-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QM/1SPyAjSAPAXfgwuOA3njlozDMj1klgAD8P3D2hcqpr2HCuBpJ4syrqrMptG/l PjIQ5txzl9CYeKwrDpCk6w== 0000726294-99-000015.txt : 19990812 0000726294-99-000015.hdr.sgml : 19990812 ACCESSION NUMBER: 0000726294-99-000015 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BELMONT BANCORP CENTRAL INDEX KEY: 0000726294 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 341374776 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-12724 FILM NUMBER: 99683360 BUSINESS ADDRESS: STREET 1: 325 MAIN ST CITY: BRIDGEPORT STATE: OH ZIP: 43912 BUSINESS PHONE: 6146953323 MAIL ADDRESS: STREET 1: P O BOX 249 CITY: ST CLAIRSVILLE STATE: OH ZIP: 43950 10-K/A 1 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A (Mark one) X ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the period from _____________ to _________________ Commission file number 0-12724 BELMONT BANCORP. (Name of issuer in its charter) Ohio (State of Incorporation) I.R.S. Employer ID No. 34-1376776 325 MAIN STREET BRIDGEPORT, OHIO 43912 (Address of principal executive offices) Telephone (740)-695-3323 Securities registered under Section 12(b) of the Exchange Act: NONE Securities registered under Section 12(g) of the Exchange Act: Title of each class: Name of each exchange on which registered: Common stock, $0.25 par value NASDAQ SmallCap Market Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained in this form, and no disclosure will be contained, to the best of the Registrant's knowledge. In definitive proxy or information statements incorporated by reference to Part III of this Form 10- K or any amendment to this Form 10-K.X Aggregate market value of voting stock held by nonaffiliates as of March 5, 1999 - $95,304,000. There were 5,222,152 shares of $0.25 par value, common stock outstanding as of March 5, 1999. PART II This report on Form 10-K/A presents the financial position of Belmont Bancorp. (the "Corporation") as of December 31, 1998 and 1997 and for the years ended December 31, 1998 and 1997. The Corporation has restated its earnings to reflect certain loan losses, as more fully described under "Results of Operations--Recent Developments", under Item 7. ITEM 6-SELECTED FINANCIAL DATA Consolidated Five Year Summary of Operations (as Restated) For the Years Ending December 31, 1998, 1997, 1996, 1995, 1994 (Unaudited) ($000's except per share data) 1998 1997 1996 1995 1994 Interest income $ 30,787 $ 28,348 $ 25,501 $ 23,454 $ 19,715 Interest expense 16,480 14,004 12,127 10,927 8,807 Net interest income 14,307 14,344 13,374 12,527 10,908 Provision for loan losses 12,882 1,055 465 1,150 805 Net interest income after provision for loan losses 1,425 13,289 12,909 11,377 10,103 Securities gains (losses) 1,338 799 396 102 (63) Trading gains 62 - - - - Gain on sale of real estate 383 - - - - Other operating income 2,183 2,010 1,861 1,683 1,290 Operating expenses 9,496 8,732 8,388 7,623 7,069 Income before income taxes (4,105) 7,366 6,778 5,539 4,261 Income taxes (2,186) 1,421 1,776 1,333 1,027 Net income $(1,919) $ 5,945 $ 5,002 $ 4,206 $ 3,234 Earnings per common share (1) $ (0.37) $ 1.13 $ 0.94 $ 0.78 $ 0.60 Cash dividend declared per share (1) $ 0.385 $ 0.306 $ 0.240 $ 0.190 $ 0.151 Book value per common share (1) $ 4.86 $ 6.05 $ 5.17 $ 4.57 $ 3.63 Total loans $208,186 $224,900 $ 188,783 $159,957 $147,096 Total assets 438,283 388,713 333,903 317,279 312,963 Total deposits 304,351 263,908 261,539 246,850 255,923 Total shareholders'equity 25,364 31,899 27,332 25,164 20,214 (1) Restated for stock dividends paid during 1994, 1995, 1997 and 1998. 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 as restated. RESULTS OF OPERATIONS RECENT DEVELOPMENTS The Corporation has restated its 1998 earnings as previously reported due to loan relationships with a large commercial borrower (the "Borrower") from New Philadelphia, Ohio. As publicly announced on April 28, 1999, the Borrower, a retailer of manufactured housing, voluntarily and unexpectedly ceased operations at the close of business on April 26, 1999. Belmont National Bank has a significant commercial loan relationship with the Borrower. In the course of assessing the impact of this event on the Bank, management discovered certain irregularities related to indirect consumer loans which had been obtained from the Bank through the Borrower's finance department. The Bank provided interim financing during the construction period for homes for the Borrower's customers. The Bank advanced the proceeds of the consumer loans directly to the Borrower with the permission of the customer. Previously reported net income for the year ended December 31, 1998 was $6,147,000; earnings for the year have been restated to reflect a loss of $1,919,000 or a loss of $0.37 per share. Further details on the restatement including a summary of the effects of the restatement can be found in Footnote 24 of the Notes to the Consolidated Financial Statements as Restated. With respect to the consumer loans provided to the Borrower's customers, the Bank advanced the proceeds of the consumer loans directly to the Borrower with the permission of the customer. These funds were apparently used by the Borrower to fund its operations. In many instances, the Borrower failed to perform on the retail sales contract even though the Bank had provided the funds to the Borrower so the Borrower could complete the terms of the sales agreement. In addition, the Borrower often failed to payoff the floor-plan lender on the home purchased which has further impacted the Bank's collateral position with respect to the homes. Any cancelled sales contracts that were originated prior to 1999 are recognized as a loss during the fourth quarter of 1998. Also, loss associated with contracts in the progress of construction that were funded prior to 1999 have been recognized as a loss during the fourth quarter of 1998. Losses on contracts funded during 1999 have been recognized during the first quarter of 1999. In addition, the estimate of loss associated with the commercial loan relationship has been recognized during the first quarter of 1999. The Bank continues to assess the impact of this segment of its consumer loan portfolio on its current and future operations. On June 3, 1999 at a preliminary hearing, the Borrower agreed to be adjudicated as a debtor under Chapter 11 bankruptcy laws. Charge-offs of the indirect consumer loans during the fourth quarter of 1998 totaled $11,227,000. At December 31, 1998, the remaining balance of indirect consumer loans was $8,007,000. These loans are included in underperforming assets. During the quarter ended March 31, 1999, the Corporation charged off $2,460,000 in indirect consumer loans for loans that were funded during 1999. The remaining balance on the indirect consumer loans total $6,672,000 at March 31, 1999; at March 31, 1999 a reserve in the allowance for loan losses in the amount of $2,147,000 has been allocated to these consumer loans. Charge- offs associated with the Borrower's commercial loans totaled $1,955,000 during the first quarter of 1999. The balance on the commercial loan relationship with the Borrower at March 31, 1999 was $3,618,000; at March 31, 1999 a reserve in the allowance for loan losses in the amount of $1,118,000 has been allocated to the commercial credits. Future results of operations may continue to be affected by this situation. The Bank is pursuing a claim with its fidelity bond carrier seeking partial restitution, however there can be no assurance that the claim will be paid. Based upon the restated financial results for the year ended 1998, net income decreased from $5,945,000 for 1997 to a loss of $1,919,000 for the year ended 1998. The net loss per common share for 1998 was $0.37 compared to earnings per share of $1.13 in 1997 and $0.94 in 1996. Because of the 1998 reported loss, there was a negative return on shareholders' equity of 5.76% for 1998. Returns on average common shareholders' equity were 20.21% for 1997 and 19.55% in 1996. The Corporation's net income to average assets, referred to as return on assets, was a negative 0.46% for the year ended 1998 compared to 1.62% in 1997 and 1.49% during 1996. The table below summarizes earnings performance for the past three years. ($000s) except per share data 1998 1997 1996 Net income (1,919) 5,945 5,002 Net income (loss) per share $(0.37) $ 1.13 $ 0.94 Return on average assets -0.46% 1.62% 1.49% Return on average common equity -5.76% 20.21% 19.55% NET INTEREST REVENUE A major share of the Corporation'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, 1998, 1997, and 1996, and computes net interest income, net interest margin and net interest rate spread for each period. All three of these measures are reported on a taxable equivalent basis. Belmont Bancorp. and Subsidiaries Consolidated Average Balance Sheets (as Restated) For the Years Ended December 31, 1998, 1997 and 1996 (Fully Taxable Equivalent Basis) (000's)
1998 1997 1996 Average Averag 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 $222,961 $21,321 9.56% $208,265 $19,632 9.43% $174,445 $16,389 9.39% Securities: Taxable 134,337 8,053 5.99% 110,739 7,515 6.79% 115,070 7,828 6.80% Exempt from income tax 24,261 1,802 7.43% 24,728 1,861 7.53% 23,403 1,802 7.70% Trading account assets 1,193 68 5.70% - - - - - - Federal funds sold 4,194 228 5.44% 1,317 71 5.39% 3,409 181 5.31% Total interest earning assets 386,946 31,472 8.13% 345,049 29,079 8.43% 316,327 26,200 8.28% Cash and due from banks 10,972 10,267 9,328 Other assets 20,100 15,648 14,229 Market value depreciation of securities available for sale (597) (546) (767) Allowance for possible loan loss (4,312) (3,461) (2,928) Total Assets $413,109 $366,957 $336,189 Liabilities Interest bearing liabilities Interest checking $ 45,864 1,525 3.33% $ 43,476 1,444 3.32% $ 38,576 $ 1,225 3.18% Savings 82,196 2,709 3.30% 78,636 2,474 3.15% 79,341 2,423 3.05% Other time deposits 134,485 7,438 5.53% 115,304 6,145 5.33% 111,657 5,738 5.14% Other borrowings 86,084 4,809 5.59% 68,095 3,941 5.79% 50,274 2,741 5.45% Total interest bearing liabilities 348,629 16,481 4.73% 305,511 14,004 4.58% 279,848 12,127 4.33% Demand deposits 29,910 29,878 27,878 Other liabilities 1,256 2,146 2,199 Total liabilities 379,795 337,535 309,925 Shareholders' Equity 33,314 29,422 26,264 Total Liabilities and Shareholders' Equity $413,109 $366,957 $336,189 Net interest income margin on a taxable equivalent basis 14,991 3.87% 15,075 4.37% 14,073 4.45% Net interest rate spread 3.41% 3.84% 3.95% Interest bearing liabilities to interest earning assets 90.10% 88.54% 88.47%
Fully taxable equivalent basis computed at effective federal tax rate of 34%. Average loan balances include nonperforming loans. Belmont Bancorp. and Subsidiaries Analysis of Net Interest Income Changes For the Years Ended December 31, 1998, 1997 and 1996 (Fully Taxable Equivalent Basis) (000's)
1998 Compared to 1997 1997 Compared to 1996 Volume Yield Mix Total Volume Yield Mix Total Increase (decrease) in interest income: Loans and leases $1,385 $ 284 $ 21 $1,690 $3,177 $ 55 $ 12 $3,244 Securities Taxable 1,601 (877) (188) 536 (295) (19) - (314) Exempt from income taxes (35) (24) - (59) 102 (41) (2) 59 Trading account assets - - 68 68 - - - - Federal funds sold 155 1 2 158 (111) 3 (2) (110) Total interest income change 3,106 (616) (97) 2,393 2,873 (2) 8 2,879 Increase (decrease) in interest expense: Interest checking 79 2 - 81 156 56 8 220 Savings 112 118 4 234 (22) 73 (1) 50 Other time deposits 1,022 232 39 1,293 187 213 7 407 Short-term borrowings 1,041 (137) (36) 868 972 169 59 1,200 Total interest expense change 2,254 215 7 2,476 1,293 511 73 1,877 Increase (decrease) in net interest Income on a taxable equivalent basis $ 852 $(831) $(104) $(83) $1,580 $(513) $(65) $1,002 (Increase) decrease in taxable equivalent adjustment 46 (32) Net interest income change $(37) $ 970
The Corporation's net interest income declined by 0.6%, or $84,000, on a taxable equivalent basis during 1998 compared to the same period last year. During 1998, the Corporation's average interest-earning assets grew by approximately $41.9 million, up 12.1% from 1997. The yield on interest earning assets was down 30 basis points (a basis point is equal to .01%) from 8.43% in 1997 to 8.13% in 1998. The cost of interest bearing liabilities rose 15 basis points from 1997 to 1998. Consequently, the net interest rate spread decreased from 3.84% during 1997 to 3.41% during 1998. The taxable equivalent net interest margin was 3.87% during 1998 compared to 4.37% for 1997 and 4.45% during 1996. The Analysis of Net Interest Income Changes, separates the dollar change in the Corporation'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 Corporation's net interest income during the year-to-date periods presented from 1997 to 1998 was generated by a decline in yields on earning assets and higher funding costs. OTHER OPERATING INCOME Other operating income excluding securities gains and a gain on sale of real estate, increased 11.7% and totaled $2,245,000 in 1998, compared to $2,010,000 in 1997 and $1,861,000 in 1996. The table below shows the dollar amounts and growth rates of the components of other operating income. 1998 1997 1996 ($000s) Total Change Total Change Total Trust income $ 463 -0.64% $ 466 -7.17% $ 502 Service charges on deposits 752 6.36% 707 7.12% 660 Gain on sale of loans 144 58.24% 91 26.39% 72 Trading profits (losses) 62 na - na - Recovery on class action lawsuit - na - -100.00% 27 Other income 824 10.46% 746 24.33% 600 Subtotal 2,245 11.69% 2,010 8.01% 1,861 Investment securities gains (losses) - 100.00% (3) -200.00% (1) Gains (losses) on securities available for sale 1,338 66.83% 802 102.02% 397 Gain on sale of real estate 383 na - na - Total $3,966 41.19% $2,809 24.46% $2,257 Gains on sale of loans contributed $144,000 to noninterest income during 1998, up from $91,000 in 1997. The Corporation utilizes the secondary mortgage market to divest itself of fixed rate mortgage loans with rates below a target rate for purposes of managing the interest rate risk associated with these loans. Servicing rights were retained on the loans sold. The Corporation continues to utilize the secondary market as a means of offering competitively priced mortgage loan products without retaining the interest rate risk associated with long term, fixed rate product. At December 31, 1998 mortgage loans serviced for others totaled approximately $38.2 million. Losses on investments held in the maturity portfolio during 1997 and 1996 occurred as a result of calls on municipal bonds in the portfolio. These losses totaled $3,000 during 1997 and $1,000 during 1996. Net gains were realized on securities available for sale during 1998 totaling $1,338,000 compared to gains of $802,000 during 1997 and $397,000 during 1996. The related income taxes on securities transactions, including trading and securities available for sale, were $337,000, $174,000, and $104,000 for the years ended 1998, 1997 and 1996, respectively. OPERATING EXPENSES The table below details the percentage changes in various categories of expense for the three years ended 1998, 1997, and 1996. ($000s) 1998 % Change 1997 % Change 1996 Salaries and wages $3,533 16.45% $3,034 14.66% $2,646 Employee benefits 1,100 20.35% 914 15.70% 790 Net occupancy expense 824 5.24% 783 14.14% 686 Equipment expense 933 -1.48% 947 15.91% 817 FDIC insurance 65 1.56% 64 -87.74% 522 Other operating expenses 3,041 1.71% 2,990 2.15% 2,927 Total $9,496 8.75% $8,732 4.10% $8,388 Management strives to maintain the Corporation's efficiency ratio at or below 50%. (The efficiency ratio is computed by dividing the sum of fully taxable equivalent net interest margin plus non-interest income by non-interest expenses.) For the year ended 1998, the efficiency ratio was 50.1% compared to 48.8% in 1997 and 51.4% in 1996. Salaries and wages were higher in the areas of trust and asset management services, credit administration and data processing due to increased strategic focus on asset management services, loan portfolio expansion, and fulfillment of vacant positions. Other non-interest operating expense includes FDIC insurance assessments. FDIC insurance expense included in other operating expenses was $65,000, $64,000, and $522,000 in 1998, 1997 and 1996, respectively, including a one time, pre-tax assessment on deposits insured through the Savings Association Insurance Fund during the third quarter of 1996 totaling $397,000. Taxes, other than payroll and real estate taxes, included in noninterest expense totaled $493,000 during 1998, up from $426,000 in 1997. This includes the Ohio state corporate franchise tax based on the equity of the subsidiary bank. Other noninterest expense also includes expense associated with other real estate owned. During 1998 there was no expense associated with other real estate owned. During 1997 this expense was $20,000 compared to $143,000 in 1996. Expenses associated with one property which was disposed of during the fourth quarter of 1996 totaled $140,000. The federal tax benefit resulting from the consumer loan charge-off was $4,155,000 for the fourth quarter of 1998. This benefit was partially offset by federal taxes on the Corporation's taxable income exclusive of the loan charge-off resulting in a net federal tax benefit of $2,186,000 for 1998. In the fourth quarter of 1997, federal income taxes were reduced by $482,000 in historic tax credits associated with a low income housing project that the subsidiary, Belmont Financial Network, invested in as a limited partner. The project contributed $74,000 in low income housing credits (LIHC) during 1998 and is expected to generate approximately $1.6 million in LIHC over the next ten years. Operating expenses will be negatively impacted in future periods by the work-out associated with the indirect consumer loans as previously discussed. An estimate of associated expense is unknown at the present time. FINANCIAL CONDITION SECURITIES The book values of investments as of December 31, 1998 and 1997 are detailed in the following tables:
1998 1997 Gross Gross Unreal- Gross Estimated Unreal- Gross Estimated Amortized ized Unrealized Fair Amortized ized Unrealized Fair (Expressed in thousands) Cost Gains Losses Value Cost Gains Losses Value Securities held to maturity: U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 2,255 $ - $ (26) $ 2,229 $ 2,260 $ - $ (52) $ 2,208 Obligations of states and political subdivisions 3,823 273 (3) 4,093 4,487 222 (13) 4,696 Mortgage-backed securities 6,438 84 (30) 6,492 9,208 119 (50) 9,277 Total held to maturity $ 12,516 $ 357 $ (59) $ 12,814 $ 15,955 $ 341 $(115) $ 16,181 Securities available for sale: U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 10,653 $ 1 $ (97) $ 10,557 $ 14,886 $ 16 $ (10) $ 14,892 Obligations of states and political subdivisions 29,509 63 (515) 29,057 17,832 346 - 18,178 Mortgage-backed securities 94,623 324 (1,246) 93,701 58,897 341 (286) 58,952 Corporate debt 7,530 1 (191) 7,340 - - - - Mortgage derivative securities 38,797 124 (282) 38,639 24,537 47 (153) 24,431 Total debt securities 181,112 513 (2,331) 179,294 116,152 750 (449) 116,453 Equity securities 5,700 134 (133) 5,701 4,703 - - 4,703 Total available for sale $186,812 $ 647 $(2,464) $184,995 $120,855 $ 750 $(449) $121,156
The investment portfolio consists largely of fixed and floating rate mortgage related securities, predominantly underwritten to the standards of and guaranteed by the government agency GNMA and by the government-sponsored agencies of FHLMC and FNMA. These securities differ from traditional debt securities primarily in that they have uncertain maturity dates and are priced based on estimated prepayment rates on the underlying mortgages. The maturities and yields of securities held to maturity and available for sale (excluding equity securities) are detailed in the following tables.
Securities Held to Maturity December 31, 1998 Over 10 Year Maturity 1-5 Year 6-10 Year Maturity Total < 1 year Maturity Maturity ($000s) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield U.S. Government agencies and corporations $ - $2,255 4.81% $ - $ - $ 2,255 4.81% States and political subdivisions (a) 533 5.48% 1,228 8.15% 557 10.00% 1,506 9.57% 3,824 8.61% Agency mortgage- backed securities (b) 87 -2.25% 5,033 6.87% 827 7.98% 490 8.33% 6,437 7.00% Total $620 4.41% $8,516 6.51% $1,384 8.79% $1,996 9.26% $12,516 7.10%
Securities Available for Sale (excluding Equity Securities) December 31, 1998
Over 10 Year Maturity 1-5 Year 6-10 Year Maturity Total < 1 year Maturity Maturity ($000s) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield U. S. Treasury securities $ 101 6.32% $ - $ - $ - $ 101 6.32% U.S. Government agencies and corporations (b) - - 10,455 6.43% - 10,455 6.43% States and political subdivisions (a) - - 102 7.58% 28,955 7.13% 29,057 7.13% Corporate debt - - - 7,340 6.39% 7,340 6.39% Agency mortgage- backed securities (b) 1,307 3.01% 79,263 5.76% 7,654 6.98% 5,478 8.41% 93,702 5.98% Mortgage derivative securities 3,198 9.07% 14,278 5.79% 910 10.10% 20,253 6.77% 38,639 6.68% Total fair value $4,606 7.31% $93,541 5.76% $19,121 6.82% $62,026 7.02% $179,294 6.35% Amortized cost $4,605 $94,555 $19,206 $62,746 $181,112
(a) Taxable equivalent yields (b) Maturities of mortgage-backed securities and agency loan pools are based on estimated average life. At December 31, 1998, the Corporation owned an aggregate par value of $4.5 million in privately issued collateralized mortgage obligations issued by the Residential Funding Mortgage Securities Corporation and an aggregate par value of $5.4 million of privately issued collateralized mortgage obligations issued by Norwest Asset Securities Corporation. No other securities of a single issuer, other than U.S. Treasury or other U.S. government agency securities, exceeded 10% of shareholders' equity. The state and political subdivision portfolio includes approximately $7.0 million zero coupon revenue bonds. These bonds are purchased at a significant discount to par value and the income recognized on the bonds is derived from the accretion of the discount using a method that approximates a level yield. MARKETABLE EQUITY SECURITIES The Corporation held marketable equity securities in its investment portfolio as of December 31, 1998. In accordance with regulatory requirements, all equity securities were transferred to Securities Available for Sale on January 1, 1994 because these securities do not have a stated maturity. Current accounting principles require that marketable equity securities be recorded at the lower of cost or market value with a corresponding adjustment to reduce shareholders' equity if market value is lower than cost. At December 31, 1998 and 1997, estimated market values approximated original cost. Taxable Market Equivalent December 31, 1998 ($000s) Cost Value Yield Federal Home Loan Bank stock $5,001 $5,001 7.00% Corporate Stock 512 513 0.93% Federal Reserve Bank Stock 187 187 6.00% $5,700 $5,701 Taxable Market Equivalent December 31, 1997 ($000s) Cost Value Yield Federal Home Loan Bank stock $4,450 $4,450 7.19% Corporate Stock 66 66 5.17% Federal Reserve Bank Stock 187 187 6.00% $4,703 $4,703 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. ($000s) 1998 1997 1996 1995 1994 Commercial loans: Real estate construction $ 135 $ 1,418 $ 1,327 $ 1,530 $ 1,801 Acceptances of other banks 0 0 0 0 0 Real estate mortgage 14,719 19,984 25,954 28,744 23,701 Commercial, financial and agricultural 119,730 109,618 80,554 50,532 38,983 Direct financing leases 0 0 0 3 5 Total commercial loans $134,584 $131,020 $107,835 $ 80,809 $ 64,490 Consumer loans: Residential mortgage $ 58,099 $ 77,995 $ 71,715 $ 69,999 $ 76,094 Installment loans 14,483 14,435 7,626 6,959 5,116 Credit card and other consumer 1,020 1,450 1,607 2,190 1,396 Total consumer loans $ 73,602 $ 93,880 $ 80,948 $ 79,148 $ 82,606 Total loans and leases $208,186 $224,900 $188,783 $159,957 $147,096 An analysis of maturity and interest rate sensitivity of business loans at the end of 1998 follows: Under 1 to 5 Over 5 ($000s) 1 Year Years Years Total Domestic loans: Real estate construction $ 10 $ 15 $ 110 $ 135 Real estate mortgage 8,655 2,717 3,347 14,719 Commercial, financial and agricultural 59,682 46,693 12,885 119,260 Direct financing leases 0 0 0 0 Total business loans (a) $68,347 $49,425 $16,342 $134,114 Rate sensitivity: Predetermined rate $ 4,087 $22,547 $15,443 $ 42,077 Floating or adjustable rate 64,260 26,878 899 92,037 Total domestic business loans $68,347 $49,425 $16,342 $134,114 Foreign loans 0 0 0 0 (a) does not include nonaccrual loans PROVISION AND ALLOWANCE FOR POSSIBLE LOAN LOSSES The Corporation, as part of its philosophy of risk management, has established various credit policies and procedures intended to minimize the Corporation'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. Credit risk is continuously monitored by Management through the periodic review of individual credits to ensure compliance with policies and procedures. Adequate collateralization, contractual guarantees, and compensating balances are also utilized by Management to mitigate risk. Management determines the appropriate level of the allowance for possible loan losses by continually evaluating the quality of the loan portfolio. The reserve is allocated to specific loans that exhibit above average credit loss potential based upon their payment history and the borrowers' financial conditions. The adequacy of the allowance for possible loan losses is evaluated based on an assessment of the losses inherent in the loan portfolio. This assessment results in an allowance consisting of two components, allocated and unallocated. The allocations are made for analytical purposes. The total allowance is available to absorb losses from any segment of the portfolio. Management maintains a watch list of substandard loans for monthly review. Although these loans may not be delinquent and may be adequately secured, Management believes that due to location, size, or past payment history, it is necessary to monitor these loans monthly. The allowance for possible loan losses totaled $5,474,000, or 2.63% of total loans and leases at December 31, 1998. At the end of the previous year, the allowance for possible loan losses was $4,134,000, or 1.84% of total loans and leases. The provision charged to expense during 1998 was $12,882,000 compared to $1,055,000 in the year ago period. The increase in the provision for 1998 was related to the indirect consumer loans discussed previously. Management's allocation of the allowance for possible loan losses for the past five years based on estimates of potential future loan loss is set forth in the table below: ($000s) 1998 1997 1996 1995 1994 Specific reserves: Commercial $ 268 $ 560 $ 330 $ 310 $ 10 Mortgage 0 0 10 10 5 Consumer 60 161 176 5 7 Criticized loans without specific allocation 616 470 296 414 315 Provision for loan categories based on historical loss experience: Commercial 1,577 1,534 1,197 799 664 Commercial real estate 324 313 269 152 103 Residential mortgage 272 358 328 325 298 Consumer 2,267 209 137 143 112 Unallocated 90 529 410 545 23 Total $5,474 $4,134 $3,153 $2,703 $1,537 Reserves as a % of total loans ($000s) 1998 1997 1996 1995 1994 Specific reserves: Commercial 0.13% 0.25% 0.17% 0.19% 0.01% Mortgage 0.00% 0.00% 0.01% 0.01% 0.00% Consumer 0.03% 0.07% 0.09% 0.00% 0.00% Criticized loans without specific allocation 0.30% 0.21% 0.16% 0.26% 0.21% Provision for loan categories based on historical loss experience: Commercial 0.76% 0.68% 0.63% 0.50% 0.45% Commercial real estate 0.16% 0.14% 0.14% 0.10% 0.07% Residential mortgage 0.13% 0.16% 0.17% 0.20% 0.20% Consumer 1.09% 0.09% 0.07% 0.09% 0.08% Unallocated 0.03% 0.24% 0.23% 0.34% 0.02% Total 2.63% 1.84% 1.67% 1.69% 1.04% Total loans and leases outstanding $208,186 $224,899 $188,783 $159,957 $147,096 The following table sets forth the five year historical information on the reserve for loan losses: ($000s) 1998 1997 1996 1995 1994 Balance as of January 1 $ 4,134 $3,153 $2,703 $1,537 $1,617 Provision for loan losses 12,882 1,055 465 1,150 805 Adjustment incident to acquisition 0 0 0 0 0 Loans charged off: Real estate 133 24 30 25 49 Commercial 178 23 0 0 806 Consumer 11,245 43 32 26 85 Direct financing leases 0 0 0 0 0 Total loans charged-off 11,556 90 62 51 940 Recoveries of loans previously charged-off: Real estate 11 2 2 3 18 Commercial 1 1 0 1 29 Consumer 3 13 45 18 7 Direct financing leases 0 0 0 45 1 Total recoveries 15 16 47 67 55 Net charge-offs (recoveries) 11,541 74 15 (16) 885 Balance at December 31 $ 5,475 $4,134 $3,153 $2,703 $1,537 ($000s) 1998 1997 1996 1995 1994 Loans and leases outstanding at December 31 $208,186 $224,899 $188,783 $159,957 $147,096 Allowance as a percent of loans and leases outstanding 2.63% 1.84% 1.67% 1.69% 1.04% Average loans and leases $222,961 $208,265 $174,445 $152,502 $134,952 Net charge-offs as a percent of average loans and leases 5.18% 0.04% 0.01% -0.01% 0.66% The following schedule shows the amount of under- performing assets and loans 90 days or more past due but accruing interest. UNDER-PERFORMING ASSETS ($000s) 1998 1997 1996 1995 1994 Nonaccrual loans and leases $8,576 $1,515 $143 $162 $ 478 Loans 90 days or more past due but accruing interest 4 44 74 14 11 Other real estate owned - 20 66 579 586 Total $8,580 $1,579 $283 $755 $1,075 In addition to the above schedule of under- performing assets, Management prepares a watch list consisting of loans which Management has determined require closer monitoring to further protect the Corporation against loss. The balance of loans classified by Management as substandard due to delinquency and a change in financial position at the end of 1998 and not included in the table above was $4,746,000. The indirect consumer loans and the commercial loans of the Borrower discussed previously may impact future operating results. The Corporation continues to analyze its loan portfolio. As of the date of this Form 10-K/A, the Corporation recognized a provision for loan losses of $5,735,000 for the quarter ended March 31, 1999 and a provision for loan losses of $1,871,000 for the quarter ended June 30,1999. DEPOSITS Primarily core deposits are used to fund interest- earning assets. The Corporation has a lower volume of interest-free checking accounts than its peer group which is typical for its market area. This results in an overall higher cost of funds than peer average. The accompanying tables show the relative composition of the Corporation's average deposits and the change in average deposit sources during the last three years. AVERAGE DEPOSITS 1998 1997 1996 ($000s) Demand $ 29,910 $ 29,878 $ 27,878 Interest bearing checking 45,863 43,476 38,576 Savings 82,196 78,636 79,341 Other time 107,399 101,405 99,649 Certificates-$100,000 and over 27,087 13,899 12,008 Total average deposits $292,455 $267,294 $257,452 DISTRIBUTION OF AVERAGE 1998 1997 1996 DEPOSITS Demand 10.23% 11.18% 10.83% Interest bearing checking 15.68% 16.27% 14.98% Savings 28.11% 29.42% 30.82% Other time 36.72% 37.94% 38.71% Certificates-$100,000 and over 9.26% 5.20% 4.66% Total 100.00% 100.00% 100.00% CHANGE IN AVERAGE DEPOSIT SOURCES 1997 to 1998 1996 to 1997 ($000s) Demand $ 32 $2,000 Interest bearing checking 2,387 4,900 Savings 3,560 (705) Other time 5,994 1,756 Certificates-$100,000 and over 13,188 1,891 Total $25,161 $9,842 BORROWINGS Other sources of funds for the Corporation include short-term repurchase agreements and Federal Home Loan Bank borrowings. Borrowings at the Federal Home Loan Bank are utilized to match the maturities of selected loans and to leverage the capital of the Corporation to enhance profitability for shareholders. CAPITAL RESOURCES At December 31, 1998, shareholders' equity was $25,364,000 compared to $31,899,000 at December 31, 1997, a decrease of $6,535,000 or 20.5%. The decrease in capital during 1998 was due to the losses associated with the consumer loan portfolio as previously discussed. In addition, the Corporation paid cash dividends to shareholders totalling $2,022,000 during 1998. 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, while total capital consists of core capital, certain debt instruments and a portion of the reserve for loan losses. At December 31, 1998, the Corporation had a Tier 1 capital ratio of 9.08% and a total capital ratio of 10.33%. The following table shows several capital and liquidity ratios for the Corporation for the last three years: December 31 1998 1997 Average shareholders' equity to : Average assets 8.06% 8.02% Average deposits 11.39% 11.01% Average loans and leases 14.94% 14.13% Primary capital 8.50% 9.10% Risk-based capital ratio: Tier 1 9.08% 11.81% Total 10.33% 13.06% Leverage ratio 5.94% 8.00% National banks must maintain a total assets leverage ratio of at least 3.0%. The total assets leverage ratio is calculated by dividing capital less intangibles into assets, net of intangibles. In many cases, regulators require an additional cushion of at least 1.0% to 2.0%. At December 31, 1998, the Corporation's Tier One leverage ratio was 5.94%. The following table presents dividend payout ratios for the past three years. 1998 1997 1996 Total dividends declared as a percentage of net income N/A 27.17% 26.59% Common dividends declared as a percentage of earnings per common share N/A 27.20% 25.64% Cash dividends were declared and paid during 1998 prior to the Corporation's determination that it would not realize positive earnings for the year. Dividends of $0.385 per share were paid. DIVIDENDS The subsidiary Bank is the primary source of funds to pay dividends to the shareholders of Belmont Bancorp. The approval of the Comptroller of the Currency will be required for future dividends from the Bank to Belmont Bancorp. because previously paid dividends have exceeded the total of the Bank's retained net profits for the 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. The Corporation has ceased payment of a cash dividend until the Corporation achieves a certain level of profitability and capital. LIQUIDITY AND CAPITAL RESOURCES The Corporation meets its liability based needs through the operation of Belmont National 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 increased by $40.4 million, or 15.3%, from the end of 1997 to 1998. Average deposits increased $25.2 million, or 9.4%, during 1998 compared to 1997. The Bank has utilized alternative funding sources to leverage shareholders' equity and improve overall profitability. Sources include the Federal Home Loan Bank of Cincinnati and various correspondent bank relationships. The Bank also has lines of credit with various correspondent banks totaling $6,500,000 which may be used as an alternative funding source; the unused portion of these lines at December 31, 1998 was $4,550,000. During June 1999, one correspondent temporarily suspended their line of credit in the amount of $4.5 million until the Bank collateralized the line with securities. In addition, the Bank has a line of credit with the Federal Home Loan Bank of Cincinnati for $30 million; at December 31, 1998, the line was not drawn upon. All borrowings at the Federal Home Loan Bank are subject to eligible collateral requirements. Future liquidity may be impacted by the items discussed under the Item 7--Results of Operations. Year 2000 The Corporation is aware of the overall potential impact the 1999 to 2000 calendar changes could present. The loss of hardware and/or software systems as well as the loss of electricity and/or telecommunications are areas of concern throughout the entire industry. A smooth transition to the Year 2000 is planned with little or no impact to our customer base. The Corporation began gathering Year 2000 data in August 1997. A written project plan was researched and delivered during the fourth quarter of 1997. The Year 2000 project plan was presented to the Board of Directors in February 1998 and was approved at the February board meeting. The Year 2000 Project Team was assigned in December 1997 and is comprised of representatives from all affected departments. Monthly meetings are held to review the current project status and to assign various tasks to departments. As a financial institution, the Corporation follows Year 2000 guidelines written by the Federal Financial Institutions Examination Council as well as OCC Advisory Letters. The Office of the Comptroller of the Currency has completed three extensive examinations of Belmont National Bank and the Year 2000 plan. The assigned examiner reviews all plans, research, and results on a continual basis. The Belmont National Bank Year 2000 plan is comprised of the five Y2K phases: Awareness, Assessment, Renovation, Validation and Implementation. The Awareness phase consists of the institution being aware of the potential problem(s) that could result from the Year 2000. This phase was completed in December 1997. The Assessment phase was completed in January 1998 and included inventories of all equipment including hardware, software, environmental controls, fax machines, copiers, vault timers, security systems, network systems etc. The Renovation phase, January 1998 through October 1998, consisted of known renovations such as upgrading network routers, servers, and software, and the installation of a new mainframe system. June 1998 through December 1998 was the time frame designated for the Validation phase. This phase consisted of testing the software and hardware at Belmont National Bank. During this phase all "mission critical" systems were tested by changing the date and completing transactions with calculation results validated. From March 1998 through the remainder of 1999 Belmont National Bank will implement new software, hardware and/or any equipment that did not pass all Y2K tests. As of January 1999, all "mission critical" systems have been tested. All mission critical systems passed Year 2000 testing. Other less critical systems that did not pass were replaced by June 1999. The regulatory agency examiner has reviewed all test results. Belmont National Bank has included a customer awareness policy dedicated to maintaining updated communication with its customer base. The Bank provided a project update in June 1998 and issued a new update in February 1999. Both Y2K status reports were available through the Bank's WEB site on the internet as well as to customers and employees at all branch locations. At its June 1998 meeting, the Loan Committee established a Year 2000 evaluation form, which was included in the lending policy for all new commercial loan applicants. The lending department prepared and distributed Y2K readiness surveys to existing loan customers with aggregate balances greater than $150,000. All returned survey responses were evaluated and a rating was assigned to each commercial customer. The customer's Y2K readiness status was reviewed quarterly. Year 2000 surveys were also sent to commercial deposit account holders with balances greater than $250,000. Senior Management reviewed these surveys and took appropriate action based on a low to high risk rating system. Regular update reports have been presented to the Board of Directors of the Corporation. ITEM 7A-QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE SENSITIVITY The Corporation's net interest revenue can be vulnerable to wide fluctuations arising from a change in the general level of interest rates to the degree that the average yield on assets responds differently to such a change than does the average cost of funds. To maintain a consistent earnings performance, the Corporation actively manages the repricing characteristics of its assets and liabilities to control net interest income rate sensitivity. The mismatching of asset and liability repricing characteristics in specific time frames is referred to as interest rate sensitivity gaps. Mismatching or "gapping" can be profitable when the term structure of interest rates (the yield curve) is positive, i.e. short term yields are lower than long term yields, but gapping entails an element of risk, particularly in volatile markets. An institution is said to have a negative gap when its liabilities reprice in a shorter time period than its assets. A positive gap exists when assets reprice more quickly than liabilities. A negative gap in a period when the general level of interest rates is declining will produce a larger net interest income spread than would be the case if all assets and liabilities were perfectly matched. Conversely, net interest income will be adversely affected by a negative gap position in a period when the general level of interest rates is rising. Gaps, therefore, must be prudently managed. The Corporation examines its interest rate sensitivity position by categorizing the balance sheet into respective repricing time periods similar to those shown on the accompanying table. Repricing of certain assets, such as installment loans, mortgage loans and leases, is based upon contractual amortization or repricing, although experience indicates that they reprice more quickly due to early payoffs. Mortgage- backed securities are included in maturity/repricing categories based upon historical prepayment speeds. Based upon historical deposit rate relationships, savings and interest bearing checking are partially included in the non-rate sensitive category since rate changes on these products are not completely sensitive to fluctuations in the interest rate environment. Asset/liability management encompasses both interest rate risk and liquidity management. The resulting net cumulative gap positions reflect the Corporation's sensitivity to interest rate changes over time. The calculation is a static indicator and is not a net interest income predictor of a dynamic business in a volatile environment. As a static indicator, the gap methodology does capture major trends. Rate Sensitivity Analysis December 31, 1998
Maturing or repricing Non-rate Total Sensitive 1-30 31-90 91-180 181-356 1 Year 1-5 & Over days days days days & Over Years 5 years Total Interest earning assets: Loans and leases $58,406 $14,171 $ 7,968 $10,599 $ 91,144 $60,114 $ 56,928 $208,186 Trading securities 955 955 967 359 2,281 Investment securities 2,491 648 576 3,715 5,531 3,270 12,516 Securities available for sale 14,937 6,816 5,655 28,377 55,785 68,690 60,520 184,995 Total interest earning assets 74,298 23,478 14,271 39,552 151,599 135,302 121,077 407,978 Interest bearing liabilities: Interest checking 5,580 5,580 36,857 42,437 Savings 17,077 17,077 71,188 88,265 Certificates-$100,000 and over 1,190 2,497 5,482 10,392 19,561 3,987 3,697 27,245 Other time 7,845 14,991 23,398 23,887 70,121 31,405 14,659 116,185 Repurchase agreements 6,239 6,239 6,239 Short term borrowings 3,950 3,950 3,950 Long term debt 5,000 5,000 11,401 75,000 91,401 Total interest bearing liabilities 35,642 17,488 28,880 45,518 127,528 46,793 201,401 375,722 Rate sensitivity gap 38,656 5,990 (14,609) (5,966) 24,071 88,509 (80,324) 32,256 Cumulative gap $38,656 $44,646 $30,037 $24,071 $112,580 $ 32,256 Cumulative gap as a percentage of interest earning assets 9.48% 10.94% 7.36% 5.90% 27.59% 7.91%
Interest bearing checking and savings deposits that have no contractual maturity are scheduled in the table above according to Management's best estimate of their repricing sensitivity to changes in market rates. The Bank seeks to manage interest rate risk utilizing various modeling techniques and through monitoring short and long term interest rates and adjusting its product line and pricing accordingly. Forward-looking Statements This report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, that involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those in the forward-looking statements. These factors include the economic environment, competition, products and pricing in geographic and business areas in which the Corporation operates, prevailing interest rates, changes in government regulations and policies affecting financial services companies, credit quality and credit risk management, changes in the banking industry including the effects of consolidation resulting from possible mergers of financial institutions, acquisitions and integration of acquired businesses. The Corporation undertakes no obligation to release revisions to these forward-looking statements or reflect events or circumstances after the date of this report. ITEM 8 - FINANCIAL STATEMENTS & SUPPLEMENTARY DATA The financial statements and schedules are set forth beginning on page F-1. PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K The following exhibits are filed as part of this report: Exhibit 23 - Consent of Independent Certified Public Accountants Exhibit 27 - Financial data schedule 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 August 3, 1999. By s/W. Quay Mull II BELMONT BANCORP. W. Quay Mull II, Chairman & Interim CEO (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. John A. Belot s/John A. Belot Director Mary L. Holloway Haning Director Charles J. Kaiser, Jr. s/Charles J. Kaiser, Jr. Director John H. Goodman, II s/John H. Goodman, II Director Dana Lewis s/Dana Lewis Director Jane R. Marsh s/Jane R. Marsh Secretary, Belmont Bancorp. and Sr. Vice President, Controller & Cashier, Belmont National Bank James Miller Director Terrence Lee s/Terrence Lee Director Tom Olszowy s/Tom Olszowy Director Keith Sommer s/Keith Sommer Director Charles A. Wilson, Jr. s/Charles A. Wilson, Jr. Vice Chairman s/W. Quay Mull II Chairman of the Board & Interim CEO W. Quay Mull II August 3, 1999 PAGE F-1 Belmont Bancorp. and Subsidiaries Consolidated Balance Sheets ($000's) December 31, 1998 1997 Assets as Restated Cash and due from banks $ 9,439 $ 10,265 Loans held for sale 1,734 884 Trading securities 2,281 - Securities available for sale (at fair value) 184,995 121,156 Securities held to maturity (fair value of $12,814 - 1998; and $16,181 - 1997) 12,516 15,955 Loans 206,452 224,016 Less allowance for possible loan losses (5,475) (4,134) Net loans 200,977 219,882 Premises and equipment, net 7,377 7,401 Other real estate owned - 20 Accrued income receivable 2,731 2,586 Other assets 16,233 10,564 Total Assets $438,283 $388,713 Liabilities and Shareholders' Equity Liabilities Noninterest bearing deposits: Demand $ 30,219 $ 29,987 Interest bearing deposits: Demand 42,437 33,463 Savings 88,265 79,829 Time 143,430 120,629 Total deposits 304,351 263,908 Securities sold under repurchase agreements 6,239 5,256 Federal funds purchased and other short term borrowings 3,950 14,635 Long-term debt 91,401 69,635 Accrued interest on deposits and other borrowings 896 731 Other liabilities 6,082 2,649 Total liabilities 412,919 356,814 Shareholders' Equity Preferred stock - authorized 90,000 shares with no par value; issued and outstanding, none - - Common stock - $0.25 par value, 17,800,000 shares authorized, 5,288,326 issued in 1998 and 1997 1,321 1,321 Surplus 7,854 7,781 Treasury stock (66,174 shares in 1998; 13,330 shares in 1997) (1,400) (131) Retained earnings: Unappropriated 17,938 21,879 Appropriated for contingencies 850 850 Accumulated other comprehensive income (loss) (1,199) 199 Total shareholders' equity 25,364 31,899 Total liabilities and shareholders' equity $438,283 $388,713 The accompanying notes are an integral part of the financial statements. Belmont Bancorp. and Subsidiaries Consolidated Statements of Income For the Years Ended December 31, 1998, 1997 and 1996 ($000's) Interest Income 1998 1997 1996 as Restated Loans and lease financing: Taxable $ 20,923 $ 19,141 $ 15,905 Tax-exempt 271 334 329 Investment securities: Taxable 7,720 7,238 7,660 Tax-exempt 1,241 1,284 1,251 Dividends 336 280 175 Interest on trading securities 68 - - Interest on federal funds sold 228 71 181 Total interest income 30,787 28,348 25,501 Interest Expense Deposits 11,671 10,063 9,386 Other borrowings 4,809 3,941 2,741 Total interest expense 16,480 14,004 12,127 Net interest income 14,307 14,344 13,374 Provision for Possible Loan Losses 12,882 1,055 465 Net interest income after provision for possible loan losses 1,425 13,289 12,909 Noninterest Income Trust fees 463 466 502 Service charges on deposits 752 707 660 Other operating income 968 837 699 Gain on sale of real estate 383 - - Trading gains 62 - - Investment securities gains 1,338 799 396 Total noninterest income 3,966 2,809 2,257 Noninterest Expense Salary and employee benefits 4,633 3,948 3,436 Net occupancy expense of premises 824 783 686 Equipment expenses 933 947 817 Other operating expenses 3,106 3,054 3,449 Total noninterest expense 9,496 8,732 8,388 Income (loss) before income taxes (4,105) 7,366 6,778 Income Taxes (Benefit) (2,186) 1,421 1,776 Net income (loss) $ (1,919) $ 5,945 $ 5,002 Weighted Average Number of Shares Outstanding 5,252,161 5,278,152 5,286,610 Earnings (loss) Per Common Share $(0.37) $ 1.13 $ 0.95 The accompanying notes are an integral part of the financial statements. Belmont Bancorp. and Subsidiaries Consolidated Statements of Shareholders' Equity For the Years Ended December 31, 1998, 1997 and 1996 ($000's)
Accumulated Other Retained Earnings Compre- Compre- Preferred Common Unappro- Appro- Treasury hensive hensive Stock Stock Surplus priated priated Stock Income Income Balance, December 31, 1995 $ 1,000 $1,057 $7,781 $14,148 $850 $ (8) $ 336 Comprehensive income Net Income - - - 5,002 - - - $5,002 Other comprehensive income, net of tax Unrealized loss on securities (504) (504) Comprehensive income $4,498 Cash dividends declared: Preferred stock - - - (61) - - - Common stock(per share $.240) - - - (1,269) - - - Redemption of preferred stock (1,000) - - - - - - Balance, December 31, 1996 $ - $1,057 $7,781 $17,820 $850 $ (8) $(168) Comprehensive income Net income - - - 5,945 - - - $5,945 Other comprehensive income, net of tax Unrealized gains on securities 367 367 Comprehensive income $6,312 Cash dividends declared: Common stock (per share $.306) - - - (1,615) - - - Five-for-four stock split effected in the form of a stock dividend - 264 - (264) - - - Cash paid in lieu of fractional shares on stock dividend - - - (7) - - - Purchase of treasury stock - - - - - (123) - Balance, December 31, 1997 $ - $1,321 $7,781 $21,879 $850 $(131) $ 199 Comprehensive income Net loss (as restated) - - - (1,919) - - - $(1,919) Other comprehensive income, net of tax Unrealized loss on securities net of reclassification adjustment (see disclosure) (1,398) (1,398) Comprehensive income $(3,317) Cash dividends declared: Common stock (per share $.385) - - - (2,022) - - - Purchase of treasury stock - - - - - (1,308) - Issuance of treasury stock - - 73 - - 39 - Balance, December 31, 1998 $ - $1,321 $7,854 $17,938 $850 $(1,400) $(1,199) (As Restated) The accompanying notes are an integral part of the financial statements.
Belmont Bancorp. and Subsidiaries Consolidated Statements of Cash Flows For the Years Ended December 31, 1998, 1997 and 1996 ($000's) 1998 1997 1996 Operating Activities as Restated Net income (loss) $ (1,919) $ 5,945 $ 5,002 Adjustments to reconcile net income to net cash flows provided by (used in) operating activities: Provision for loan losses 12,882 1,055 465 Depreciation and amortization expense 743 818 674 Amortization of investment security premiums 2,403 1,278 1,469 Accretion of investment security discounts and interest recorded on zero-coupon securities (302) (230) (358) Investment securities losses - 3 1 Trading (gains) losses (63) - - Gains on securities available for sale (1,338) (802) (397) Proceeds from sales of securities held in trading account 12,893 - - Purchase of securities for trading account (14,865) - - Loss (gain) on sale of fixed assets (384) (1) 6 Gain on sale of loans (144) (91) (72) Loss (gain) on sale of other real estate owned - (7) 65 (Increase) decrease in interest receivable (144) (665) 229 Increase in interest payable 165 67 3 Net increase in loans held for sale (850) (642) (242) Others, net (1,103) (6,546) 6,130 Net cash provided by operating activities 7,974 182 12,975 Investing Activities Net decrease (increase) in federal funds sold - 24,450 (24,450) Proceeds from maturities and calls of investment securities 4,370 3,575 1,859 Purchase of securities available for sale (193,441) (164,305) ( 99,267) Purchase of investment securities - - - Proceeds from sale of securities available for sale 87,580 105,407 110,808 Principal collected on mortgage-backed securities 37,964 16,545 22,930 Net increase in loans and leases, net of charge-offs (14,013) (39,771) (38,514) Proceeds from sale of loans 20,144 13,361 9,874 Loans purchased - (9,124) - Recoveries on loans previously charged-off 15 16 47 Proceeds from sale of other real estate owned 39 111 514 Purchase of life insurance contracts (413) (2,365) - Purchase of premises and equipment (947) (979) (2,859) Proceeds from sale of fixed assets 612 20 8 Net cash used in investing activities (58,090) (53,059) (19,050) Financing Activities Net increase in deposits 40,443 2,369 14,689 Net increase (decrease) in repurchase agreements 983 (3,024) (6,259) Net increase (decrease) in short-term borrowings (10,685) 4,635 (14,126) Proceeds from the issuance of long-term debt 35,000 52,950 15,125 Payments on long-term debt (13,233) (2,991) (251) Dividends paid on common and preferred stock (2,022) (1,622) (1,330) Redemption of preferred stock - - (1,000) Issuance of treasury stock 112 - - Purchase of treasury stock (1,308) (123) - Net cash provided by financing activities 49,290 52,194 6,848 Increase (Decrease) in Cash and Cash Equivalents (826) (683) 773 Cash and Cash Equivalents, Beginning of Year 10,265 10,948 10,175 Cash and Cash Equivalents, End of Year $ 9,439 $ 10,265 $ 10,948 The accompanying notes are an integral part of the financial statements. Belmont Bancorp. and Subsidiaries Notes to the Consolidated Financial Statements (as Restated) For the Years Ended December 31, 1998, 1997 and 1996 1. Summary of Significant Accounting Policies The accounting and reporting policies and practices of Belmont Bancorp. (the "Corporation") 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. Held to Maturity Securities: These securities are purchased with the original intent to hold to maturity and events which may be reasonably anticipated are considered when determining the Corporation's intent and ability to hold to maturity. Securities meeting such criteria at date of purchase and as of the balance sheet date are carried at cost, adjusted for amortization of premiums and accretion of discounts. Available for Sale Securities: Debt and equity securities to be held for indefinite periods of time and not intended to be held to maturity are classified as available for sale and carried at fair value with net unrealized gains and losses, net of tax, reflected as a component of shareholders' equity 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 Corporation'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. 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 Corporation 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 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 Corporation 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 Corporation'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. Since the adoption of SFAS Nos. 114 and 118, the Corporation had no loans which management has determined to be impaired. The Corporation 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. Allowance For Loan Losses: The allowance for loan losses is maintained at a level which, in management's judgment, is adequate to absorb credit losses inherent in the loan portfolio. The amount of the allowance is based on management's evaluation of the collectibility of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, and economic conditions. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows. The allowance is increased by a provision for loan losses, which is charged to expense and reduced by charge- offs, net of recoveries. Changes in the allowance relating to impaired loans are charged or credited to the provision for loan losses. Because of uncertainties inherent in the estimation process, management's estimate of credit losses inherent in the loan portfolio and the related allowance may change in the near term. Premises and Equipment: Premises and equipment are stated at cost, less accumulated depreciation and amortization. Provisions for depreciation and amortization are computed generally using the straight line method over the estimated useful lives of the assets. Leasehold improvements are amortized on the straight line basis over the lease period. When units of property are disposed of, the premises and equipment accounts are relieved of the cost and the accumulated depreciation related to such units. Any resulting gains or losses are credited to or charged against income. Costs of repairs and maintenance are charged to expense as incurred. Major renewals and betterments are capitalized at cost. Other Real Estate: Real estate acquired in satisfaction of indebtedness is recorded at the lesser of the loan balance prior to foreclosure, plus certain costs incurred for improvements to the property, or fair value less estimated selling costs of the property. 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 Corporation has no securities which would be considered potential common stock. The following is a reconciliation of net income to income available to common shareholders in computing basic earnings per share: (Expressed in Thousands) 1998 1997 1996 Net income (loss) $(1,919) $5,945 $5,002 Preferred stock dividends - - (61) Income available to common shareholders $(1,919) $5,945 $4,941 Excess of Cost Over Net Assets Acquired: The excess of cost over net assets of branches purchased in 1991 is being amortized on the straight line method over ten years. The excess of cost over net assets of branches purchased in 1992 is being amortized on the straight line method over a five to eight year period for the portion allocated to the core deposit base and ten years for the remaining excess. The unamortized balances at December 31, 1998 and 1997, were $481,000 and $677,000, respectively. Amortization charged to expense was $196,000 in the period ended December 31, 1998, and $415,000 for the periods ended December 31, 1997 and 1996. Reclassifications: Certain prior year amounts have been reclassified to conform with current year presentation. 2. Shareholders' Equity On December 31, 1996, the Corporation redeemed and retired all of the remaining outstanding shares of its $100 par value, non-voting, senior cumulative preferred stock. On June 16, 1997, the Corporation declared a five-for-four stock split, which was effected in the form of a 25% stock dividend to shareholders of record on June 16, 1997, and paid on July 1, 1997. On February 27, 1998, the Corporation declared a two-for-one stock split to shareholders of record on March 16, 1998. As a result of the split, the par value of each share was reduced to $0.25. All references in the accompanying financial statements to the number of common shares and per-share amounts in prior years, have been restated to reflect the stock splits. At various times during 1998 and 1997, the Corporation repurchased shares of its common stock in open market transactions. The following table represents the change in the Corporation's outstanding shares: Preferred Common Stock Stock Shares outstanding, December 31, 1995 10,000 2,114,644 Preferred stock redemption (10,000) - Shares outstanding, December 31, 1996 - 2,114,644 25% stock dividend - 527,354 Shares repurchased - (4,500) Shares outstanding, December 31, 1997 - 2,637,498 Two-for-one stock split - 2,644,163 Treasury shares reissued - 5,000 Shares repurchased - (64,509) Shares outstanding, December 31, 1998 - 5,222,152 3. Investment Securities The estimated fair value of investment securities are as follows at December 31:
1998 1997 Gross Gross Unreal- Gross Estimated Unreal- Gross Estimated Amortized ized Unrealized Fair Amortized ized Unrealized Fair (Expressed in thousands) Cost Gains Losses Value Cost Gains Losses Value Securities held to maturity: U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 2,255 $ - $ (26) $ 2,229 $ 2,260 $ - $ (52) $ 2,208 Obligations of states and political subdivisions 3,823 273 (3) 4,093 4,487 222 (13) 4,696 Mortgage-backed securities 6,438 84 (30) 6,492 9,208 119 (50) 9,277 Total held to maturity $ 12,516 $ 357 $ (59) $ 12,814 $ 15,955 $ 341 $(115) $ 16,181 Securities available for sale: U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 10,653 $ 1 $ (97) $ 10,557 $ 14,886 $ 16 $ (10) $ 14,892 Obligations of states and political subdivisions 29,509 63 (515) 29,057 17,832 346 - 18,178 Mortgage-backed securities 94,623 324 (1,246) 93,701 58,897 341 (286) 58,952 Corporate debt 7,530 1 (191) 7,340 - - - - Mortgage derivative securities 38,797 124 (282) 38,639 24,537 47 (153) 24,431 Total debt securities 181,112 513 (2,331) 179,294 116,152 750 (449) 116,453 Equity securities 5,700 134 (133) 5,701 4,703 - - 4,703 Total available for sale $186,812 $ 647 $(2,464) $184,995 $120,855 $ 750 $(449) $121,156
The amortized cost and estimated fair value of investment securities at December 31, 1998, by contractual maturity, follow. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities Securities Held to Maturity Available for Sale Estimated Estimated Amortized Fair Amortized Fair (Expressed in thousands) Cost Value Cost Value Due in one year or less $ 533 $ 540 $ 100 $ 101 Due after one year through five years 3,483 3,520 - - Due after five years through ten years 557 621 2,026 2,010 Due after ten years 1,506 1,642 45,566 44,842 Mortgage-backed securities 6,437 6,491 94,623 93,702 Mortgage derivative securities - - 38,797 38,639 Equity securities - - 5,700 5,701 Total $12,516 $12,814 $186,812 $184,995 Sales and write-downs of investment securities resulted in the following: (Expressed in thousands) 1998 1997 1996 Proceeds from sales $87,580 $105,407 $110,808 Gross gains 1,355 869 745 Gross losses (18) (67) (346) Losses on securities called (1) (3) (3) Gains on securities called 1 - - Gross trading gains 101 - - Gross trading losses (39) - - All securities sold were classified as available for sale at the time of sale. There were no transfers of securities between classifications in 1998, 1997, or 1996. Assets carried at $34,847,000 and $29,526,000 at December 31, 1998 and 1997, respectively, were pledged to secure United States Government and other public funds, and for other purposes as required or permitted by law. 4. Loans and Allowance for Possible Loan Losses Loans outstanding at December 31 are as follows: (Expressed in thousands) 1998 1997 Real estate-construction $ 135 $ 1,418 Real estate-mortgage 56,364 77,111 Real estate-secured by nonfarm, nonresidential property 14,719 19,983 Commercial, financial and agricultural 116,539 106,443 Obligations of political subdivisions in the U.S 3,191 3,175 Installment and credit card loans to individuals 15,504 15,886 Loans receivable $206,452 $224,016 Mortgage loans serviced for others approximated $38,230,000, $31,301,000, and $21,047,000 at December 31, 1998, 1997, and 1996, respectively. The bank discontinues accruing interest income on loans and leases when, in the opinion of management, the collectibility of such interest appears doubtful. Non- accruing loans and leases amounted to $8,573,000 and $1,515,000 at December 31, 1998 and 1997, respectively. The after-tax effect of the interest that would have been accrued on these loans was $67,000 in 1998 and $46,000 in 1997. The following is an analysis of loan activity to directors, executive officers, and their associates (see Note 13): (Expressed in thousands) 1998 1997 Balance previously reported $ 6,906 $ 7,812 New loans during the year 474 2,003 Total 7,380 9,815 Less repayments during the year 1,145 2,909 Balance, December 31 $ 6,235 $ 6,906 Activity in the allowance for loan losses is summarized as follows: December 31 (Expressed in thousands) 1998 1997 1996 Balance at beginning of year $ 4,134 $3,153 $2,703 Additions charged to operating expense 12,882 1,055 465 Recoveries on loans previously charged off 15 17 47 Total 17,031 4,225 3,215 Loans Charged off 11,556 91 62 Balance at end of year $ 5,475 4,134 3,153 The entire allowance represents a valuation reserve which is available for future charge-offs. 5. Premises and Equipment Premises and equipment are stated at cost, less accumulated depreciation and amortization, as follows: Original December 31 Useful Life (Expressed in thousands) 1998 1997 Years Land and land improvements $ 1,186 $ 1,225 Buildings 5,843 5,874 30 - 50 Furniture, fixtures and equipment 5,972 5,456 5 - 12 Leasehold improvements 492 377 5 - 20 Total 13,493 12,932 Less accumulated depreciation and amortization 6,116 5,531 Premises and equipment, net $ 7,377 $ 7,401 Charges to operations for depreciation and amortization approximate $743,000, $818,000, and $674,000 for 1998, 1997, and 1996, respectively. 6. Deposits The distribution of the bank's deposits at December 31, 1998 and 1997, are as follows:
1998 1997 Non- Non- interest interest Bearing Interest Bearing Bearing Interest Bearing (Expressed in thousands) Demand Demand Savings Time Demand Demand Savings Time Individuals, partnerships and Corporations $13,893 $42,437 $88,265 $130,378 $20,818 $33,463 $79,829 $112,190 U.S. Government 41 - - - 44 - - - States and political subdivisions - - - 13,052 7,016 - - 8,439 Other depository institutions in the U.S. 14,564 - - - - - - - Certified, officers' checks, travelers cheques, etc. 1,721 - - - 2,109 - - - Total $30,219 $42,437 $88,265 $143,430 $29,987 $33,463 $79,829 $120,629
Time deposits include certificates of deposit issued in denominations of $100,000 or more which amounted to $27,245,000 at December 31, 1998, and $17,716,000 at December 31, 1997. A maturity distribution of time certificates of deposit of $100,000 or more follows: (Expressed in thousands) 1998 1997 Due in three months or less $ 3,687 $ 5,966 Due after three months through six months 5,482 4,093 Due after six months through twelve months 10,392 4,526 Due after one year through five years 3,987 1,996 Due after five years 3,697 1,135 Total $27,245 $17,716 7. Securities Sold Under Repurchase Agreements Securities sold under agreements to repurchase represent primarily overnight borrowings. However, as of December 31, 1998 and 1997, Belmont National Bank had repurchase agreements outstanding with maturities of three months. 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) 1998 1997 1996 Balance at year-end $6,239 $5,256 $ 8,280 Average during the year 6,733 7,116 11,529 Maximum month-end balance 7,807 8,847 21,362 Weighted average rate during the year 5.65% 5.66% 4.86% Weighted average rate at December 31 5.36% 6.39% 5.55% 8. Short-Term Borrowings Short-term borrowings consist of advances from the Federal Home Loan Bank of Cincinnati (FHLB) and federal funds purchased. These represent primarily overnight borrowings. FHLB advances are made under agreements which allow for maximum borrowings of $30 million. Advances can be made at fixed or variable rates of interest. Collateral for the advances consists of residential mortgage loans and shares of stock of the Federal Home Loan Bank of Cincinnati. Information related to these borrowings at December 31, 1998 and 1997, is summarized below: (Expressed in thousands) FHLB Advances 1998 1997 Balance at year-end $ - $ 8,829 Average balance during the year $ 2,709 $17,648 Maximum month-end balance $22,047 $49,209 Weighted average rate during the year 5.63% 5.66% Interest rate at December 31 - 6.90% Collateral: Residential mortgage loans $ - $13,244 Federal Home Loan Bank stock $ - $ 4,450 Federal Funds Purchased 1998 1997 Balance at year-end $ 3,950 $ 5,806 Average during the year $ 843 $ 953 Maximum month-end balance $11,000 $ 7,000 Weighted average rate during the year 5.35% 5.93% Weighted average rate at December 31 5.25% 6.76% 9. Long-Term Debt Long-term debt consists of advances from the Federal Home Loan Bank of Cincinnati. Fixed-rate, single payment loans totaling $85,000,000 and $62,000,000 at December 31, 1998 and 1997, respectively, mature in 1999 through 2008 with interest rates ranging from 4.53% to 6.56%. Fixed-rate, amortizing loans totaling $6,401,000 and $7,635,000 at December 31, 1998 and 1997, respectively, reach final maturity in years 2001 through 2017, with interest rates ranging from 5.50% to 6.95%. The loans are secured by residential mortgage loans with a carrying value of $44,356,000 and $63,151,000 at December 31, 1998 and 1997, respectively, Federal Home Loan Bank Stock, and investment securities with a carrying value of $84,427,000 and $39,877,000 at December 31, 1998 and 1997, respectively. Scheduled principal payments on long-term debt in each of the five years subsequent to December 31, 1998, are as follows: (Expressed in thousands) 1999 $ 6,055 2000 5,997 2001 967 2002 379 2003 343 Thereafter 77,660 10. Income Tax The components of applicable income taxes are as follows: (Expressed in thousands) 1998 1997 1996 Currently payable (refundable) $(2,269) $1,710 $1,910 Deferred 83 (289) (134) Income tax (benefit) $(2,186) $1,421 $1,776 The following temporary differences gave rise to the deferred tax asset at December 31, 1998 and 1997: (Expressed in thousands) 1998 1997 Allowance for loan losses $1,020 $1,256 Interest on non-accrual loans 18 24 Unrealized (gains) losses on investments 624 (94) Deferred loan origination fees 10 11 Deferred compensation and liability for future employees' benefits 295 228 Intangible assets 342 301 Premises and equipment due to differences in depreciation (137) (156) Direct finance leases (86) (86) Federal Home Loan Bank stock dividends (347) (235) Alternative minimum tax credit carryforward 148 - Total deferred tax assets $1,887 $1,249 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:
1998 1997 1996 (Expressed in thousands) Amount Percent Amount Percent Amount Percent Tax at statutory rate $(1,396) (34.0) $2,504 34.0 $2,305 34.0 Reductions in taxes resulting from: Tax exempt interest on investments and loans (514) (12.5) (550) (7.5) (537) (7.9) Tax credits (74) (1.8) (482) (6.5) - - Excess of tax loss over book gains on investment securities (31) (0.7) (33) (0.4) (37) (0.6) Earnings on life insurance policies (93) (2.3) (43) (0.6) (39) (0.6) Non-deductible interest expense 64 1.6 68 0.9 78 1.2 Use of capital loss carryforward (147) (3.6) (44) (0.6) - - Others - net 5 0.1 1 - 6 0.1 Actual tax expense (benefit) $(2,186) (53.2) $1,421 19.3 $1,776 26.2
11. Employee Benefit Plans The Corporation 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 pension expense for 1998, 1997, and 1996 was $295,000, $277,000, and $234,000, respectively. In addition to providing the profit-sharing plan, Belmont Bancorp. sponsors two defined benefit post-retirement plans that cover both salaried and nonsalaried employees. Employees must be fifty-five years old and have ten years of service to qualify for both plans. One plan provides medical and dental benefits, and the other provides life insurance benefits. The post-retirement health care plan is contributory, with retiree contributions adjusted annually; the life insurance plan is noncontributory. On January 1, 1993, Belmont Bancorp. adopted Statement of Financial Accounting Standards ("SFAS") No. 106, "Employer's Accounting for Post-retirement Benefits Other than Pensions." The statement requires the accrual of the expected cost of providing post-retirement benefits to employees and certain dependents during the years that an employee renders service. The following table sets forth the plan's combined funded status reconciled with the amount shown in the Corporation's balance sheet at December 31: (Expressed in thousands) 1998 1997 Accumulated post-retirement benefit obligation: Retirees $ 50 $ 39 Active plan participants 42 49 92 88 Plan assets at fair value - - Accumulated post-retirement benefit obligation in excess of plan assets 92 88 Unrecognized net gain (loss) from past experience different from that assumed and from changes in assumptions 49 56 Prior service cost not yet recognized in expense (10) 2 Accrued post-retirement benefit cost in the balance sheet $131 $146 The Corporation's post-retirement health care plan is under funded. The accumulated post-retirement benefit obligation and plan assets for that plan are $92,000 and $-0-, respectively, at December 31, 1998, and $88,000 and $-0-, respectively, at December 31, 1997. Post-retirement expense includes the following components: (Expressed in thousands) 1998 1997 1996 Service cost $ 2 $ 5 $ 6 Interest cost on accumulated post-retirement benefit obligation 7 9 10 Net amortization and deferral (20) (12) (10) Post-retirement expense $(11) $ 2 $ 6 The annual assumed rate of increase in the per capita cost of covered benefits for 1998 and 1997 is 11.0% for medical benefits and 8.5% for dental benefits. The rates are assumed to decrease gradually to 5.5% (for medical in 2006 and for dental in 2004), and remain at that level thereafter. Increasing the assumed health care trend rates by one percentage point in each year would have an immaterial effect on the accumulated post-retirement benefit obligation and the aggregate of the service and interest cost components of the net periodic post-retirement benefit cost. The weighted-average discount rate used in determining the accumulated post-retirement benefit obligation was 7%. The long-term inflation rate assumed was 4%. 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 Corporation will pay for insurance, taxes and maintenance. As of December 31, 1998, 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, 1999 $119 2000 119 2001 120 2002 122 2003 121 Thereafter 203 Total minimum lease payments $804 Rental expense under operating leases approximated $139,000 in 1998, $132,000 in 1997, and $129,000 in 1996. 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 1998 and 1997. The outstanding balance of all loans to the related parties was $6,235,000 and $6,906,000 at December 31, 1998 and 1997, respectively. All loans and commitments included in such transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others and did not involve more than the normal risk of collectibility or present other unfavorable features. 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 Corporation has in particular classes of financial instruments. The Corporation'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 Corporation 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) 1998 1997 Commitments to extend credit $30,297 $27,081 Standby letters of credit 2,414 1,449 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 Corporation evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on management's credit evaluation of the counter party. Collateral held varies, but may include accounts receivable, inventory, property, plant, and equipment, and income-producing properties. Standby letters of credit are conditional commitments issued by the Corporation 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, $2,121,000 expire in 1999, while the remaining $293,000 expire in various years through 2027. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. In the ordinary course of business, the Corporation and its subsidiaries have been named as defendants in legal actions. Management believes, based on the advice of counsel, that liabilities, if any, arising from these actions will not be material to the Corporation's financial position or results of operations. 15. Concentrations of Credit Risk The subsidiary bank extends commercial, consumer, and real estate loans to customers primarily located in Belmont, Harrison, and Tuscarawas Counties in Ohio and Ohio County, 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. At December 31, 1998, there were approximately $21,669,000 in loans to businesses that operated in the outdoor amusement industry or manufactured equipment for use in this industry. These loans represent 9.95% of total loans. Approximately one-half of these loans are to borrowers located in the State of Ohio. The remaining businesses operate throughout the continental United States. There were no other significant concentrations. 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 of the preceding two years. Under this formula, the bank cannot declare dividends in 1999 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. 17. Other Operating Expenses Other operating expenses include the following: (Expressed in thousands) 1998 1997 1996 Taxes other than payroll and real estate $ 507 $ 426 $ 395 Supplies and printing 299 280 301 Insurance, including Federal Deposit Insurance 127 125 567 Amortization of intangibles 196 415 415 Other (individually less than 1% of total interest income) 1,977 1,808 1,771 Total $3,106 $3,054 $3,449 18.Restrictions on Cash The subsidiary bank is required to maintain an average reserve balance with the Federal Reserve Bank. The average amounts of the reserve balance for the years ended December 31, 1998 and 1997, were $4,337,000 and $3,987,000, respectively. 19. Cash Flows Information The Corporation'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 1998, 1997, and 1996 were $16,316,000, $13,937,000, and $12,124,000, respectively. Cash payments for income taxes for 1998, 1997, and 1996, were $2,168,000, $2,074,000, and $1,733,000, respectively. 20. Regulatory Matters The subsidiary bank is 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 bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the bank must meet specific capital guidelines that involve quantitative measures of the bank's assets, liabilities, and certain off- balance-sheet items as calculated under regulatory accounting practices. The 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 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). Management believes, as of December 31, 1998, that the bank meets all capital adequacy requirements to which they are subject. As of December 31, 1998, the most recent notifications from the Office of the Comptroller of the Currency categorized the bank as adequately capitalized under the regulatory framework for prompt corrective action. To remain adequately capitalized, the bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. Based on the effects of the events described in Note 24, management believes that the institution will be considered adequately capitalized as of March 31, 1999, under the regulatory framework for prompt corrective action. To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions (expressed in thousands) Amount Ratio Amount Ratio Amount Ratio As of December 31, 1998: Total Capital $27,365 9.6% $22,752 8.0% $28,440 10.0% (to Risk Weighted Assets) Tier I Capital 23,810 8.4% 11,376 4.0% 17,064 6.0% (to Risk Weighted Assets) Tier I Capital 23,810 5.8% 16,429 4.0% 20,537 5.0% (to Average Assets) As of December 31, 1997: Total Capital 33,614 12.9% 20,912 8.0% 26,141 10.0% (to Risk Weighted Assets) Tier I Capital 30,336 11.6% 10,456 4.0% 15,684 6.0% (to Risk Weighted Assets) Tier I Capital 30,336 8.1% 14,962 4.0% 18,702 5.0% (to Average Assets) 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. 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 Corporation. 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. Investment Securities and Securities Available for Sale: For debt securities, derivative instruments and marketable equity securities held for investment purposes and for sale, 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. 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 weekly. Accordingly, the carrying amount is a reasonable estimate of fair value. Long-Term Debt: The fair values of long-term debt are estimated using discounted cash flow analyses based on the Corporation's current incremental borrowing rates for similar types of borrowing arrangements. The estimated fair values of the Corporation's financial instruments are as follows: 1998 1997 Carrying Estimated Carrying Estimated (Expressed in thousands) Amount Fair Value Amount Fair Value Financial assets: Cash and federal funds sold $ 9,439 $ 9,439 $ 10,265 $ 10,265 Trading securities 2,281 2,281 - - Securities available for sale 184,995 184,995 121,156 121,156 Securities held to maturity 12,516 12,814 15,955 16,181 Loans, net 202,711 215,559 220,766 225,678 Financial liabilities: Deposits 304,351 307,079 263,908 264,413 Repurchase agreements 6,239 6,239 5,256 5,256 Short-term borrowings 3,950 3,950 14,635 14,635 Long-term debt 91,401 93,975 69,635 60,857 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, Assets 1998 1997 Cash $ 307 $ 227 Investment in subsidiaries (at equity in net assets) 23,366 30,611 Equity securities 513 66 Advances to subsidiaries 1,006 1,068 Prepaid expenses 155 247 Other assets 660 565 Total assets $26,007 $32,784 Liabilities Payable to subsidiary $ 149 $ 485 Deferred compensation 494 400 Total liabilities 643 885 Shareholders' Equity Preferred stock - - Common stock 1,321 1,321 Capital surplus 7,854 7,781 Treasury stock- 66,174 and 13,330 shares, respectively (1,400) (131) Retained earnings-appropriated 850 850 Retained earnings-unappropriated 17,938 21,879 Net unrealized gain (loss) on securities available for sale (1,199) 199 Total shareholders' equity 25,364 31,899 Total liabilities and shareholders' equity $26,007 $32,784 Statements of Income 1998 1997 1996 Operating income Dividends from subsidiaries $ 3,921 $2,207 $2,479 Gain on sale of securities - 126 - Other income 108 27 19 Total income 4,029 2,360 2,498 Operating expenses 143 113 67 Income before income tax and equity in undistributed income of subsidiaries 3,886 2,247 2,431 Income tax (credit) (41) 12 (18) Equity in undistributed income (loss) of subsidiaries (5,846) 3,710 2,553 Net income (loss) $(1,919) $5,945 $5,002 Statements of Cash Flows 1998 1997 1996 Operating activities Net income (loss) $(1,919) $ 5,945 $ 5,002 Adjustments to reconcile net income to net cash provided by operating activities: Gain on sale of securities - (126) - Undistributed earnings of affiliates 5,846 (3,710) (2,553) Changes in operating assets and liabilities: Prepaid expenses 92 (242) 153 Accrued expenses and dividends 94 121 259 Other assets (95) (143) (422) Net cash provided by operating activities 4,018 1,845 2,439 Investing activities Proceeds from sale of securities - 180 - Payments to subsidiaries (274) (154) (31) Investment purchases (446) - - Net cash provided by (used in) investing activities (720) 26 (31) Financing activities Cash paid for fractional shares - (7) - Purchase of treasury stock (1,308) (123) - Redemption of preferred stock 112 - (1,000) Dividends (2,022) (1,615) (1,330) Net cash used in financing activities (3,218) (1,745) (2,330) Increase (decrease) in cash & cash equivalents 80 126 78 Cash and cash equivalents at beginning of year 227 101 23 Cash and cash equivalents at end of year $ 307 $ 227 $ 101 Supplemental disclosures: The Corporation made income tax payments of $2,168,000, $2,074,000, and $1,733,000 in 1998, 1997, and 1996, respectively. These payments represented income tax payments for the Corporation and its consolidated subsidiaries. The parent company incurred no interest expense in 1998, 1997, or 1996. 23. Comprehensive Income In June, 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This statement establishes standards for reporting and display of comprehensive income in a full set of financial statements. The Corporation adopted this statement on January 1, 1998, and has reclassified information in the 1997 and 1996 financial statements to reflect application of the provisions of this statement. Unrealized gains and losses on securities available for sale are the only components of other comprehensive income that apply to the Corporation. (Expressed in thousands) 1998 1997 1996 Before-tax amount $(2,118) $ 556 $ (764) Tax expense (benefit) (720) 189 (260) Net-of-tax amount $(1,398) $ 367 $ (504) Disclosure of reclassification amount for 1998: Unrealized holding loss arising during the period $ (959) Less: reclassification adjustment for gains included in net income (439) Net unrealized loss on securities $(1,398) The income tax benefit related to the reclassification adjustment for 1998 was $226. 24. Restatement and Subsequent Events As publicly announced on April 28, 1999, a large commercial borrower of BNB voluntarily and unexpectedly ceased operations on April 26, 1999. In the course of assessing the impact of this event on BNB, management discovered certain irregularities related to indirect consumer loans which had been obtained by BNB through the borrower's finance department. With respect to the consumer loans BNB provided to the borrower's customers, BNB advanced the proceeds of the loans directly to the borrower, with the permission of the customer. An investigation revealed that there were instances where the customer would subsequently cancel the sales contract with the borrower, but the funds were not returned by the borrower to BNB. In other instances, the borrower failed to perform on the retail sales contract even though BNB had provided funds to the borrower so that the borrower could complete the terms of the sales contract. In addition, the borrower often failed to pay off other lenders which has further impacted BNB's collateral position. As a result, management has recognized as a loss any cancelled sales contracts plus the estimated loss associated with contracts in the progress of construction. Additional funds were advanced by BNB on consumer loans, as described above, in 1999. BNB also advanced loans for the direct benefit of the borrower in 1999. As a result of the events which occurred in April 1999, BNB has recognized additional losses of $5.7 million in the first quarter of 1999 related to these loans. The accompanying Consolidated Financial Statements as of December 31, 1998, presented the restated results. A summary of the effects of the restatement follows (in thousands, except per share data: Consolidated Balance Sheet December 31, 1998 As previously Reported as Restated Assets Cash and due from banks $ 9,439 $ 9,439 Loans held for sale 1,734 1,734 Trading securities 2,281 2,281 Securities available for sale 184,995 184,995 Securities held to maturity 12,516 12,516 Loans 217,679 206,452 Less allowance for possible loan losses (4,529) (5,475) Net loans 213,150 200,977 Premises and equipment, net 7,377 7,377 Accrued income receivable 2,780 2,731 Other assets 12,077 16,233 Total assets $446,349 $438,283 Liabilities and Shareholders' Equity Liabilities Noninterest bearing deposits: Demand $ 30,219 $ 30,219 Interest bearing deposits: Demand 42,437 42,437 Savings 88,265 88,265 Time 143,430 143,430 Total deposits 304,351 304,351 Securities sold under repurchase agreements 6,239 6,239 Federal funds purchased and other short term borrowings 3,950 3,950 Long-term debt 91,401 91,401 Accrued interest on deposits and other borrowings 896 896 Other liabilities 6,082 6,082 Total liabilities 412,919 412,919 Shareholders' equity Preferred stock 0 0 Common stock 1,321 1,321 Surplus 7,854 7,854 Treasury stock (1,400) (1,400) Retained earnings: Unappropriated 26,004 17,938 Appropriated for contingencies 850 850 Accumulated other comprehensive income (1,199) (1,199) Total shareholders' equity 33,430 25,364 Total liabilities and shareholders'equity $446,349 $438,283 Consolidated Statement of Income (Loss) Year Ended December 31, 1998 As previously Reported as Restated Interest Income Loans and lease financing: Taxable $ 20,972 $ 20,923 Tax-exempt 271 271 Investment securities: Taxable 7,720 7,720 Tax-exempt 1,241 1,241 Dividends 336 336 Interest on trading securities 68 68 Interest on federal funds sold 228 228 Total interest income 30,836 30,787 Interest Expense Deposits 11,671 11,671 Other borrowings 4,809 4,809 Total interest expense 16,480 16,480 Net interest income 14,356 14,307 Provision for Possible Loan Losses 710 12,882 Net interest income after provision for possible loan losses 13,646 1,425 Noninterest Income Trust fees 463 463 Service charges on deposits 752 752 Other operating income 968 968 Gain on sale of real estate 383 383 Investment securities gains 1,400 1,400 Total noninterest income 3,966 3,966 Noninterest Expense Salary and employee benefits 4,633 4,633 Net occupancy expense of premises 824 824 Equipment expense 933 933 Other operating expenses 3,106 3,106 Total noninterest expense 9,496 9,496 Income (loss) before income taxes 8,116 (4,105) Income Taxes (benefit) 1,969 (2,186) Net income (loss) $ 6,147 (1,919) Weighted Average Number of Shares Outstanding 5,252,161 5,252,161 Earnings (loss) per common share $ 1.17 $ (0.37) Opinion of Independent Certified Public Accountants Board of Directors Belmont Bancorp. St. Clairsville, Ohio We have audited the accompanying consolidated balance sheets of Belmont Bancorp. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, changes in shareholders' equity, and cash flows, for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Belmont Bancorp. and subsidiaries at December 31, 1998 and 1997, and the consolidated results of its operations, changes in shareholders' equity, and cash flows, for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. As discussed in Note 24, the 1998 financial statements have been restated. s/S.R.Snodgrass A.C. S.R. Snodgrass A.C. Wheeling, West Virginia May 19, 1999 EX-23 2 EXHIBIT 23 - CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Shareholders and the Board of Directors of Belmont Bancorp. We consent to incorporation by reference of our report dated May 19, 1999, relating to the consolidated balance sheets as restated of Belmont Bancorp. as of December 31, 1998 and 1997, and the related consolidated statements of income, shareholders' equity, and statements of cash flows as restated for each of the three years in the period ended December 31, 1998. Said report appears following the financial statements beginning on page F-1 of Belmont Bancorp.'s annual form 10-K/A. s/S.R. Snodgrass A.C. S.R. Snodgrass A.C. Wheeling, WV August 3, 1999 EX-27 3
9 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 9439 0 0 2281 184995 12516 12814 208186 5475 438283 304351 10189 6978 91401 0 0 1321 24043 438283 21194 9525 0 30787 11671 16480 14307 12882 1338 9496 (4105) (1919) 0 0 (1919) (0.37) (0.37) 3.87 8573 4 0 7429 4134 11556 15 5475 5475 0 0
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