999, and 1998 (Taxable Equivalent Basis)
($000's)
2000 Compared to 1999 1999 Compared to 1998
----------------------------------- -----------------------------------
Volume Yield Mix Total Volume Yield Mix Total
- --------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in interest income:
Loans and leases ($4,329) ($97) $ 26 ($4,400) ($2,837) ($2,126) $283 ($4,680)
Securities:
Taxable (3,319) 1,482 (702) (2,539) (541) (531) 36 (1,036)
Exempt from income taxes 232 (32) (3) 197 1,264 (102) (71) 1,091
Trading account assets (86) (86) 86 (86) 34 (11) (5) 18
Federal funds sold 43 68 11 122 59 (14) (4) 41
- --------------------------------------------------------------------------------------------------------------------------
Total interest income change (7,459) 1,335 (582) (6,706) (2,021) (2,784) 239 (4,566)
- --------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in interest expense:
Interest checking (496) (210) 83 (623) (173) (119) 13 (279)
Savings (456) 42 (8) (422) 24 (79) (1) (56)
Other time deposits (1,091) 482 (75) (684) (59) (386) 3 (442)
Other borrowings (3,116) (184) 122 (3,178) 79 (170) (3) (94)
- --------------------------------------------------------------------------------------------------------------------------
Total interest expense change (5,159) 130 122 (4,907) (129) (754) 12 (871)
- --------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net interest
Income on a taxable equivalent basis ($2,300) $1,205 ($704) ($1,799) ($1,892) ($2,030) $227 ($3,695)
(Increase) decrease in taxable equivalent
adjustment (27) (351)
- --------------------------------------------------------------------------------------------------------------------------
Net interest income change ($1,826) ($4,046)
- --------------------------------------------------------------------------------------------------------------------------
13
The Company's net interest income declined by 15.9%, or $1,799,000, on a
taxable equivalent basis during 2000 compared to 1999. During 2000, the
Company's average interest-earning assets fell by approximately $107 million,
down 29.2% from 1999. Most of the downsizing of the Company occurred during the
fourth quarter of 1999 and the first half of 2000 as the Company reduced its
asset size as part of its strategy to achieve a 6% Tier 1 leverage ratio.
The yield on interest earning assets was up 45 basis points (a basis point
is equal to .01%) from 7.33% in 1999 to 7.78% in 2000 due to an increase in
yield on taxable securities. The cost of interest bearing liabilities was nearly
unchanged from 1999 to 2000. The net interest rate spread improved from 2.80%
during 1999 to 3.23% during 2000. The taxable equivalent net interest margin was
3.66% during 2000 compared to 3.08% for 1999 and 3.87% during 1998.
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 1999 to 2000 was generated
primarily by a decline in the volume of earning assets which was partially
offset by an improvement in the yield of earning assets. The decrease in the
Company's net interest income during the year-to-date periods presented from
1998 to 1999 was principally due to 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, decreased 6.8% and totaled $2,379,000 in 2000, compared to
$2,553,000 in 1999 and $2,245,000 in 1998. The table below shows the dollar
amounts and growth rates of the components of other operating income:
2000 1999 1998
(Expressed in thousands) Total Change Total Change Total
- ------------------------------------------------------------------------------------------------------------------
Trust income $ 419 -13.4% $ 484 4.5% $ 463
Service charges on deposits 848 -7.9% 921 22.5% 752
Interest on federal tax refund 256 na - na -
Earnings on bank-owned life insurance 231 -1.7% 235 -14.2% 274
Gain (loss) on sale of loans and
loans held for sale (40) -111.7% 341 136.8% 144
Trading profits (losses) - 100.0% (10) -116.1% 62
Other income (individually less than
1% of total income) 665 14.3% 582 5.8% 550
------------------------------------------------------------------
Subtotal 2,379 -6.8% 2,553 13.7% 2,245
Securities gains (losses) 4 100.5% (880) -165.8% 1,338
Gain on sale of real estate - na - -100.0% 383
------------------------------------------------------------------
Total $2,383 42.4% $1,673 -57.8% $3,966
==================================================================
Service charges on deposits declined 7.9% from $921,000 in 1999 to $848,000
in 2000. This decline is primarily the result of a reduction in the number of
deposit accounts. Service charges on deposits increased 22.5% from $752,000 in
1998 to $921,000 in 1999 due to higher overdrafts and return check fee income
and an increase in the fee schedule for commercial checking accounts.
During the second quarter of 2000, the Company recorded $256,000 in
interest earned on federal tax refunds for taxes paid in previous years.
14
A loss of $40,000 was recognized during 2000 for loans sold compared to a
$341,000 gain recorded during 1999 and a $144,000 gain in 1998.
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.
OPERATING EXPENSES
The table below details the dollar amounts of and percentage changes in
various categories of expense for the three years ended 2000, 1999, and 1998:
(Expressed in thousands) 2000 % change 1999 % change 1998
- ---------------------------------------------------------------------------------------------------------------
Taxes other than payroll and real estate $ 24 -90.6% $ 254 -48.8% $ 496
Supplies and printing 165 -29.2% 233 -22.1% 299
Insurance, including federal deposit insurance 774 358.0% 169 33.1% 127
Amortization of intangibles 10 -97.7% 439 124.0% 196
Legal fees 1,153 -31.0% 1,671 3113.5% 52
Consulting expense 139 -90.4% 1,442 1199.1% 111
Examinations and audits 359 -6.8% 385 80.8% 213
Prepayment penalties on Federal Home Loan
Bank advances - -100.0% 342 Na -
Legal settlements 12 -95.9% 295 Na -
Other (individually less than 1% of total income) 1,464 -18.6% 1,798 11.5% 1,612
------ ------ ------
Total $4,100 -41.7% $7,028 126.3% $3,106
====== ====== ======
Taxes (other than payroll and real estate taxes) were down $230,000 from
1999 to 2000 largely due to lower state franchise tax expense. Taxes were also
lower by $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. FDIC deposit premiums for the year 2000 were $667,000
compared to $110,000 for 1999 and $65,000 for 1998. FDIC costs are expected to
decline during 2001 based on the improvement in the Bank's capital ratios as of
September 30, 2000, the measurement date for FDIC assessments for the first half
of 2001. Fidelity bond and director and officer liability insurance costs also
increased by $49,000 from 1999 to 2000 based on new policies obtained during
July 2000.
Amortization of intangible assets during 2000 was related to mortgage
servicing rights. The estimated value of mortgage servicing rights at the end of
2000 was $320,000 for a mortgage servicing porfolio of $38 million. The balance
of core deposit 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.
Amortization of core deposit intangibles for 1998 was $196,000.
Legal expenses were for costs related to lending and loan collection
efforts, civil litigation against Progressive Insurance and others related to
the Schwartz Homes, Inc. matters, regulatory matters, and a shareholder action
against the Company, the Board of Directors and several current and former
officers of the Bank. Legal
15
expenses for 2000 totaled $1,153,000, down from $1,671,000 for 1999. Significant
legal expenses are expected during 2001 as well.
Consulting expenses of $139,000 for 2000 and $111,000 for 1998 were
significantly less than the $1,442,000 in consulting expense recorded for 1999.
During 1999, the cost of interim management services charged to consulting
expenses totaled $1,180,000, and consulting expenses of $194,000 were related to
accounting and other services associated with the Schwartz Homes, Inc. loan
collection.
Examination and audit expense declined slightly during 2000 compared to
1999. This cost had 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.
Prepayment penalties associated with the repayment of borrowings at the
Federal Home Loan Bank totaled $342,000 during 1999. These costs were incurred
as part of the plan to reduce the asset size of the Company thereby improving
the Bank's capital ratios. No repayment penalties were incurred during 2000.
Legal settlement expense for 2000 totaled $12,000 compared to $295,000 for
1999. This expense was related to the Schwartz Homes, Inc. litigation.
Other expenses incurred in 2000 and 1998 were significantly less than the
expense incurred in 1999, principally due to expenses associated with interim
management services retained during the last half of 1999.
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, 2000 was 7.24%. Net unrealized
losses in the securities portfolio at December 31, 2000 totaled $2,947,000,
compared to net unrealized losses of $8,489,000 at December 31, 1999. The
decline in unrealized losses was the result of a lower interest rate environment
at December 31, 2000 compared to December 31, 1999. Bond prices rise as interest
rates decline. Management believes the current declines in fair value are
temporary.
16
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, 2000
Over 10 Year
Maturity * 1 year 1-5 Year Maturity 6-10 Year Maturity Maturity
($000s) Amount Yield Amount Yield Amount Yield Amount Yield
- ------------------------------------------------------------------------------------------------------------------------------------
U. S. Treasury securities $ 100 5.04% $ - $ $ -
U.S. Government agencies
and corporations/(b)/ - - 2,310 7.79% 3,001 7.01% - -
States and political
subdivisions/(a)/ 47 10.14% 96 10.30% 408 10.65% 41,037 7.31%
Corporate debt - - - - - - 2,745 9.13%
Agency mortgage-backed
securities/(b)/ 171 4.11% 17,198 6.87% 11,899 7.49% 5,423 7.94%
Collateralized mortgage
obligations 4,264 7.31% 8,232 7.05% 920 8.29% 7,685 6.46%
- -----------------------------------------------------------------------------------------------------------------------------------
Total fair value $ 4,582 7.17% $ 27,836 7.01% $ 16,228 7.51% $ 56,890 7.29%
- -----------------------------------------------------------------------------------------------------------------------------------
Amortized cost $ 4,582 $ 28,159 $ 16,357 $ 59,330
- -----------------------------------------------------------------------------------------------------------------------------------
Total
($000s) Amount Yield
- ----------------------------------------------------------------
U. S. Treasury securities $ 100 5.04%
U.S. Government agencies
and corporations/(b)/ 5,311 7.35%
States and political
subdivisions/(a)/ 41,588 7.35%
Corporate debt 2,745 9.13%
Agency mortgage-backed
securities/(b)/ 34,691 7.24%
Collateralized mortgage
obligations 21,101 6.94%
- ----------------------------------------------------------------
Total fair value $ 105,536 7.24%
- ----------------------------------------------------------------
Amortized cost $ 108,428
- ----------------------------------------------------------------
/(a)/ Taxable equivalent yields
/(b)/ Maturities of mortgage-backed securities and agency loan pools are based
on estimated average life.
* less than
17
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 $7,231,000 and an estimated fair value of $7,137,000.
Credit risk on privately issued bonds is evaluated based upon independent rating
agencies and on the underlying collateral of the obligation.
At December 31, 2000, 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 subsequent to purchase. The following table
details the issuer, book value and market value of these investments.
(Expressed in thousands)
Estimated
Issuer Amortized Cost Fair Value
- --------------------------------------------------------------------------------------------------
Privately Issued Collateralized Mortgage Obligations:
Norwest Asset Securities Corporation $ 3,438 $ 3,396
General Obligations:
Hampton Township, PA School District 4,337 4,225
Revenue Bonds:
Suburban Lancaster PA Sewer Authority 2,835 2,600
Equity Securities:
Federal Home Loan Bank stock 3,086 3,086
--------------------------------------------
Total $13,696 $13,307
============================================
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) 2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
Commercial loans (a):
Real estate construction $ 12,856 $ 9,732 $ 135 $ 1,418 $ 1,327
Real estate mortgage 22,738 17,478 14,719 19,984 25,954
Commercial, financial
and agricultural 48,789 81,842 119,730 109,618 80,554
--------------------------------------------------------------------------------
Total commercial loans $ 84,383 $109,052 $134,584 $131,020 $107,835
--------------------------------------------------------------------------------
Consumer loans:
Residential mortgage $ 40,794 $ 47,789 $ 58,099 $ 77,995 $ 71,715
Installment loans 3,832 9,315 14,483 14,435 7,626
Credit card and other consumer 867 823 1,020 1,450 1,607
--------------------------------------------------------------------------------
Total consumer loans $ 45,493 $ 57,927 $ 73,602 $ 93,880 $ 80,948
--------------------------------------------------------------------------------
Total loans and leases $129,876 $166,979 $208,186 $224,900 $188,783
======================================================================================
18
(a) Certain prior year amounts have been reclassified to conform to current year
presentation.
An analysis of maturity and interest rate sensitivity of business loans at the
end of 2000 follows:
Under 1 to 5 Over 5
(Expressed in thousands) 1 year Years Years Total
- ------------------------------------------------------------------------------------------------------------------------
Domestic loans:
Real estate construction $ 3,809 $ 6,010 $1,192 $11,011
Real estate mortgage 12,832 4,933 3,113 20,878
Commercial, financial
and agricultural 27,302 12,102 5,164 44,568
--------------------------------------------------------------------
Total business loans (b) $43,943 $23,045 $9,469 $76,457
====================================================================
Rate sensitivity:
Predetermined rate $ 1,935 $ 5,771 $8,823 $16,529
Floating or adjustable rate 42,008 17,274 646 59,928
--------------------------------------------------------------------
Total domestic business loans $43,943 $23,045 $9,469 $76,457
====================================================================
Foreign loans 0 0 0 0
====================================================================
(b) 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 diversifying specific industry. The Bank has certain
concentrations of credit, which are more fully described in Footnote 15 of the
Company's financial statements beginning on page F-1. Management regularly
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 loan
losses by regularly 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 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 loan losses totaled $7,667,000, or 5.9% of total loans
and leases at December 31, 2000. At the end of the previous year, the allowance
for loan losses was $9,702,000, or 5.8% of total loans and leases. The
provision for loan losses charged to expense during 2000 was $242,000 compared
to $15,877,000 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 defunct retailer of mobile homes formerly 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
19
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. In April 1999, Schwartz
Homes unexpectedly ceased operations and in June 1999 other creditors of
Schwartz Homes placed it in involuntary bankruptcy.
In March 2000, a confirmation order was approved by the court in the
Schwartz Homes, Inc. bankruptcy. For the year ended December 31, 2000, the Bank
received settlement proceeds of $3.2 million of which $1.2 million was applied
to the remaining credit exposure for the Schwartz homebuilder loans, $1.8
million was recorded as recoveries in the allowance for loan losses, and the
remaining funds were recorded as recovery of legal expenses. Of the $2.3
million in net charge-offs for the year ended December 31, 2000, $1.5 were
related to the Schwartz Homes loan relationship. There are no remaining loans
outstanding related to Schwartz Homes or its customers at December 31, 2000.
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.
Of the $11.5 million in net charge-offs for the year ended December 31,
1998, $11.2 million were related to the Schwartz Homes consumer loans.
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) 2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
Domestic:
Commercial, financial and agricultural $4,096 $4,692 $2,254 $2,564 $1,823
Commercial real estate 2,207 1,154 507 313 269
Residential mortgage 301 371 295 358 338
Consumer 94 3,485 2,329 370 313
Foreign - - - - -
Unallocated 969 - 90 529 410
--------------------------------------------------------
Total $7,667 $9,702 $5,475 $4,134 $3,153
========================================================
Loans outstanding as a percentage of each loan category are depicted in the
following table:
2000 1999 1998 1997 1996
---------------------------------------------------------------
Commercial, financial and agricultural 35.3% 58.6% 56.5% 47.6% 40.3%
Real estate-construction 9.9% 0.1% 0.1% 0.6% 0.7%
Real estate-mortgage 31.4% 27.8% 27.3% 34.4% 38.0%
Commercial real estate 17.5% 5.5% 7.1% 8.9% 13.7%
Installment loans to individuals 3.6% 6.1% 7.5% 7.1% 4.9%
Obligations of political subdivisions in the U.S. 2.3% 1.9% 1.5% 1.4% 2.4%
Lease financing 0.0% 0.0% 0.0% 0.0% 0.0%
---------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===============================================================
20
The following tables set forth the five-year historical and statistical
information on the allowance for loan losses:
(Expressed in thousands) 2000 1999 1998 1997 1996
- ---------------------------------------------------------------------------------------------
Balance as of January 1 $ 9,702 $ 5,475 $ 4,134 $ 3,153 $ 2,703
Provision for loan losses 242 15,877 12,882 1,055 465
Adjustment incident to acquisition 0 0 0 0 0
Loans charged off:
Real estate 119 151 133 24 30
Commercial 812 8,435 178 23 0
Consumer 3,369 3,831 11,245 43 32
Direct financing leases 0 0 0 0 0
-----------------------------------------------------
Total loans charged-off 4,300 12,417 11,556 90 62
Recoveries of loans previously
charged-off:
Real estate 6 282 11 2 2
Commercial 136 73 1 1 0
Consumer 1,881 412 3 13 45
Direct financing leases 0 0 0 0 0
-----------------------------------------------------
Total recoveries 2,023 767 15 16 47
-----------------------------------------------------
Net charge-offs 2,277 11,650 11,541 74 15
-----------------------------------------------------
Balance at December 31 $ 7,667 $ 9,702 $ 5,475 $ 4,134 $ 3,153
=====================================================
(Expressed in thousands) 2000 1999 1998 1997 1996
- ---------------------------------------------------------------------------------------------
Loans and leases outstanding
at December 31 $129,876 $166,979 $208,186 $224,899 $188,783
Allowance as a percent of loans
and leases outstanding 5.90% 5.81% 2.63% 1.84% 1.67%
Average loans and leases $143,012 $193,295 $222,961 $208,265 $174,445
Net charge-offs as a percent of
average loans and leases 1.59% 6.03% 5.18% 0.04% 0.01%
The following schedule depicts the five-year history of non-performing
assets.
(Expressed in thousands) 2000 1999 1998 1997 1996
- ----------------------------------------------------------------------------
Nonaccrual loans and leases $8,518 $13,769 $8,569 $1,515 $ 143
Loans 90 days or more past due
but accruing interest 2 541 4 44 74
Other real estate owned 766 - - 20 66
----------------------------------------
Total $9,286 $14,310 $8,573 $1,579 $ 283
========================================
Restructured loans in compliance with modified terms totaled $230,000 and
$1,046,000 at December 31, 2000 and 1999, respectively.
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
21
balance of loans classified by management as substandard due to delinquency and
a change in financial position and not included in non-performing assets was
$14,687,000 and $19,246,000 at the December 31, 2000 and 1999, respectively.
Loan classified as doubtful and not included in non-performing assets totaled
$224,000 at December 31, 2000. There were no loans classified as doubtful at
December 31, 1999.
DEPOSITS
Primarily, core deposits are used to fund interest-earning assets. 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 2000 1999 1998
- -------------------------------------------------------------------------------------------
Demand $ 24,749 $ 28,865 $ 29,910
Interest bearing checking 24,464 40,649 45,864
Savings 68,652 82,919 82,196
Other time 95,608 106,599 107,398
Certificates-$100,000 and over 16,997 26,820 27,087
----------------------------------------------
Total average deposits $ 230,470 $285,852 $292,455
==============================================
Distribution of Average Deposits 2000 1999 1998
- -------------------------------------------------------------------------------------------
Demand 10.7% 10.1% 10.2%
Interest bearing checking 10.6% 14.2% 15.7%
Savings 29.8% 29.0% 28.1%
Other time 41.5% 37.3% 36.7%
Certificates-$100,000 and over 7.4% 9.4% 9.3%
----------------------------------------------
Total 100.0% 100.0% 100.0%
===============================================
Change in Average 1999 1998 1997
Deposit Sources to 2000 to 1999 to 1998
- -------------------------------------------------------------------------------------------
Demand ($4,116) ($1,045) $ 32
Interest bearing checking (16,185) (5,215) 2,388
Savings (14,267) 723 3,560
Other time (10,991) (799) 5,993
Certificates-$100,000 and over (9,823) (267) 13,188
----------------------------------------------
Total ($55,382) ($6,603) $ 25,161
===============================================
The decline in average deposits during 1999 and 2000 is attributable to a
number of factors. The negative publicity resulting from the Bank's loan losses
had an adverse impact on bank deposits. In addition, the Bank actively reduced
deposits to shrink its asset size thereby reducing the amount of capital
required to meet the terms of its regulatory agreements. There was also a sale
of $10 million in deposits during January of 1999.
Deposit trends have increased during the last half of 2000. Average
deposits for the fourth quarter of 2000 were $229 million, up $4 million from
the third quarter of 2000.
BORROWINGS
Other sources of funds for the Company include short-term repurchase
agreements and Federal Home Loan Bank borrowings.
22
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
$23.7 million, or 9.3%, from the end of 1999 to 2000 and $48.9 million, or
16.1%, from the end of 1998 to 1999. As discussed above, these trends were the
result of adverse publicity surrounding the Bank's financial condition, planned
reductions in deposit levels to facilitate capital restoration and a branch
sale. Average deposits decreased $55.4 million, or 19.4%, during 2000 compared
to 1999. Average deposits decreased $6.6 million, or 2.3%, during 1999 compared
to 1998. Deposit trends stabilized midyear during 2000 and increased during the
third and fourth quarters of 2000.
The Bank also has lines of credit with various correspondent banks
totaling $5,100,000 that may be used as an alternative funding source; none of
these lines were drawn upon at December 31, 2000. The Bank has an unused credit
line with the Federal Home Loan Bank for $20 million. All borrowings at the
Federal Home Loan Bank are subject to eligible collateral requirements.
Liquidity may be impacted by the ability of the Company to generate future
earnings.
At December 31, 2000, shareholders' equity was $25.6 million compared to
$11.2 million at December 31, 1999, an increase of $14.4 million. The increase
in capital occurred as a result of the sale of common stock during 2000 and an
improvement in the market value of securities classified as available for sale.
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
may include a portion of deferred tax assets. However, presently none of the
Company's deferred tax assets are included as Tier 1 capital. Total capital
consists of Tier I capital, plus certain debt instruments and a portion of the
allowance for loan losses.
The following table shows several capital and liquidity ratios for the
Company for the last two years:
December 31 2000 1999
- --------------------------------------------------------------------------
Average shareholders' equity to:
Average assets 6.4% 4.9%
Average deposits 7.7% 6.8%
Average loans and leases 12.5% 10.0%
Primary capital 11.8% 6.6%
Risk-based capital ratio:
Tier 1 12.7% 5.6%
Total 13.9% 6.9%
Tier 1 leverage ratio 7.8% 3.5%
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 3, the Bank entered into an agreement
with the Office of the Comptroller of the Currency to maintain a Tier 1 leverage
ratio of at least 6.0%. As a result of its recapitalization efforts, the Bank
was formally notified that it had achieved an adequately capitalized designation
under Prompt Corrective Action regulations as of June 30, 2000 in a letter
23
from the Office of the Comptroller of the Currency dated July 27, 2000. There
are no conditions or events since that notification that management believes has
changed the Bank's capital category.
See also Notes 2 and 20 to the Company's consolidated financial
statements.
DIVIDENDS
The following table presents dividend payout ratios for the past three
years:
2000 1999 1998
Total dividends declared
as a percentage of net income 0.00% * *
Common dividends declared
as a percentage of earnings per
common share 0.00% * *
* not applicable because the Company reported losses for 1999 and 1998.
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 the Company. The approval of the Comptroller of the Currency
will be required for future dividends from the Bank to the Company 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.
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 this Report concerning the manner in which
Belmont intends to conduct its future operations, and potential trends that may
impact future results of operations, are forward-looking statements. Belmont may
be unable to realize its plans and objectives due to various important factors,
including, but not limited to, the factors described below. These and other
factors are more fully discussed elsewhere in this Report.
. Belmont has entered into consent agreements with the Federal Reserve Bank
of Cleveland and the Office of the Comptroller of the Currency that
require it to take various actions and meet various requirements. If
Belmont fails to satisfy all of these requirements, the Comptroller of the
Currency and Federal Reserve Bank could potentially assume complete or
significantly greater control of Belmont's operations.
. Belmont has recognized substantial loan losses in recent years,
principally related to loans made under the direction of prior management.
While Belmont has created what it believes are appropriate loan loss
reserves, Belmont could incur significant additional loan losses in future
periods, particularly if general economic conditions or conditions in
particular industries in which its loans are concentrated deteriorate.
24
. Belmont is subject to increasingly vigorous and intense competition from
other banking institutions and from various financial institutions and
other nonbank or non-regulated companies or firms that engage in similar
activities. Many of these institutions have significantly greater
resources than Belmont.
. Belmont is currently engaged in certain significant lawsuits. In addition
to making significant expenditures for legal fees, adverse judgments in
one or more of these lawsuits could have a materially adverse impact on
Belmont's financial condition.
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.
The earnings simulation model forecasts the effects on income under a
variety of scenarios. This model includes assumptions about how the balance
sheet is likely to evolve through time in different interest rate environments.
Loan and deposit growth rate assumptions are derived from historical analysis
and management's outlook, as are the assumptions used to project yields and
rates for new loans and deposits. Securities portfolio maturities and
prepayments are assumed to be reinvested in similar instruments. Mortgage loan
prepayment assumptions are developed from industry median estimates of
prepayment speeds.
Based on the earnings simulation model at December 31, 2000, 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 ($654) -7.1%
Down 100 basis points (170) -1.8%
Up 100 basis points 163 1.8%
Up 200 basis points 210 2.3%
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%
25
The net present value estimation ("NPV") measure is used for discerning
levels of risk present in the balance sheet that might not be taken into account
in the earnings simulation model due to the shorter time horizon used by that
model. The NPV of the balance sheet, at a point in time, is defined as the
discounted present value of asset cash flows minus the discounted value of
liability cash flows. The NPV measure also assumes a static balance sheet,
versus the growth assumptions that are incorporated into the earnings simulation
measure and an unlimited time horizon instead of the one-year horizon applied in
the earnings simulation. As with earnings simulation modeling, assumptions about
the timing and variability of balance sheet cash flows are important to NPV
analysis. The estimated decline in the present value of equity as a percentage
of the total market value of equity at December 31, 2000 would be 21% 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.
Supplementary Data
Summarized Quarterly Financial Information
($000's except per share data)
First Second Third Fourth
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------
2000
- --------------------------------------------------------------------------------------------------
Interest income $ 4,815 $ 4,614 $ 4,921 $ 4,787
Interest expense 2,831 2,632 2,560 2,679
- --------------------------------------------------------------------------------------------------
Net interest income 1,984 1,982 2,361 2,108
Provision for loan losses 242 - - -
Securities gains (losses) (1) 1 - 4
Net overhead (1) 1,983 1,523 1,908 2,077
- --------------------------------------------------------------------------------------------------
Income (loss) before income taxes (242) 460 453 35
Income tax benefit (302) (66) (57) (255)
- --------------------------------------------------------------------------------------------------
Net income $ 60 $ 526 $ 510 $ 290
Basic earnings per common share $ 0.01 $ 0.07 $ 0.05 $ 0.03
- --------------------------------------------------------------------------------------------------
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
Securities 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 tax benefit (1,657) (499) (2,202) (1,196)
- --------------------------------------------------------------------------------------------------
Net income ($2,609) ($945) ($3,866) ($3,611)
Basic loss per common share ($0.50) ($0.18) ($0.74) ($0.69)
(1) Noninterest income exclusive of securities gains (losses) less noninterest
expense.
26
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
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
The information required by this section will be included in the Company's
Proxy Statement to be filed with the Securities and Exchange Commission on or
before April 30, 2001. Such information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this section will be included in the Company's
Proxy Statement to be filed with the Securities and Exchange Commission on or
before April 30, 2001. Such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this section will be included in the Company's
Proxy Statement to be filed with the Securities and Exchange Commission on or
before April 30, 2001. Such information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this section will be included in the Company's
Proxy Statement to be filed with the Securities and Exchange Commission on or
before April 30, 2001. Such information is incorporated herein by reference.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements as listed on page 29.
2. Financial Statement Schedules as listed on page 29.
3. Exhibits as listed on page E-1.
(b) Reports on Form 8-K.
None.
27
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 March 19, 2001.
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 March 19, 2001
- --------------------------------------------------------------------------------------------------------------------
/s/ Wilbur R. Roat Director, President & Chief Executive Officer March 19, 2001
- --------------------------------------------------------------------------------------------------------------------
/s/ Jane R. Marsh Secretary (principal financial and accounting officer) March 19, 2001
- --------------------------------------------------------------------------------------------------------------------
/s/ Joseph F. Banco Director March 19, 2001
- --------------------------------------------------------------------------------------------------------------------
/s/ Jay A. Beck Director March 19, 2001
- --------------------------------------------------------------------------------------------------------------------
/s/ David R. Giffin Director March 19, 2001
- --------------------------------------------------------------------------------------------------------------------
/s/ John H. Goodman, II Director March 19, 2001
- --------------------------------------------------------------------------------------------------------------------
/s/ Charles J. Kaiser, Jr. Director March 19, 2001
- --------------------------------------------------------------------------------------------------------------------
/s/ Terrence A. Lee Director March 19, 2001
- --------------------------------------------------------------------------------------------------------------------
/s/ Tom Olszowy Director March 19, 2001
- --------------------------------------------------------------------------------------------------------------------
/s/ Keith A. Sommer Director March 19, 2001
- --------------------------------------------------------------------------------------------------------------------
/s/ Robert W. Whiteside Director March 19, 2001
- --------------------------------------------------------------------------------------------------------------------
/s/ Charles A. Wilson, Jr. Director March 19, 2001
- --------------------------------------------------------------------------------------------------------------------
28
INDEX TO FINANCIAL STATEMENTS
Consolidated Balance Sheets at December 31, 2000 and 1999 F-1
Consolidated Statements of Income for the years ended
December 31, 2000, 1999 and 1998 F-2
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2000, 1999 and 1998 F-3
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998 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-20
29
Belmont Bancorp. and Subsidiaries
Consolidated Balance Sheets
($000's)
- -------------------------------------------------------------------------------
December 31,
Assets 2000 1999
---------------------------
Cash and due from banks $ 11,270 $ 15,439
Federal funds sold 14,730 2,025
Loans held for sale -- 1,845
Securities available for sale at fair value 109,684 110,692
Loans 129,876 165,134
Less allowance for loan losses (7,667) (9,702)
---------------------------
Net loans 122,209 155,432
Premises and equipment, net 6,792 7,263
Deferred federal tax assets 7,346 8,551
Cash surrender value of life insurance 4,419 4,196
Federal taxes receivable -- 5,696
Accrued income receivable 1,658 1,751
Other assets 3,680 2,877
---------------------------
Total Assets $ 281,788 $ 315,767
===========================
Liabilities and Shareholders' Equity
Liabilities
Noninterest bearing deposits:
Demand $ 25,123 $ 28,685
Interest bearing deposits:
Demand 26,136 28,456
Savings 66,857 77,403
Time 113,570 120,888
---------------------------
Total deposits 231,686 255,432
Securities sold under repurchase agreements 1,204 6,093
Federal funds purchased and other short-term
borrowings -- 19,740
Long-term borrowings 20,000 20,000
Accrued interest on deposits and other borrowings 820 747
Other liabilities 2,476 2,524
---------------------------
Total liabilities 256,186 304,536
---------------------------
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; 11,153,195 shares issued at 12/31/00,
5,288,326 shares issued at 12/31/99 2,788 1,321
Additional paid-in capital 17,414 7,904
Treasury stock at cost (51,792 shares) (1,170) (1,170)
Retained earnings 8,515 7,129
Accumulated other comprehensive loss (1,945) (5,603)
---------------------------
Total shareholders' equity 25,602 11,231
---------------------------
Total liabilities and shareholders' equity $ 281,788 $ 315,767
===========================
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, 2000, 1999 and 1998 ($000's)
- -------------------------------------------------------------------------------
Interest Income 2000 1999 1998
---------------------------------------
Loans:
Taxable $ 11,867 $ 16,223 $ 20,923
Tax-exempt 255 284 271
Securities:
Taxable 4,254 6,642 7,720
Tax-exempt 2,139 1,985 1,241
Dividends 231 381 336
Interest on trading securities -- 86 68
Interest on federal funds sold 391 269 228
---------------------------------------
Total interest income 19,137 25,870 30,787
---------------------------------------
Interest Expense
Deposits 9,165 10,894 11,671
Other borrowings 1,537 4,715 4,809
---------------------------------------
Total interest expense 10,702 15,609 16,480
---------------------------------------
Net interest income 8,435 10,261 14,307
Provision for Loan Losses 242 15,877 12,882
---------------------------------------
Net interest income (loss) after
provision for loan losses 8,193 (5,616) 1,425
---------------------------------------
Noninterest Income
Trust fees 419 484 463
Service charges on deposits 848 921 752
Interest on federal tax refund 256 -- --
Other operating income 896 817 824
Trading gains (losses) -- (10) 62
Securities gains (losses) 4 (880) 1,338
Gain (loss) on sale of
loans and loans held for sale (40) 341 144
Gain on sale of real estate -- -- 383
---------------------------------------
Total noninterest income 2,383 1,673 3,966
---------------------------------------
Noninterest Expense
Salary and employee benefits 4,066 3,826 4,633
Net occupancy expense of premises 839 898 824
Equipment expenses 865 891 933
Other operating expenses 4,100 7,027 3,106
---------------------------------------
Total noninterest expense 9,870 12,642 9,496
---------------------------------------
Income (loss) before income taxes 706 (16,585) (4,105)
Income Tax Benefit (680) (5,554) (2,186)
---------------------------------------
Net income (loss) $ 1,386 $ (11,031) $ (1,919)
=======================================
Weighted Average Number of
Shares Outstanding 8,778,621 5,235,431 5,252,161
=======================================
Basic Earnings (loss)
Per Common Share $ 0.16 $ (2.11) $ (0.37)
=======================================
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, 2000, 1999 and 1998 ($000's)
- -------------------------------------------------------------------------------
Accumulated
Other
Additional Compre- Compre-
Preferred Common Paid-in- Retained Treasury hensive hensive
Total Stock Stock Capital Earnings Stock Income (Loss) Income (Loss)
--------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $ 31,899 $ -- $ 1,321 $ 7,781 $22,729 $ (131) $ 199
Comprehensive income
Net loss (1,919) (1,919) $ (1,919)
Other comprehensive
income, net of tax
Unrealized loss on securities
net of reclassification
adjustment (1,398) (1,398) (1,398)
----------
Comprehensive income (loss) $ (3,317)
==========
Cash dividends declared:
Common stock ($.385 per share) (2,022) (2,022)
Purchase of treasury stock (1,308) (1,308)
Issuance of treasury stock 112 73 39
-------------------------------------------------------------------------------
Balance, December 31, 1998 $ 25,364 -- $ 1,321 $ 7,854 $18,788 $(1,400) $(1,199)
Comprehensive income
Net loss (11,031) (11,031) $ (11,031)
Other comprehensive
income, net of tax
Unrealized loss on
securities net of
reclassification
adjustment (4,404) (4,404) (4,404)
----------
Comprehensive income (loss) $ (15,435)
==========
Cash dividends declared:
Common stock ($.12 per share) (628) (628)
Issuance of Series A
convertible preferred stock 1,650 1,650
Issuance of treasury stock 280 50 230
-------------------------------------------------------------------------------
Balance, December 31, 1999 $ 11,231 $ 1,650 $ 1,321 $ 7,904 $ 7,129 $(1,170) (5,603)
Comprehensive income
Net income 1,386 1,386 $ 1,386
Other comprehensive income,
net of tax
Unrealized gain on securities
net of reclassification
adjustment 3,658 3,658 3,658
----------
Comprehensive income $ 5,044
==========
Conversion of Series A preferred
stock to common stock -- (1,650) 206 1,444
Issuance of common stock 9,327 1,261 8,066
-------------------------------------------------------------------------------
Balance, December 31, 2000 $ 25,602 $ -- $ 2,788 $17,414 $ 8,515 $(1,170) $(1,945)
===============================================================================
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, 2000, 1999 and 1998 ($000's)
- -------------------------------------------------------------------------------
2000 1999 1998
--------------------------------------
Operating Activities
Net income (loss) $ 1,386 $ (11,031) $ (1,919)
Adjustments to reconcile
net income (loss) to net
cash flows from
operating activities:
Provision for loan
losses 242 15,877 12,882
Depreciation and
amortization expense 675 710 743
Amortization of
investment security
premiums 593 2,419 2,403
Accretion of investment
security discounts (610) (648) (302)
Amortization of
intangibles 10 439 196
Securities (gains)
losses (4) 880 (1,338)
Trading (gains) losses -- 10 (63)
Deferred taxes (680) (4,668) 83
Proceeds from sale of
trading securities -- 13,592 12,893
Purchase of securities
for trading account -- (15,516) (14,865)
Gain (loss) on sale of
fixed assets (4) -- (384)
Gain (loss) on sale of
loans 40 (341) (144)
Changes in:
Interest receivable 93 980 (144)
Interest payable 73 (149) 165
Loans held for sale 1,805 (111) (850)
Federal tax refund 5,696 -- --
Others, net (280) (3,478) (1,382)
--------------------------------------
Cash from operating
activities 9,035 (1,035) 7,974
--------------------------------------
Investing Activities
Proceeds from:
Maturities and calls of
securities 4,557 6,237 4,370
Sale of securities
available for sale 5,667 73,846 87,580
Principal collected on
mortgage-backed securities 11,046 40,897 37,964
Sale of loans 2,178 9,008 20,144
Redemption of life
insurance contracts -- 1,741 --
Sales of other real
estate owned 97 155 39
Sales of premises and
equipment 9 -- 612
Purchases of:
Securities available for sale (14,698) (39,289) (193,441)
Life insurance contracts -- (81) (413)
Premises and equipment (209) (596) (947)
Changes in:
Federal funds sold (12,705) (2,025) --
Loans, net 29,902 20,516 (13,998)
--------------------------------------
Cash from investing
activities 25,844 110,409 (58,090)
--------------------------------------
Financing Activities
Proceeds from:
Advances of long-term
debt -- -- 35,000
Issuance of preferred
stock -- 1,650 --
Issuance of common stock 9,327 -- --
Issuance of treasury
stock -- 280 112
Payments on long-term debt -- (71,401) (13,233)
Dividends paid on common stock -- (628) (2,022)
Purchase of treasury stock -- -- (1,308)
Sale of branch deposits -- (10,311) --
Changes in:
Deposits (23,746) (38,608) 40,443
Repurchase agreements (4,889) (146) 983
Short-term borrowings (19,740) 15,790 (10,685)
--------------------------------------
Cash from financing activities (39,048) (103,374) 49,290
--------------------------------------
Increase (Decrease) in
Cash and Cash Equivalents (4,169) 6,000 (826)
Cash and Cash Equivalents,
Beginning of Year 15,439 9,439 10,265
--------------------------------------
Cash and Cash Equivalents,
End of Year $ 11,270 $ 15,439 $ 9,439
======================================
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, 2000, 1999 and 1998
- -------------------------------------------------------------------------------
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.
Securities Held to Maturity: 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.
Securities Available for Sale: 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. These gains and losses are reported in current earnings.
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 2000 or 1998.
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
incurred 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.
F-5
Belmont Bancorp. and Subsidiaries
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2000, 1999 and 1998
- -------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies (continued)
Allowances for impaired loans are generally determined based on collateral
values or the present value of estimated cash flows.
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
according to the loan agreement. 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, 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.
F-6
Belmont Bancorp. and Subsidiaries
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2000, 1999 and 1998
- -------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies (continued)
Business Segments: Internal financial information is primarily reported and
aggregated in the banking line of business.
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. The preferred stock was converted to common
stock during 2000. Diluted earnings per common share includes the dilutive
effect of additional potential common shares issuable under stock options.
These options were anti-dilutive in 1999 and 2000.
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 and
$196,000 in the period ended December 31, 1998.
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. This process is an
ongoing activity and continued throughout 2000. 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
December 31, 2000, the Bank has unused short-term lines of credit with the
Federal Home Loan Bank and other correspondent banks of approximately $24
million to meet its liquidity requirements.
As more fully described in Note 20, formal regulatory action by the Federal
Reserve Bank and the Office of the Comptroller of the Currency (OCC) have
required the Company and Bank to meet minimum capital requirements including
improving and maintaining its Tier 1 capital as a percent of average assets (or
Tier 1 leverage ratio) at 6% so long as the regulatory agreements remain in
place. The Bank achieved this requirement by June 30, 2000.
3. Shareholders' Equity
On June 30, 2000, the Company completed a recapitalization plan it began in
November 1999 with the sale of $1.65 million of convertible preferred stock to
its Board of Directors, which stock was subsequently converted into 825,000
shares of the Company's common stock based on a common stock price of $2.00 per
share. The shares of common stock issued in the conversion are "restricted
securities" as that term is defined in Rule 144 under the Securities Act of
1933.
In February 2000, the Company commenced the first of two successive public
offerings. In the initial offering, which closed in April 2000, the Company
sold 2,039,869 shares of common stock at $2.00 per share and received $4.1
million in gross offering proceeds. In the second offering, which began in May
2000 and closed in June 2000, the Company sold 3,000,000 shares of common stock,
also at $2.00 per share. The Company received $6.0 million in gross offering
proceeds in this fully subscribed follow-on offering.
In this recapitalization, the Company issued a total of 5,864,869 shares of its
common stock and received $11.7 million in aggregate gross offering proceeds.
After payment of aggregate offering costs of approximately $700,000, the Company
applied the net offering proceeds of $11.0 million to increase the Bank's
capital.
The following table represents the change in the Company's outstanding shares:
Preferred Common
Stock Stock
---------------------------
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
Preferred shares converted into common stock (16,500) 825,000
Shares issued -- 5,039,869
-----------------------
Shares outstanding, December 31, 2000 -- 11,101,403
=======================
F-7
Belmont Bancorp. and Subsidiaries
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2000, 1999 and 1998
- -------------------------------------------------------------------------------
4. Securities
At December 31, 2000 and 1999, all securities were classified as available for
sale. The estimated fair value of securities as of December 31 are depicted in
the following tables:
2000
----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(Expressed in thousands) Cost Gains Losses Value
----------------------------------------------------
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $ 5,632 $ -- $ (221) $ 5,411
Obligations of states and
political subdivisions 43,398 120 (1,930) 41,588
Mortgage-backed securities 35,130 51 (490) 34,691
Collateralized mortgage obligations 21,166 101 (166) 21,101
Corporate debt 3,102 -- (357) 2,745
---------------------------------------------------
Total debt securities 108,428 272 (3,164) 105,536
Marketable equity securities 4,203 83 (138) 4,148
---------------------------------------------------
Total available for sale $112,631 $355 $(3,302) $109,684
===================================================
1999
----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(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
====================================================
The amortized cost and estimated fair value of securities at December 31, 2000,
by contractual maturity, follow. Expected maturities may differ from
contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Estimated
Amortized Fair
(Expressed in thousands) Cost Value
-------------------------------
Due in one year or less $ 147 $ 147
Due after one year
through five years 2,515 2,406
Due after five years
through ten years 3,464 3,409
Due after ten years 46,006 43,782
Mortgage-backed securities 35,130 34,691
Collateralized mortgage obligations 21,166 21,101
Equity securities 4,203 4,148
------------------------------
Total $112,631 $ 109,684
==============================
Sales and write-downs of securities resulted in the following:
(Expressed in thousands) 2000 1999 1998
--------------------------------
Proceeds from sales $ 5,667 $73,846 $87,580
Gross gains 78 118 1,355
Gross losses (18) (992) (18)
Realized losses on market declines (56) -- --
Losses on securities called -- (7) (1)
Gains on securities called -- 1 1
Gross trading gains -- 69 101
Gross trading losses -- (79) (39)
Assets carried at $26,078,000 and $20,654,000 at December 31, 2000 and 1999,
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 Loan Losses
Loans outstanding at December 31 are as follows:
(Expressed in thousands) 2000 1999
-------------------
Real estate-construction $ 12,856 $ 9,732
Real estate-mortgage 40,794 45,944
Real estate-secured by nonfarm,
nonresidential property 22,738 17,478
Commercial, financial and agricultural 45,838 78,661
Obligations of political subdivisions in the U.S 2,951 3,181
Installment and credit card loans to individuals 4,699 10,138
-------------------
Loans receivable $129,876 $165,134
===================
Mortgage loans serviced for others approximated $38,097,000 and $38,558,000,
at December 31, 2000 and 1999, respectively.
Non-accruing loans and leases amounted to $8,518,000 and $13,769,000 at December
31, 2000 and 1999, respectively. The after-tax effect of the interest that
would have been accrued on these loans was $533,000 in 2000 and $992,000 in
1999. Loans past due 90 days and still accruing interest were $2,000 and
$541,000 at year-end 2000 and 1999.
F-8
Belmont Bancorp. and Subsidiaries
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2000, 1999 and 1998
- -------------------------------------------------------------------------------
5. Loans and Allowance for Loan Losses (continued)
At December 31, impaired loans were as follows:
(Expressed in thousands) 2000 1999
----------------------
Year-end loans with no allocated
allowance for loan losses $ 2 $ 352
Year-end loans with allocated
allowance for loan losses 9,020 13,930
----------------------
Total $ 9,022 $ 14,282
Amount of the allowance
for loan losses allocated $ 2,673 $ 5,157
Average impaired loans $ 11,545 $ 12,839
Interest income recognized during impairment -- --
Cash-basis interest income recognized -- --
Management believed there were no impaired loans during 1998.
Activity in the allowance for loan losses is summarized as follows:
December 31
(Expressed in thousands) 2000 1999 1998
-------------------------------------
Balance at beginning of year $ 9,702 $ 5,475 $ 4,134
Additions charged to operating expense 242 15,877 12,882
Recoveries on loans previously
charged-off 2,023 767 15
Loans charged-off (4,300) (12,417) (11,556)
-------------------------------------
Balance at end of year $ 7,667 $ 9,702 $ 5,475
=====================================
The entire allowance represents a valuation reserve which is available for
future charge-offs.
6. Premises and Equipment
Premises and equipment are as follows:
Original
December 31 Useful Life
(Expressed in thousands) 2000 1999 Years
--------------------------------------
Land and land improvements $ 1,189 $ 1,187
Buildings 5,864 5,855 30 - 50
Furniture, fixtures and equipment 6,436 6,260 5 - 12
Leasehold improvements 787 787 5 - 20
--------------------------------------
Total 14,276 14,089
Less accumulated depreciation
and amortization 7,484 6,826
--------------------------------------
Premises and equipment, net $ 6,792 $ 7,263
======================================
7. Deposits
At December 31, 2000, the aggregate maturities of time deposits are
summarized as follows:
(Expressed in thousands)
2001 $ 72,513
2002 17,888
2003 5,260
2004 1,735
2005 6,107
Thereafter 10,067
--------
Total $113,570
========
Time deposits include certificates of deposit issued in denominations of
$100,000 or more which amounted to $17,378,000 at December 31, 2000, and
$20,794,000 at December 31, 1999. A maturity distribution of time certificates
of deposit of $100,000 or more follows:
(Expressed in thousands) 2000 1999
--------------------------------
Due in three months or less $ 4,397 $ 6,677
Due after three months through six months 4,592 6,135
Due after six months through twelve months 3,017 2,791
Due after one year through five years 3,597 2,127
Due after five years 1,775 3,064
------------------------------
Total $17,378 $20,794
==============================
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 matured 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) 2000 1999
------------------
Balance at year-end $1,204 $6,093
Average during the year $2,463 $5,877
Maximum month-end balance $4,308 $6,093
Weighted average rate during the year 5.38% 5.00%
Weighted average rate at December 31 4.89% 4.77%
F-9
Belmont Bancorp. and Subsidiaries
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2000, 1999 and 1998
- -------------------------------------------------------------------------------
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 $22,206,000 and $34,613,000 at December 31, 2000 and 1999,
respectively. The carrying value of FHLB stock and securities that secure the
FHLB debt was $27,391,000 and $34,859,000 at December 31, 2000 and 1999,
respectively. FHLB advances are made under agreements which allow for maximum
borrowings of $40 million subject to collateral requirements. Advances can be
made at fixed or variable rates of interest.
Information related to these borrowings at December 31, 2000 and 1999, is
summarized below.
Short-term borrowings
(Expressed in thousands)
FHLB Advances 2000 1999
- ------------- ------------------
Balance at year-end $ -- $19,740
Average balance during the year $ 6,421 $ 1,712
Maximum month-end balance $19,155 $19,740
Weighted average rate during the year 6.20% 5.41%
Interest rate at December 31 N/A 5.24%
Federal Funds Purchased 2000 1999
- ----------------------- ------------------
Balance at year-end $ -- $ --
Average during the year $ 16 $ 693
Maximum month-end balance $ -- $ 4,200
Weighted average rate during the year 6.29% 5.15%
Weighted average rate at December 31 N/A N/A
Long-term borrowings
Long term borrowings consist of two $10 million advances from the Federal Home
Loan Bank of Cincinnati (the "FHLB") with initial fixed interest rates of 4.78%
and 4.54% for three years. These advances have a ten year final maturity and
are due in 2008. The FHLB has the option at the end of the first three year
term and every quarter thereafter to convert the advances to a floating rate
based on the 3 month LIBOR rate. If this option is exercised by the FHLB, the
Bank may repay the advance without penalty in full or in part. 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.
Scheduled principal payments on long-term debt in each of the five years
subsequent to December 31, 2000, are as follows:
(Expressed in thousands)
2001 $ 0
2002 0
2003 0
2004 0
2005 0
Thereafter 20,000
10. Income Tax
The components of income taxes are as follows:
(Expressed in thousands) 2000 1999 1998
--------------------------
Current payable (refundable) $ -- $ (886) $(2,269)
Deferred (680) (5,668) 83
Change in valuation allowance -- 1,000 --
--------------------------
Income tax (benefit) $(680) $(5,554) $(2,186)
==========================
The following temporary differences gave rise to the deferred tax asset at
December 31, 2000 and 1999:
(Expressed in thousands) 2000 1999
------------------
Deferred tax assets:
Allowance for loan losses $ 1,264 $ 1,792
Interest on non-accrual loans 104 511
Deferred compensation liability
for employees' future benefits 283 323
Intangible assets 368 422
Unrealized losses on investments 1,002 2,887
Other deferred tax assets 72 97
Net operating loss carryforward 4,857 3,179
Tax credit carryforwards 1,460 1,263
-----------------
Total deferred tax assets 9,410 10,474
Valuation allowance (1,000) (1,000)
-----------------
Total deferred tax assets,
net of valuation allowance 8,410 9,474
-----------------
Deferred tax liabilities:
Federal Home Loan Bank stock dividends (546) (471)
Other deferred tax liabilities (518) (452)
-----------------
Total deferred tax liabilities (1,064) (923)
-----------------
Net deferred tax asset $ 7,346 $ 8,551
=================
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:
2000 1999 1998
---------------------------------------------------------
(Expressed in thousands) Amount Percent Amount Percent Amount Percent
---------------------------------------------------------
Tax at statutory rate $ 240 34.0 $(5,639) (34.0) $(1,396) (34.0)
Tax exempt interest
on investments
and loans (684) (96.9) (794) (4.8) (450) (11.0)
Tax credits (197) (27.9) (169) (1.0) (74) (1.8)
Earnings on life
insurance policies (79) (11.2) (24) -- (93) (2.3)
Others - net 40 5.7 72 -- (173) (4.1)
Change in valuation
allowance -- -- 1,000 6.3 -- --
---------------------------------------------------------
Actual tax expense (benefit) $(680) (96.3) $(5,554) (33.5) $(2,186) (53.2)
=========================================================
F-10
Belmont Bancorp. and Subsidiaries
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2000, 1999 and 1998
- -------------------------------------------------------------------------------
10. Income Tax (continued)
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. During 2000, the Company generated additional
taxable losses of $4,758,000 which can be carried forward through 2020. The
Company also has a low income housing credit carryforward of $950,000 and an
alternative minimum tax carryforward of $509,000. The low income housing credit
expires $485,000 in 2017, $99,000 in 2018, $169,000 in 2019, and $197,000 in
2020. 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 $1,000,
$(303,000) and $476,000 for 2000, 1999 and 1998, respectively.
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 2000, 1999, and 1998 was $52,000, $55,000, and
$295,000, 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 the 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, 2000 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,
2001 $123
2002 124
2003 121
2004 70
2005 58
Thereafter 36
----
Total minimum lease payments $532
====
Rental expense under operating leases approximated $119,000 in 2000, $139,000
in 1999, and $139,000 in 1998.
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 2000 and 1999.
The following is an analysis of loan activity to directors, executive officers,
and their associates:
(Expressed in thousands) 2000 1999
------------------
Balance previously reported $ 5,459 $ 6,235
New loans during the year 34 877
------------------
Total 5,493 7,112
Less repayments during the year (486) (1,575)
Effect of changes in related parties (1,023) (78)
------------------
Balance, December 31 $ 3,984 $ 5,459
==================
Related party deposits totaled $2,018,000 and $579,000 at December 31, 2000 and
1999, respectively.
F-11
Belmont Bancorp. and Subsidiaries
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2000, 1999 and 1998
- -------------------------------------------------------------------------------
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) 2000 1999
----------------
Commitments to extend credit $15,389 $16,444
Standby letters of credit 466 686
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. At December 31, 2000, $11,252,000 in
commitments to extend credit were issued at an adjustable rate of interest; the
remaining $4,137,000 in commitments were issued at fixed rates.
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, $406,000 expire in 2001, while the remaining $60,000
expire in 2002. 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
year end, the bank had concentrations of credit in the following industries:
(Expressed in thousands) 2000
Loan balance and Percent of
Industry available credit Tier 1 Capital
- -------------------------------------------------------------------------------
Amusement industry $ 6,864 35.8%
Services-hotel/motel 5,549 29.0%
(Expressed in thousands) 1999
------------------------------------
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 2001
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, 2000, 1999 and 1998
- -------------------------------------------------------------------------------
17. Other Operating Expenses
Other operating expenses include the following:
(Expressed in thousands) 2000 1999 1998
-----------------------
Taxes other than payroll
and real estate $ 24 $ 254 $ 496
Supplies and printing 165 233 299
Insurance, including
federal deposit insurance 774 169 127
Amortization of intangibles 10 439 196
Legal fees 1,153 1,671 52
Consulting expense 139 1,442 111
Examinations and audits 359 385 213
Prepayment penalties on Federal
Home Loan Bank advances -- 342 --
Legal settlements 12 295 --
Other (individually less than
1% of total income) 1,464 1,797 1,612
-----------------------
Total $4,100 $7,027 $3,106
=======================
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, 2000 and 1999,
were $2,162,000 and $3,290,000, 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 2000, 1999, and 1998 were $10,629,000,
$15,758,000, and $16,316,000, respectively. Cash payments for income taxes for
2000, 1999, and 1998, were $0, $383,000, and $2,168,000, respectively. In
2000, the Company received a tax refund of $5,696,000.
Non-cash transfers during 2000 involved the conversion of preferred stock to
common stock for $1,650,000 and the transfer of loans to other real estate of
$901,000.
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 and the regulatory framework for adequately
capitalized institutions are depicted as set forth in the following table:
For Capital
Actual Adequacy Purposes (1)
(Expressed in thousands) Amount Ratio Amount Ratio
---------------------------------------
As of December 31, 2000:
Total risk based capital
to risk weighted assets:
Consolidated $23,327 13.9% $13,360 8.0%
Bank 21,277 12.9% 13,196 8.0%
Tier I capital
to risk weighted assets:
Consolidated 21,171 12.7% 6.680 4.0%
Bank 19,146 11.6% 6,598 4.0%
Tier I capital
to average assets:
Consolidated 21,171 7.8% 10,898 4.0%
Bank 19,146 7.1% 10,820 4.0% (2)
F-13
Belmont Bancorp. and Subsidiaries
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2000, 1999 and 1998
- -------------------------------------------------------------------------------
20. Regulatory Matters (continued)
For Capital
Actual Adequacy Purposes (1)
(Expressed in thousands) 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%
Bank 11,738 5.8% 16,220 8.0%
Tier I capital
to risk weighted assets:
Consolidated 11,435 5.6% 8,214 4.0%
Bank 9,115 4.5% 8,110 4.0%
Tier I capital
to average assets:
Consolidated 11,435 3.5% 13,118 4.0%
Bank 9,115 2.8% 13,012 4.0% (2)
(1) These are also the standards to be "adequately capitalized" under Prompt
Corrective Action Provisions.
(2) The Consent Order requires a 6% Tier 1 leverage ratio.
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 and maintain
a 6% Tier 1 leverage ratio. Through its recapitalization efforts, the Company
and the Bank achieved the minimum Tier 1 leverage ratio mandated by the consent
order by June 30, 2000.
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: In February 2000, the Bank was notified by the OCC
that its capital category at December 31, 1999 under Prompt Corrective Action
regulations was significantly undercapitalized. As a result of its
recapitalization efforts described in Note 3, the Bank was formally notified
that it had achieved an adequately capitalized designation under Prompt
Corrective Action regulations as of June 30, 2000 in a letter from the OCC dated
July 27, 2000. There are no conditions or events since that notification that
management believes has changed the Bank's capital category.
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.
F-14
Belmont Bancorp. and Subsidiaries
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2000, 1999 and 1998
- -------------------------------------------------------------------------------
21. Fair Value of Financial Instruments (continued)
Securities: For debt securities 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.
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.
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:
2000 1999
----------------------------------------------------------
Carrying Estimated Carrying Estimated
(Expressed in thousands) Amount Fair Value Amount Fair Value
------------------------------------------------------------
Financial assets:
- -----------------
Cash due from banks $ 11,270 $ 11,270 $ 15,439 $ 15,439
Federal funds sold 14,730 14,730 2,025 2,025
Securities available for sale 109,684 109,684 110,692 110,692
Loans, net 122,209 123,836 157,277 157,004
Accrued interest receivable 1,658 1,658 1,751 1,751
Financial liabilities:
- ----------------------
Deposits 231,686 226,514 255,432 257,184
Repurchase agreements 1,204 1,204 6,093 6,096
Accrued interest payable 820 820 747 747
Short-term borrowings -- -- 19,740 19,740
Long-term borrowings 20,000 19,780 20,000 19,445
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,
2000 1999
------------------------
Assets
Cash $ 1,402 $ 1,141
Investment in subsidiaries
(at equity in net assets) 23,418 8,950
Equity securities 400 473
Advances to subsidiaries 447 271
Prepaid expenses -- 509
Other assets 1,062 762
------------------------
Total assets $ 26,729 $ 12,106
========================
Liabilities
Payable to subsidiary $ 560 $ 348
Deferred compensation 567 527
------------------------
Total liabilities 1,127 875
Shareholders' Equity 25,602 11,231
------------------------
Total liabilities and shareholder's equity $ 26,729 $ 12,106
========================
Statements of Income
2000 1999 1998
-------------------------------
Operating income
Dividends from subsidiaries $ -- $ 628 $ 3,921
Realized loss in market decline
on equity securities (56) -- --
Other income 71 51 108
-------------------------------
Total income 15 679 4,029
Operating expenses 141 79 143
-------------------------------
Income (loss) before income tax
and equity in undistributed
income of subsidiaries (126) 600 3,886
Income tax (benefit) (43) (57) (41)
Equity in undistributed income (loss)
of subsidiaries 1,469 (11,688) (5,846)
-------------------------------
Net income (loss) $ 1,386 $(11,031) $(1,919)
===============================
F-15
Belmont Bancorp. and Subsidiaries
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2000, 1999 and 1998
- -------------------------------------------------------------------------------
Statements of Cash Flows
2000 1999 1998
-----------------------------
Operating activities
Net income (loss) $ 1,386 $(11,031) $(1,919)
Adjustments to reconcile net income to
net cash provided by operating activities:
Realized loss in market decline
on equity securities 56 -- --
Undistributed (earnings) loss of affiliates (1,469) 11,688 5,846
Changes in operating assets and liabilities:
Prepaid expenses 508 (354) 92
Accrued expenses and dividends 40 33 94
Other (295) (88) (95)
-----------------------------
Cash from operating activities 226 248 4,018
-----------------------------
Investing activities
Payments from subsidiaries 212 1,083 --
Payments to subsidiaries (175) (149) (274)
Additional investment in subsidiary (9,329) (1,650) --
Investment purchases -- -- (446)
-----------------------------
Cash from investing activities (9,292) (716) (720)
-----------------------------
Financing activities
Issuance of preferred stock -- 1,650 --
Issuance of common stock 9,327 -- --
Purchase of treasury stock -- -- (1,308)
Issuance of treasury stock -- 280 112
Dividends -- (628) (2,022)
-----------------------------
Cash from financing activities 9,327 1,302 (3,218)
-----------------------------
Increase (decrease) in cash & cash equivalents 261 834 80
Cash and cash equivalents at beginning of year 1,141 307 227
-----------------------------
Cash and cash equivalents at end of year $ 1,402 $ 1,141 $ 307
=============================
23. Comprehensive Income
The components of other comprehensive income were as follows:
(Expressed in thousands) 2000 1999 1998
------------------------------
Unrealized holding gains/losses
arising during the period $ 5,546 $ (7,776) $ (780)
Adoption of SFAS No. 133 -- 224 --
Reclassification adjustment (4) 880 (1,338)
------------------------------
Net gains/losses
arising during the period 5,542 (6,672) (2,118)
Tax effect (1,884) 2,268 720
------------------------------
Other comprehensive income (loss) $ 3,658 $ (4,404) $(1,398)
==============================
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 tortuous 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.
Management believes that it has satisfied or is in the process of satisfying all
of the conditions of the order.
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. Management
believes that it has satisfied or is in the process of satisfying all of the
terms of the agreement.
F-16
Belmont Bancorp. and Subsidiaries
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2000, 1999 and 1998
- -------------------------------------------------------------------------------
24. Litigation (continued)
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. The complaint has been amended to claim damages of $1,250,000.
This secretary has entered into a pleas agreement under which she has paid
$500,000 in restitution and received a prison sentence. The Bank believes that
it has valid defenses against the claim and intends to defend it vigorously. The
Bank has also filed cross-claims against the secretary and a third party it
believes benefited from the misappropriation of funds. 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.
In October 1999, 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 case has been scheduled for trial in May 2001. 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 court denied the
Company's motion to dismiss this case in July 2000. In August 2000, the
plaintiff filed an amended complaint, as to which the Company has filed an
answer, affirmative defenses and cross-claims against the Company's former
accountants, S.R. Snodgrass, A.C. and a principal thereof, and against J.
Vincent Ciroli, Jr., formerly the Company's President and Chief Executive
Officer. In February 2000, the court granted leave to the plaintiff to file a
second amended complaint. The second amended complaint eliminates the direct
claims against the Company and the Bank and the request for class action
certification. Accordingly, as amended, this action constitutes a derivative
suit against current and former officers and directors of the Company and the
Bank, which is being defended by the Company and the Bank on their behalf. The
parties are currently in the discovery phase of this case. 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. In September 2000, the court granted the
Company's motion to dismiss the declaratory judgment action. Progressive had
also asked this court, if Progressive is found to be liable under these
policies, to determine whether the Bank or other parties who have sued the Bank
in separate actions are entitled to the insurance proceeds. Progressive has
deposited with the court bonds in the aggregate amount of $7.75 million, which
amount Progressive believes is sufficient to satisfy any liabilities under the
policies in respect of this interpleader claim. This interpleader claim remains
before the court. The Company intends to vigorously seek recoveries under the
insurance policies sold to the Company by Progressive.
F-17
Belmont Bancorp. and Subsidiaries
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2000, 1999 and 1998
- -------------------------------------------------------------------------------
24. Litigation (continued)
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
foreclosure of collateral securing indebtedness in the amount of $765,000 and
has filed a petition for involuntary bankruptcy against Beall Homes. In February
2001, the bankruptcy court lifted the stay it had placed on the Bank's
counterclaims against Beall Homes, thereby permitting the proceeding in the
Court of Common Pleas, Belmont County, Ohio to continue. The Bank intends to
vigorously defend this action and prosecute its own claims.
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. 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. In January 2001, the Bank
entered into a settlement agreement with the Otterbachers under which they
agreed to pay $200,000 to the Bank, $100,000 of which was paid in January 2001,
$60,000 of which is required to be paid in 2001 and the balance of which is
required to be paid in five equal annual installments beginning in 2002. Under
the terms of settlement, the Otterbachers agreed to dismiss all claims they had
asserted against the Bank, including all lender liability 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/ W. 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
Belmont Bancorp. and Subsidiaries
Opinion of Independent
Certified Public Accountants
- -----------------------------------------------------------------------------
Board of Directors
Belmont Bancorp.
St. Clairsville, Ohio
We have audited the accompanying consolidated statements of income, changes in
shareholders' equity, and cash flows of Belmont Bancorp. for the year ended
December 31, 1998. 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.
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 financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows of
Belmont Bancorp., for the year 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
Independent Auditor's Report
- -------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
Belmont Bancorp.
We have audited the accompanying consolidated balance sheets of Belmont Bancorp.
and subsidiaries as of December 31, 2000 and 1999, and the related consolidated
statements of income, changes in shareholders' equity, and cash flows for the
years 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 audits. The financial statements of Belmont
Bancorp. and subsidiaries for the year ended December 31, 1998 were audited by
other auditors whose report dated May 19, 1999, expressed an unqualified opinion
on those statements.
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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Belmont Bancorp. and
subsidiaries at December 31, 2000 and 1999, and the results of its operations
and its cash flows, for the years then ended in conformity with generally
accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Columbus, Ohio
January 30, 2001
F-20
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 -- Employment Agreement dated December 15, 1999 between Wilbur
R. Roat, Belmont Bancorp. and Belmont National Bank (3)
10.2 -- Belmont Bancorp. 2001 Stock Option Plan (4)
21.1 -- List of Subsidiaries (4)
23.1 -- Consent of Crowe, Chizek and Company LLP (4)
23.2 -- Consent of S.R. Snodgrass A.C. (4)
______________________
(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 and incorporated herein by reference.
(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 and incorporated herein
by reference.
(3) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1999 (Registration No. 0-12724) and incorporated
herein by reference.
(4) Filed herewith.
E-1