10-K 1 d10k.txt FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 for the fiscal year ended December 31, 2000 or [_] Transition Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 for the transition period from _______________ to ____________________________ Commission file number 0-12724 ------------------------------ BELMONT BANCORP. (Exact name of registrant as specified in its charter) Ohio 34-1376776 ---------------------------------- ----------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 325 Main Street, Bridgeport, Ohio 43912 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (740) 695-3323 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Name of each exchange on Title of each class which registered ----------------------------- ------------------------ Common stock, $0.25 par value NASDAQ Small Cap Market Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- State the aggregate market value of the voting stock held by nonaffiliates of the registrant at March 16, 2001: $47,181,000 Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 11,101,403 shares Documents Incorporated by Reference: Documents Incorporated by Reference: Portions of the Registrant's proxy statement to be filed by April 30, 2001 are incorporated herein by reference in Items 10, 11, 12 and 13. PART I ITEM 1-BUSINESS BELMONT BANCORP. Belmont Bancorp., (the "Company" or "Belmont"), is a bank holding company which was organized under the laws of the State of Ohio in 1982. On April 4, 1984, Belmont Bancorp. acquired all of the outstanding capital stock of Belmont National Bank (the "Bank") (formerly Belmont County National Bank), a banking corporation organized as a national banking association. Belmont National Bank provides a variety of financial services. In addition to the Bank, the Company owns Belmont Financial Network, Inc., a non-bank subsidiary ("BFN"). BELMONT NATIONAL BANK Belmont National Bank resulted from the merger on January 2, 1959, of the First National Bank of St. Clairsville, and the First National Bank of Bridgeport. Both banks were organized as national associations prior to 1900. Belmont National Bank operates through a network of thirteen branches located in Belmont, Harrison and Tuscarawas Counties in Ohio and Ohio County in West Virginia. The main office is located in the Woodsdale section of Wheeling, West Virginia. In addition to its main office in West Virginia, the Bank operates a branch in the Elm Grove section of Wheeling. Branch locations in Belmont County, Ohio include St. Clairsville, Bridgeport, Lansing, Shadyside, Ohio Valley Mall, Bellaire and Plaza West, St. Clairsville. The Bank's St. Clairsville facility serves as the location for the Company's and the Bank's executive, administrative, finance and operations functions. The Harrison County branch is located in Cadiz, Ohio. Branches in Tuscarawas County are located in New Philadelphia, Ohio. The three New Philadelphia offices were acquired on October 2, 1992, when Belmont National Bank acquired the deposits and loans of these offices from Diamond Savings and Loan. Belmont National Bank provides a wide range of retail banking services to individuals and small to medium-sized businesses. These services include various deposit products, business and personal loans, credit cards, residential mortgage loans, home equity loans, and other consumer oriented financial services including IRA and Keogh accounts, safe deposit and night depository facilities. Belmont National Bank also owns automatic teller machines located at branches in Bellaire, Bridgeport, Woodsdale, Elm Grove, Cadiz, the Ohio Valley Mall, Plaza West and New Philadelphia providing 24 hour banking service to our customers. Belmont National Bank belongs to MAC, a nationwide ATM network with thousands of locations nationwide. Belmont National Bank offers a wide variety of fiduciary services. The trust department of the Bank administers pension, profit-sharing, employee benefit plans, personal trusts and estates. BELMONT FINANCIAL NETWORK On July 1, 1985, Belmont formed a subsidiary corporation, Belmont Financial Network, Inc. BFN serves as a community development corporation by investing in low income housing projects that provide low income and historic tax credits SUPERVISION AND REGULATION Belmont is supervised and examined by the Board of Governors of the Federal Reserve system under the Bank Holding Company Act of 1956, as amended (the "BHC Act"). The BHC Act requires the prior approval of the Federal Reserve Board for a bank holding company to acquire or hold more than a 5% voting interest in any bank, and restricts interstate banking activities. The BHC Act allows interstate branching by acquisitions anywhere in the country and acquisition and consolidation in those states that had not opted out by January 1, 1997. The BHC Act restricts Belmont's nonbanking activities to those which are determined by the Federal Reserve Board to be closely related to banking and a proper incident thereto. The BHC Act does not place territorial 2 restrictions on the activities of nonbank subsidiaries of bank holding companies. Belmont's banking subsidiary is subject to limitations with respect to transactions with affiliates. The enactment of the Graham-Leach-Bliley Act of 1999 (the "GLB Act") represented a pivotal point in the history of the financial services industry. The GLB Act swept away large parts of a regulatory framework that had its origins in the Depression Era of the 1930s. Effective March 11, 2000, new opportunities became available for banks, other depository institutions, insurance companies and securities firms to enter into combinations that permit a single financial services organization to offer customers a more complete array of financial products and services. The GLB Act provides a new regulatory framework for regulation through the financial holding company which has as its umbrella regulator the Federal Reserve Board. Functional regulation of the financial holding company's separately regulated subsidiaries will be conducted by their primary functional regulator. The GLB Act requires "satisfactory" or higher Community Reinvestment Act compliance for insured depository institutions and their financial holding companies in order for them to engage in new financial activities. The GLB Act provides a federal right to privacy of non- public personal information of individual customers. The Bank's deposits are insured by the Federal Deposit Insurance Corporation ("FDIC"). As a national bank, Belmont National Bank is supervised and examined by the Office of the Comptroller of the Currency. A substantial portion of the Company's cash revenue is derived from dividends paid by its subsidiary bank. These dividends are subject to various legal and regulatory restrictions as summarized in Notes 16 and 20 of the Company's Consolidated Financial Statements. A fundamental principle underlying the Federal Reserve's supervision and regulation of bank holding companies is that bank holding companies should be a source of managerial and financial strength to their subsidiary banks. Subsidiary banks in turn are to be operated in a manner that protects the overall soundness of the institution and the safety of deposits. Bank regulators can take various remedial measures to deal with banks and bank holding companies that fail to meet legal and regulatory standards. The Financial Reform, Recovery and Enforcement Act of 1989 provides that a holding company's controlled insured depository institutions are liable for any loss incurred by the FDIC in connection with the default of any FDIC-assisted transaction involving an affiliated insured bank or savings association. The Federal Deposit Insurance Corporation Improvement Act of 1991 created five capital-based supervisory levels for banks and requires bank holding companies to guarantee compliance with capital restoration plans of undercapitalized insured depository affiliates. The monetary policies of regulatory authorities, including the Federal Reserve Board and the FDIC, have a significant effect on the operating results of banks and bank holding companies. The nature and future monetary policies and the effect of such policies on the future business and earnings of Belmont and its subsidiary bank cannot be predicted. In August 1999, Belmont and the Bank entered into consent agreements with the Federal Reserve Bank of Cleveland and the Office of the Comptroller of the Currency under which Belmont and the Bank agreed to take specified actions and adhere to specified operational procedures, as more fully described under Item 3. FOREIGN OPERATIONS Belmont Bancorp. has no foreign operations. ITEM 2-PROPERTIES DESCRIPTION OF PROPERTIES In January 1996, the Bank relocated its headquarters to Wheeling, West Virginia. The office is located at 980 National Road and consists of a 14,000 square foot, combination one and two story masonry block building. 3 Approximately half of the space is leased to a tenant. In addition, the Bank transacts business in the following branch locations: St. Clairsville Office-This office consists of a two story brick building owned by the Bank with attached drive-in facilities. The building consists of 9,216 square feet which houses the commercial bank operations and the executive and human resources offices. Ohio Valley Mall Office-This office is located at the Ohio Valley Mall, a major shopping mall located two miles east of St. Clairsville, Ohio. The office consists of a 1,400 square foot office located along the perimeter of the Mall at the main entrance. An automatic teller machine is located at the drive-in facility. Lansing Office-This 1,352 square foot office is located in Lansing, Ohio, a small community approximately six miles east of St. Clairsville on US. Route 40. The facility is a masonry building with adjoining drive-in facilities. Bridgeport Office-This office is located in Bridgeport, Ohio, a community located on the Ohio/West Virginia border, approximately 10 miles east of St. Clairsville. This 5,096 square foot facility is a masonry building with adjoining drive-in facilities and an ATM. Shadyside Office-This 1,792 square foot office is located in Shadyside, a village located on Ohio State Route 7. The facility is a masonry building with accompanying drive-in facilities. Cadiz Office-This office is located in Cadiz, Ohio in Harrison County, approximately seventeen miles north of St. Clairsville at the intersection of State Routes 9 and 22. The brick and tile building contains 1,800 square feet with an accompanying drive-in facility and an ATM. New Philadelphia Office-This office, located at 152 North Broadway Avenue, is a 33,792 square foot site improved with two inter-connected, two story brick office buildings with a total building area of 13,234 square feet. Part of the office space is leased to other businesses. This location also has a drive-in facility and an automatic teller machine. Schoenbrunn Office-This office, located at 2300 East High Avenue, is comprised of a one story, 1,605 square foot brick structure with a 783 square foot drive-thru canopy. Wabash Office-This office, located at 525 Wabash Avenue, is comprised of a 14,250 square foot site with a 246 square foot drive-thru banking facility. Elm Grove Office-This office is located at 2066 National Road in Wheeling, WV, and includes a drive-thru facility and an ATM. Bellaire Office - This leased office, located in the Imperial Shopping Center, is comprised of approximately 1,750 square feet with an adjoining drive-thru facility and ATM. Plaza West Office - This office is located at the west end of St. Clairsville and includes a drive-thru facility and an ATM. All offices are owned by the Bank except for the Ohio Valley Mall and Bellaire offices. The land for the Elm Grove office is also leased. The Ohio Valley Mall office lease expires in 2003 and contains a five year renewal option. The Bellaire office lease expires in 2007 and contains a ten year renewal option. The land lease for the Elm Grove office expires in 2005 and provides for four, five year renewal options. ITEM 3-LEGAL PROCEEDINGS The Company is a defendant in a suit for damages brought in the Court of Common Pleas for Belmont County, Ohio in April 1999 by George Michael Riley and others against the Bank and certain former officers, among others, alleging torts to have occurred in connection with the Bank's denial of a loan to a third party to 4 finance the sale of a business owned by plaintiffs. In another case filed in the same Court in May 1999, Charles J. and Rebecca McKeegan, the beneficial owners of the potential purchaser of the business in the same transaction claim damages in excess of $500,000 based upon alleged tortuous conduct as to them by defendants. In both cases it is claimed that a former loan officer of the Bank later purchased the business at a lower price with financial assistance from the Bank's former chief operating officer. Based on the advice of counsel, the Company believes its exposure to liability, if any, is minimal in each case. In August 1999, the Company's directors unanimously approved and entered into a consent order with the Office of the Comptroller of the Currency and entered into a written agreement with the Federal Reserve Bank of Cleveland under which the Company and the Bank agreed to meet specified conditions relating to its future operations and capital requirements. The consent order requires the Bank to, among other things, formulate new plans, policies, procedures and programs relating to long-term strategy, organizational structure, management, loans, loan loss reserves, overdrafts, loan interest accrual and non-accrual loans, loan diversification, internal audit and periodic loan review by certain dates. Management believes that it has satisfied or is in the process of satisfying all of the conditions of the order. See also "Liquidity and Capital Resources" in Item 7 of this Report. In August 1999, the Company also entered into an agreement with the Federal Reserve Bank of Cleveland, under authority given it by the Board of Governors of the Federal Reserve System, the federal regulatory agency for Belmont. As with the consent order of the Comptroller of the Currency, the Federal Reserve Bank agreement necessitates certain actions and restrictions. Without prior Federal Reserve Bank approval, the agreement prohibits the Company from paying dividends, incurring debt, redeeming stock, receiving dividends from the Bank, imposing charges on the Bank, and engaging in any transaction with the Bank in violation of federal law. The Company is required to report quarterly on progress in complying with the Federal Reserve Bank agreement. Management believes that it has satisfied or is in the process of satisfying all of the terms of the agreement. In August 1999, the Bank was named as a defendant in a lawsuit filed in the Belmont County Common Pleas Court by Joseph C. Heinlein, Jr. against his former secretary, the Bank, other financial institutions and individuals with whom the secretary did business. The complaint alleges that the secretary embezzled funds from the plaintiff's account over a period of several years by forging his signature to checks and alleges negligence on the part of the Bank for honoring such checks. The complaint has been amended to claim damages of $1,250,000. This secretary has entered into a pleas agreement under which she has paid $500,000 in restitution and received a prison sentence. The Bank believes that it has valid defenses against the claim and intends to defend it vigorously. The Bank has also filed cross-claims against the secretary and a third party it believes benefited from the misappropriation of funds. In addition, the Company believes that any liability on the Bank's part would be covered under its insurance policy. However, the insurance carrier, Progressive Casualty Insurance Company, has filed a declaratory judgment and interpleader action raising issues of coverage and indemnification on this claim, as more fully discussed below. In October 1999, the Company filed suit in the Court of Common Pleas of Tuscarawas County, Ohio, alleging that it had been the victim of an "elaborate fraud" that has resulted in more than $15 million in losses to the Bank. Following an extensive internal review of its loan portfolio, the Bank filed claims against Steven D. Schwartz, President of Schwartz Homes, Inc., the now- closed New Philadelphia retailer of manufactured homes. At the same time, the Bank filed claims against three additional people: Linda Reese, Schwartz Homes' Chief Financial Officer; William Wallace, the Bank's former Executive Vice- President and Chief Operating Officer; and Christine Wallace, his wife. In addition, as more fully discussed below, because of Mr. Wallace's alleged conduct as a bank officer and director, the Bank is seeking to recover from its indemnity bond insurance carrier, Progressive Casualty Insurance Company, the full amount of its bond. The Wallaces have filed counterclaims in an indeterminate amount upon various bases, including invasion of privacy, defamation and failure to distribute moneys allegedly due them under a deferred and certain other compensation plans. Steven Schwartz also requested leave to file counterclaims. The case has been scheduled for trial in May 2001. The Company intends to vigorously prosecute its case and defend against these claims. In October 1999, James John Fleagane, a shareholder of the Company, filed an action against the Company, the Bank and certain of the Company's and the Bank's current and former officers and directors in the Circuit Court of Ohio County, West Virginia. The plaintiff alleges, among other things, that the Bank and its 5 directors and officers negligently transacted and administered various loans with respect to Schwartz Homes, Inc. and customers of Schwartz. The plaintiff seeks damages for the loss in value of his stock and other compensatory and punitive damages in an unspecified amount and requests class action certification for the common shareholders of the Company. The court denied the Company's motion to dismiss this case in July 2000. In August 2000, the plaintiff filed an amended complaint, as to which the Company has filed an answer, affirmative defenses and cross-claims against the Company's former accountants, S.R. Snodgrass, A.C. and a principal thereof, and against J. Vincent Ciroli, Jr., formerly the Company's President and Chief Executive Officer. In February 2000, the court granted leave to the plaintiff to file a second amended complaint. The second amended complaint eliminates the direct claims against the Company and the Bank and the request for class action certification. Accordingly, as amended, this action constitutes a derivative suit against current and former officers and directors of the Company and the Bank, which is being defended by the Company and the Bank on their behalf. The parties are currently in the discovery phase of this case. The Company intends to vigorously defend this action. Progressive Casualty Insurance Company sold to the Company a directors and officers liability policy providing for $3 million of coverage and a separate financial institution fidelity bond in the face amount of $4.75 million. In May 1999, the Company filed a claim under the fidelity bond policy to recover the losses incurred in connection with the Schwartz Homes loan relationship. The Company has also claimed coverage under the directors and officers liability policy. Progressive declined to honor these claims and, in December 1999, filed an action in the United States District Court for the Southern District of Ohio, Eastern Division asking the court to issue a declaratory judgment declaring that Progressive is not liable under either the directors and officers liability policy or the fidelity bond policy. In September 2000, the court granted the Company's motion to dismiss the declaratory judgment action. Progressive had also asked this court, if Progressive is found to be liable under these policies, to determine whether the Bank or other parties who have sued the Bank in separate actions are entitled to the insurance proceeds. Progressive has deposited with the court bonds in the aggregate amount of $7.75 million, which amount Progressive believes is sufficient to satisfy any liabilities under the policies in respect of this interpleader claim. This interpleader claim remains before the court. The Company intends to vigorously seek recoveries under the insurance policies sold to the Company by Progressive. The Company is a defendant in litigation brought in October 1999 by Beall Homes, Inc., John B. Beall, and Peggy F. Beall in the Court of Common Pleas, Belmont County, Ohio. Plaintiffs seek a declaratory judgment that certain warrants of attorney which appear on promissory notes evidencing loans between the Bank and Beall Homes, Inc. (and guaranteed by John B. Beall and Peggy F. Beall) are invalid. Plaintiffs assert claims of breach of a duty of good faith in connection with the Bank's grant of three loans to Beall Homes, fraud and breach of fiduciary duty allegedly through floor plan financing, dominating and controlling plaintiff's business, wrongful set-off and conversion of the Beall Homes account, wrongful dishonor of certain customer checks of plaintiff, wrongful set-off and conversion of the mortgage account of John B. Beall, and intentional infliction of emotional distress. Plaintiffs seek compensatory and punitive damages in an amount in excess of $25,000 and a declaration that they are not in default of any of their loans, that the warrants of attorney are invalid, that the Bank is required to provide plaintiffs with an accounting of the manner in which payments made by plaintiffs have been applied by the Bank, and other relief. The Bank has filed a counterclaim for monetary damages and foreclosure of collateral securing indebtedness in the amount of $765,000 and has filed a petition for involuntary bankruptcy against Beall Homes. In February 2001, the bankruptcy court lifted the stay it had placed on the Bank's counterclaims against Beall Homes, thereby permitting the proceeding in the Court of Common Pleas, Belmont County, Ohio to continue. The Bank intends to vigorously defend this action and prosecute its own claims. In September 1999, the Bank filed a lawsuit against Otterbacher Manufacturing, Inc. ("Manufacturing") and Gary and Karen Otterbacher regarding default by Manufacturing on a loan guaranteed by the Otterbachers. The Otterbachers filed a counterclaim against the Bank for lender liability claims relating to the Bank's declaration of default by Manufacturing and the Bank's refusal to extend additional or renew existing credit to Manufacturing. In January 2001, the Bank entered into a settlement agreement with the Otterbachers under which they agreed to pay $200,000 to the Bank, $100,000 of which was paid in January 2001, $60,000 of which is required to be paid in 2001 and the balance of which is required to be paid in five equal annual installments beginning in 2002. Under the terms of settlement, the Otterbachers agreed to dismiss all claims they had asserted against the Bank, including all lender liability claims. 6 ITEM 4-SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. PART II ITEM 5-MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDERS' MATTERS The number of shareholders of record for the Company's stock as of February 28, 2001 was 3,380. The closing price of Belmont stock on March 16, 2001 was $4.25 per share. Belmont Bancorp.'s common stock has a par value of $0.25 and, since October 1994, has been traded on the Nasdaq SmallCap market. High and low market prices and dividend information for the past two years for Belmont's common stock are depicted in the following tables.
2000 1999 --------------------------------------------------------- --------------------------------------------------------- Dividend Dividend Quarter High Low per Share Quarter High Low per Share --------------------------------------------------------- --------------------------------------------------------- 1st $6.500 $2.063 $0.000 1st $23.75 $17.00 $0.120 2nd $3.250 $1.625 0.000 2nd 19.50 9.06 0.000 3rd $4.750 $2.250 0.000 3rd 11.50 4.50 0.000 4th $6.000 $2.625 0.000 4th 10.00 5.25 0.000 ----------------- ---------------- Total $0.000 Total $0.120 ================= ================
Information regarding the limitations on dividends available to be paid can be located in Footnote 16 of the Notes to the Consolidated Financial Statements in the Company's financial statements beginning on page F-1 (Item 8). Treasury stock is accounted for using the cost method. There were 51,792 shares held in treasury on December 31, 2000 and 1999. 7 ITEM 6 - SELECTED FINANCIAL DATA The data presented herein should be read in conjunction with the audited Consolidated Financial Statements incorporated by reference. Consolidated Five Year Summary of Operations For the Years Ended December 31, 2000, 1999, 1998, 1997 and 1996 ($000s except per share data)
2000 1999 1998 1997 1996 ------------------------------------------------------------------------------------------------------------------------------ Interest income $ 19,137 $ 25,870 $ 30,787 $ 28,348 $ 25,501 Interest expense 10,702 15,609 16,480 14,004 12,127 ------------------------------------------------------------------------------------------------------------------------------ Net interest income 8,435 10,261 14,307 14,344 13,374 Provision for loan losses 242 15,877 12,882 1,055 465 ------------------------------------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses 8,193 (5,616) 1,425 13,289 12,909 Securities gains (losses) 4 (880) 1,338 799 396 Trading gains (losses) - (10) 62 - - Gain on sale of real estate - - 383 - - Interest on federal tax refund 256 - - - - Other operating income 2,123 2,563 2,183 2,010 1,861 Operating expenses 9,870 12,642 9,496 8,732 8,388 ------------------------------------------------------------------------------------------------------------------------------ Income (loss) before income taxes 706 (16,585) (4,105) 7,366 6,778 Income taxes (benefit) (680) (5,554) (2,186) 1,421 1,776 ------------------------------------------------------------------------------------------------------------------------------ Net income (loss) $ 1,386 ($11,031) ($1,919) $ 5,945 $ 5,002 ------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------ Basic earnings (loss) per common share (1) $ 0.16 ($2.11) ($0.37) $ 1.13 $ 0.94 ------------------------------------------------------------------------------------------------------------------------------ Cash dividend declared per share (1) - $ 0.120 $0.385 $ 0.306 $ 0.240 Book value per common share (1) $ 2.31 $ 1.83 $4.86 $ 6.05 $ 5.17 ------------------------------------------------------------------------------------------------------------------------------ Total loans $129,876 $ 166,979 $208,186 $224,900 $188,783 Total assets 281,788 315,767 438,283 388,713 333,903 Total deposits 231,686 255,432 304,351 263,908 261,539 Long term borrowings 20,000 20,000 91,401 69,635 19,676 Total shareholders' equity 25,602 11,231 25,364 31,899 27,332 ------------------------------------------------------------------------------------------------------------------------------
(1) Restated for stock dividends paid during 1997 and 1998. 8 ITEM 7-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The data presented in this discussion should be read in conjunction with the audited consolidated financial statements. RESULTS OF OPERATIONS The Year 2000 marked the beginning of the recovery of Belmont Bancorp. from substantial loan losses incurred during 1999 and 1998. During 2000, the Company successfully completed equity offerings that began in November 1999 and concluded in June 2000 with a total of $11 million in new capital and 5,039,869 shares of common stock issued. Support from its shareholders and depositors has enabled the Company to return to profitability and potentially allow for future growth. The following table depicts the performance of the Company over the past three years. ($000s) except per share data 2000 1999 1998 ---------------------------------------------------------------------------------------------------------- Income (loss) before income taxes $ 706 ($16,585) ($4,105) Net income (loss) $1,386 ($11,031) ($1,919) Basic earnings (loss) per common share $ 0.16 ($2.11) ($0.37) Return on average assets 0.49% -2.79% -0.46% Return on average total equity 7.77% -56.92% -5.76%
For the year ended 2000, the Company reported net income of $1,386,000, or $0.16 per common share compared to a loss of $11,031,000 or a loss of $2.11 per common share for the year ended 1999. For 1998, the Company had reported a loss of $1,919,000, or a loss of $0.37 per share. Income before federal income tax benefits was $706,000 for the year ended 2000 compared to pretax losses of $16,585,000 and $4,105,000 for the years ended 1999 and 1998, respectively. The financial results of 1999 and 1998 reflect a period when Belmont faced one of the most serious challenges in its 154 year history. The resignation of the Bank's chief operating officer and senior lending officer in March 1999 followed by the closure in April 1999 and subsequent bankruptcy of Schwartz Homes, Inc., formerly the Bank's largest commercial borrower, precipitated the recognition of large loan losses. In June 1999, Belmont's chief executive officer resigned, and the Board of Directors engaged an interim management group to provide executive management services and to assist in the recruitment of a new chief executive officer. Throughout 1999, the Bank's staff worked diligently to assess the magnitude of the losses associated with Schwartz Homes, Inc. and related consumer loans and to evaluate the entire commercial loan portfolio. The performance of the Company during 1999 was severely impacted by loan losses and additional overhead costs associated with interim management, legal services, and collection efforts. Loan charge-offs during 1999 totaled $11,650,000 and the loan loss provision was $15,877,000. New loan policies and procedures were implemented to augment internal controls and strengthen underwriting practices. In December 1999, a new chief executive officer was recruited and costs associated with interim executive management were eliminated. In March 2000, a confirmation order was approved by the court in the Schwartz Homes, Inc. bankruptcy. For the year ended December 31, 2000, the Bank received settlement proceeds of $3.2 million of which $1.2 million was applied to the remaining credit exposure for the Schwartz homebuilder loans, $1.8 million was recorded as recoveries in the allowance for loan losses, and the remaining funds were recorded as recovery of legal expenses. The Company continued to face unusually high operating expenses for the year ended 2000. In particular, large legal expenses, deposit insurance costs, and other insurance costs hindered profitability. Legal expenses were 9 in excess of $1.1 million for the year, and FDIC deposit insurance and other insurance costs increased by over $600,000 from the previous year. For 1998, the Company recorded a loan loss provision of $12,882,000 resulting in a loss of $1,919,000, or a loss of $0.37 per common share. Of this loan loss provision, $12,172,000 was recorded in the fourth quarter of 1998 and related to consumer loans to customers of Schwartz Homes, Inc. NET INTEREST REVENUE A major share of the Company's income results from the spread between income on interest earning assets and interest expense on the liabilities used to fund those assets, known as net interest income. Net interest income is affected by changes in interest rates and amounts and distributions of interest earning assets and interest bearing liabilities outstanding. Net interest margin is net interest income divided by the average earning assets outstanding. A third frequently used measure is net interest rate spread which is the difference between the average rate earned on assets and the average rate incurred on liabilities without regard to the amounts outstanding in either category. The Consolidated Average Balance Sheets and Analysis of Net Interest Income Changes compare interest revenue and interest earning assets outstanding with interest cost and liabilities outstanding for the years ended December 31, 2000, 1999, and 1998, and compute net interest income, net interest margin and net interest rate spread for each period. All three of these measures are reported on a taxable equivalent basis. 10 Consolidated Average Balance Sheets For the Years Ended December 31, 2000, 1999, and 1998 (Fully Taxable Equivalent Basis) ($000's)
2000 1999 1998 ------------------------------------------------------------------------------------------ Average Average Average Average Average Average Out- Revenue/ Yield/ Out- Revenue/ Yield/ Out- Revenue/ Yield/ standing Cost Rate standing Cost Rate standing Cost Rate --------------------------------------------------------------------------------------------------------------------------------- Assets --------------------------------------------------------------------------------------------------------------------------------- Interest Earning Assets Loans and Leases $143,012 $12,240 8.56% $193,295 $16,641 8.61% $222,961 $21,321 9.56% Securities: Taxable 66,038 4,479 6.78% 125,314 7,017 5.60% 134,337 8,053 5.99% Exempt from income tax 44,581 3,090 6.93% 41,276 2,893 7.01% 24,261 1,802 7.43% Trading account assets - - na 1,786 86 4.82% 1,193 68 5.70% Federal funds sold 6,122 391 6.39% 5,277 269 5.10% 4,194 228 5.44% --------------------------------------------------------------------------------------------------------------------------------- Total interest earning assets 259,753 $20,200 7.78% 366,948 $26,906 7.33% 386,946 $31,472 8.13% --------------------------------------------------------------------------------------------------------------------------------- Cash and due from banks 9,483 11,377 10,972 Other assets 26,255 28,590 20,100 Market value depreciation of securities available for sale (7,382) (4,486) (597) Allowance for loan loss (8,046) (7,204) (4,312) --------------------------------------------------------------------------------------------------------------------------------- Total Assets $280,063 $395,225 $413,109 =================================================================================================================================
11
2000 1999 1998 ------------------------------------------------------------------------------------------ Average Average Average Average Average Average Out- Revenue/ Yield/ Out- Revenue/ Yield/ Out- Revenue/ Yield/ standing Cost Rate standing Cost Rate standing Cost Rate --------------------------------------------------------------------------------------------------------------------------------- Liabilities Interest bearing liabilities Interest checking $ 24,464 $ 623 2.55% $ 40,649 $ 1,245 3.06% $ 45,864 $ 1,524 3.32% Savings 68,652 2,231 3.25% 82,919 2,653 3.20% 82,196 2,709 3.30% Other time deposits 112,605 6,311 5.60% 133,419 6,996 5.24% 134,485 7,438 5.53% Other borrowings 29,682 1,537 5.18% 87,498 4,715 5.39% 86,084 4,809 5.59% --------------------------------------------------------------------------------------------------------------------------------- Total interest bearing liabilities 235,403 10,702 4.55% 344,485 15,609 4.53% 348,629 16,480 4.73% --------------------------------------------------------------------------------------------------------------------------------- Demand deposits 24,749 28,865 29,910 Other liabilities 2,084 2,496 1,256 --------------------------------------------------------------------------------------------------------------------------------- Total liabilities 262,236 375,846 379,795 --------------------------------------------------------------------------------------------------------------------------------- Stockholders' Equity 17,827 19,379 33,314 --------------------------------------------------------------------------------------------------------------------------------- Liabilities & Stockholders' Equity $280,063 $395,225 $413,109 ================================================================================================================================= Net interest income margin on a taxable equivalent basis $ 9,498 3.66% $11,297 3.08% $14,992 3.87% ================================================================================================================================= Net interest rate spread 3.23% 2.80% 3.41% ================================================================================================================================= Interest bearing liabilities to interest earning assets 90.63% 93.88% 90.10% =================================================================================================================================
Fully taxable equivalent basis computed at effective federal tax rate of 34%. Average loan balances include nonperforming loans. 12 Analysis of Net Interest Income Changes For the Years Ended December 31, 2000, 1999, and 1998 (Taxable Equivalent Basis) ($000's)
2000 Compared to 1999 1999 Compared to 1998 ----------------------------------- ----------------------------------- Volume Yield Mix Total Volume Yield Mix Total -------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in interest income: Loans and leases ($4,329) ($97) $ 26 ($4,400) ($2,837) ($2,126) $283 ($4,680) Securities: Taxable (3,319) 1,482 (702) (2,539) (541) (531) 36 (1,036) Exempt from income taxes 232 (32) (3) 197 1,264 (102) (71) 1,091 Trading account assets (86) (86) 86 (86) 34 (11) (5) 18 Federal funds sold 43 68 11 122 59 (14) (4) 41 -------------------------------------------------------------------------------------------------------------------------- Total interest income change (7,459) 1,335 (582) (6,706) (2,021) (2,784) 239 (4,566) -------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in interest expense: Interest checking (496) (210) 83 (623) (173) (119) 13 (279) Savings (456) 42 (8) (422) 24 (79) (1) (56) Other time deposits (1,091) 482 (75) (684) (59) (386) 3 (442) Other borrowings (3,116) (184) 122 (3,178) 79 (170) (3) (94) -------------------------------------------------------------------------------------------------------------------------- Total interest expense change (5,159) 130 122 (4,907) (129) (754) 12 (871) -------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in net interest Income on a taxable equivalent basis ($2,300) $1,205 ($704) ($1,799) ($1,892) ($2,030) $227 ($3,695) (Increase) decrease in taxable equivalent adjustment (27) (351) -------------------------------------------------------------------------------------------------------------------------- Net interest income change ($1,826) ($4,046) --------------------------------------------------------------------------------------------------------------------------
13 The Company's net interest income declined by 15.9%, or $1,799,000, on a taxable equivalent basis during 2000 compared to 1999. During 2000, the Company's average interest-earning assets fell by approximately $107 million, down 29.2% from 1999. Most of the downsizing of the Company occurred during the fourth quarter of 1999 and the first half of 2000 as the Company reduced its asset size as part of its strategy to achieve a 6% Tier 1 leverage ratio. The yield on interest earning assets was up 45 basis points (a basis point is equal to .01%) from 7.33% in 1999 to 7.78% in 2000 due to an increase in yield on taxable securities. The cost of interest bearing liabilities was nearly unchanged from 1999 to 2000. The net interest rate spread improved from 2.80% during 1999 to 3.23% during 2000. The taxable equivalent net interest margin was 3.66% during 2000 compared to 3.08% for 1999 and 3.87% during 1998. The Analysis of Net Interest Income Changes, separates the dollar change in the Company's net interest income into three components: changes caused by (1) an increase or decrease in the average assets and liability balances outstanding (volume); (2) the changes in average yields on interest earning assets and average rates for interest bearing liabilities (yield/rate); and (3) combined volume and yield/rate effects (mix). This table shows that the decrease in the Company's net interest income during the year-to-date periods presented from 1999 to 2000 was generated primarily by a decline in the volume of earning assets which was partially offset by an improvement in the yield of earning assets. The decrease in the Company's net interest income during the year-to-date periods presented from 1998 to 1999 was principally due to a decline in yields and volume on earning assets. This was partially offset by a decline in the cost of interest bearing liabilities. OTHER OPERATING INCOME Other operating income excluding securities transactions and a gain on sale of real estate, decreased 6.8% and totaled $2,379,000 in 2000, compared to $2,553,000 in 1999 and $2,245,000 in 1998. The table below shows the dollar amounts and growth rates of the components of other operating income:
2000 1999 1998 (Expressed in thousands) Total Change Total Change Total ------------------------------------------------------------------------------------------------------------------ Trust income $ 419 -13.4% $ 484 4.5% $ 463 Service charges on deposits 848 -7.9% 921 22.5% 752 Interest on federal tax refund 256 na - na - Earnings on bank-owned life insurance 231 -1.7% 235 -14.2% 274 Gain (loss) on sale of loans and loans held for sale (40) -111.7% 341 136.8% 144 Trading profits (losses) - 100.0% (10) -116.1% 62 Other income (individually less than 1% of total income) 665 14.3% 582 5.8% 550 ------------------------------------------------------------------ Subtotal 2,379 -6.8% 2,553 13.7% 2,245 Securities gains (losses) 4 100.5% (880) -165.8% 1,338 Gain on sale of real estate - na - -100.0% 383 ------------------------------------------------------------------ Total $2,383 42.4% $1,673 -57.8% $3,966 ==================================================================
Service charges on deposits declined 7.9% from $921,000 in 1999 to $848,000 in 2000. This decline is primarily the result of a reduction in the number of deposit accounts. Service charges on deposits increased 22.5% from $752,000 in 1998 to $921,000 in 1999 due to higher overdrafts and return check fee income and an increase in the fee schedule for commercial checking accounts. During the second quarter of 2000, the Company recorded $256,000 in interest earned on federal tax refunds for taxes paid in previous years. 14 A loss of $40,000 was recognized during 2000 for loans sold compared to a $341,000 gain recorded during 1999 and a $144,000 gain in 1998. Securities losses were realized during the fourth quarter of 1999 as part of a plan to reduce the asset size of the Bank. In October 1999, the Bank sold approximately $38 million in investment securities for a loss of $788,000 and used approximately $33 million of the proceeds to repay borrowings from the Federal Home Loan Bank of Cincinnati. Prepayment penalties associated with the repayment of borrowings totaled $342,000 and are included in operating expenses. OPERATING EXPENSES The table below details the dollar amounts of and percentage changes in various categories of expense for the three years ended 2000, 1999, and 1998:
(Expressed in thousands) 2000 % change 1999 % change 1998 --------------------------------------------------------------------------------------------------------------- Taxes other than payroll and real estate $ 24 -90.6% $ 254 -48.8% $ 496 Supplies and printing 165 -29.2% 233 -22.1% 299 Insurance, including federal deposit insurance 774 358.0% 169 33.1% 127 Amortization of intangibles 10 -97.7% 439 124.0% 196 Legal fees 1,153 -31.0% 1,671 3113.5% 52 Consulting expense 139 -90.4% 1,442 1199.1% 111 Examinations and audits 359 -6.8% 385 80.8% 213 Prepayment penalties on Federal Home Loan Bank advances - -100.0% 342 Na - Legal settlements 12 -95.9% 295 Na - Other (individually less than 1% of total income) 1,464 -18.6% 1,798 11.5% 1,612 ------ ------ ------ Total $4,100 -41.7% $7,028 126.3% $3,106 ====== ====== ======
Taxes (other than payroll and real estate taxes) were down $230,000 from 1999 to 2000 largely due to lower state franchise tax expense. Taxes were also lower by $242,000 from 1998 to 1999. This reduction was primarily the result of refunds for state corporate net income and franchise taxes previously paid which totaled $225,000 due to reductions in income and equity. Insurance expense was impacted by higher premium rates for federal deposit insurance from the FDIC. FDIC deposit premiums for the year 2000 were $667,000 compared to $110,000 for 1999 and $65,000 for 1998. FDIC costs are expected to decline during 2001 based on the improvement in the Bank's capital ratios as of September 30, 2000, the measurement date for FDIC assessments for the first half of 2001. Fidelity bond and director and officer liability insurance costs also increased by $49,000 from 1999 to 2000 based on new policies obtained during July 2000. Amortization of intangible assets during 2000 was related to mortgage servicing rights. The estimated value of mortgage servicing rights at the end of 2000 was $320,000 for a mortgage servicing porfolio of $38 million. The balance of core deposit intangible assets associated with branches acquired in the early 1990's were written off during the fourth quarter of 1999. The write-off resulted in the recognition of an additional $300,000 in amortization expense for the period. These intangible assets were primarily associated with the deposits acquired in the New Philadelphia market. Given the negative publicity surrounding the Schwartz commercial and consumer loans centered in this marketplace and the resulting decline in deposits, the Bank reevaluated the remaining intangible assets and determined that it would write-off the balance. Amortization of core deposit intangibles for 1998 was $196,000. Legal expenses were for costs related to lending and loan collection efforts, civil litigation against Progressive Insurance and others related to the Schwartz Homes, Inc. matters, regulatory matters, and a shareholder action against the Company, the Board of Directors and several current and former officers of the Bank. Legal 15 expenses for 2000 totaled $1,153,000, down from $1,671,000 for 1999. Significant legal expenses are expected during 2001 as well. Consulting expenses of $139,000 for 2000 and $111,000 for 1998 were significantly less than the $1,442,000 in consulting expense recorded for 1999. During 1999, the cost of interim management services charged to consulting expenses totaled $1,180,000, and consulting expenses of $194,000 were related to accounting and other services associated with the Schwartz Homes, Inc. loan collection. Examination and audit expense declined slightly during 2000 compared to 1999. This cost had increased 80.8% from 1998 to 1999 primarily as the result of a change in external auditors, the contract internal auditor, and the additional loan review and extended scopes of the engagements as a result of lending related issues. Prepayment penalties associated with the repayment of borrowings at the Federal Home Loan Bank totaled $342,000 during 1999. These costs were incurred as part of the plan to reduce the asset size of the Company thereby improving the Bank's capital ratios. No repayment penalties were incurred during 2000. Legal settlement expense for 2000 totaled $12,000 compared to $295,000 for 1999. This expense was related to the Schwartz Homes, Inc. litigation. Other expenses incurred in 2000 and 1998 were significantly less than the expense incurred in 1999, principally due to expenses associated with interim management services retained during the last half of 1999. FINANCIAL CONDITION SECURITIES The Company uses securities to generate interest and dividend revenue, to manage interest rate risk and to provide liquidity to meet operating cash needs. The securities portfolio yield at December 31, 2000 was 7.24%. Net unrealized losses in the securities portfolio at December 31, 2000 totaled $2,947,000, compared to net unrealized losses of $8,489,000 at December 31, 1999. The decline in unrealized losses was the result of a lower interest rate environment at December 31, 2000 compared to December 31, 1999. Bond prices rise as interest rates decline. Management believes the current declines in fair value are temporary. 16 The maturities and yields of securities available for sale (excluding equity securities) are detailed in the following table:
Securities Available for Sale (excluding Equity Securities) December 31, 2000 Over 10 Year Maturity * 1 year 1-5 Year Maturity 6-10 Year Maturity Maturity ($000s) Amount Yield Amount Yield Amount Yield Amount Yield ------------------------------------------------------------------------------------------------------------------------------------ U. S. Treasury securities $ 100 5.04% $ - $ $ - U.S. Government agencies and corporations/(b)/ - - 2,310 7.79% 3,001 7.01% - - States and political subdivisions/(a)/ 47 10.14% 96 10.30% 408 10.65% 41,037 7.31% Corporate debt - - - - - - 2,745 9.13% Agency mortgage-backed securities/(b)/ 171 4.11% 17,198 6.87% 11,899 7.49% 5,423 7.94% Collateralized mortgage obligations 4,264 7.31% 8,232 7.05% 920 8.29% 7,685 6.46% ----------------------------------------------------------------------------------------------------------------------------------- Total fair value $ 4,582 7.17% $ 27,836 7.01% $ 16,228 7.51% $ 56,890 7.29% ----------------------------------------------------------------------------------------------------------------------------------- Amortized cost $ 4,582 $ 28,159 $ 16,357 $ 59,330 ----------------------------------------------------------------------------------------------------------------------------------- Total ($000s) Amount Yield ---------------------------------------------------------------- U. S. Treasury securities $ 100 5.04% U.S. Government agencies and corporations/(b)/ 5,311 7.35% States and political subdivisions/(a)/ 41,588 7.35% Corporate debt 2,745 9.13% Agency mortgage-backed securities/(b)/ 34,691 7.24% Collateralized mortgage obligations 21,101 6.94% ---------------------------------------------------------------- Total fair value $ 105,536 7.24% ---------------------------------------------------------------- Amortized cost $ 108,428 ----------------------------------------------------------------
/(a)/ Taxable equivalent yields /(b)/ Maturities of mortgage-backed securities and agency loan pools are based on estimated average life. * less than 17 The Company elected to transfer the balance of securities previously classified as Held to Maturity to the Available for Sale portfolio effective April 1, 1999 in accordance with Statement of Financial Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging Activities. Privately issued collateralized mortgage obligations included in the table above have a book value of $7,231,000 and an estimated fair value of $7,137,000. Credit risk on privately issued bonds is evaluated based upon independent rating agencies and on the underlying collateral of the obligation. At December 31, 2000, the Company owned various investments in a single issuer, the book value of which exceeded 10% of total shareholders' equity. These concentrations occurred primarily as a result of the decline in the Company's shareholders' equity subsequent to purchase. The following table details the issuer, book value and market value of these investments.
(Expressed in thousands) Estimated Issuer Amortized Cost Fair Value -------------------------------------------------------------------------------------------------- Privately Issued Collateralized Mortgage Obligations: Norwest Asset Securities Corporation $ 3,438 $ 3,396 General Obligations: Hampton Township, PA School District 4,337 4,225 Revenue Bonds: Suburban Lancaster PA Sewer Authority 2,835 2,600 Equity Securities: Federal Home Loan Bank stock 3,086 3,086 -------------------------------------------- Total $13,696 $13,307 ============================================
LOANS AND LEASES The following table shows the history of commercial and consumer loans and leases, including loans held for sale, by major category at December 31:
(Expressed in thousands) 2000 1999 1998 1997 1996 ------------------------------------------------------------------------------------------------------------------------ Commercial loans (a): Real estate construction $ 12,856 $ 9,732 $ 135 $ 1,418 $ 1,327 Real estate mortgage 22,738 17,478 14,719 19,984 25,954 Commercial, financial and agricultural 48,789 81,842 119,730 109,618 80,554 -------------------------------------------------------------------------------- Total commercial loans $ 84,383 $109,052 $134,584 $131,020 $107,835 -------------------------------------------------------------------------------- Consumer loans: Residential mortgage $ 40,794 $ 47,789 $ 58,099 $ 77,995 $ 71,715 Installment loans 3,832 9,315 14,483 14,435 7,626 Credit card and other consumer 867 823 1,020 1,450 1,607 -------------------------------------------------------------------------------- Total consumer loans $ 45,493 $ 57,927 $ 73,602 $ 93,880 $ 80,948 -------------------------------------------------------------------------------- Total loans and leases $129,876 $166,979 $208,186 $224,900 $188,783 ======================================================================================
18 (a) Certain prior year amounts have been reclassified to conform to current year presentation. An analysis of maturity and interest rate sensitivity of business loans at the end of 2000 follows:
Under 1 to 5 Over 5 (Expressed in thousands) 1 year Years Years Total ------------------------------------------------------------------------------------------------------------------------ Domestic loans: Real estate construction $ 3,809 $ 6,010 $1,192 $11,011 Real estate mortgage 12,832 4,933 3,113 20,878 Commercial, financial and agricultural 27,302 12,102 5,164 44,568 -------------------------------------------------------------------- Total business loans (b) $43,943 $23,045 $9,469 $76,457 ==================================================================== Rate sensitivity: Predetermined rate $ 1,935 $ 5,771 $8,823 $16,529 Floating or adjustable rate 42,008 17,274 646 59,928 -------------------------------------------------------------------- Total domestic business loans $43,943 $23,045 $9,469 $76,457 ==================================================================== Foreign loans 0 0 0 0 ====================================================================
(b) does not include nonaccrual loans PROVISION AND ALLOWANCE FOR LOAN LOSSES The Company, as part of its philosophy of risk management, has established various credit policies and procedures intended to minimize the Company's exposure to undue credit risk. Credit evaluations of borrowers are performed to ensure that loans are granted on a sound basis. In addition, care is taken to minimize risk by diversifying specific industry. The Bank has certain concentrations of credit, which are more fully described in Footnote 15 of the Company's financial statements beginning on page F-1. Management regularly monitors credit risk through the periodic review of individual credits to ensure compliance with policies and procedures. Adequate collateralization, contractual guarantees, and compensating balances are also utilized by Management to mitigate risk. Management determines the appropriate level of the allowance for loan losses by regularly evaluating the quality of the loan portfolio. The reserve is allocated to specific loans that exhibit above average credit loss potential based upon their payment history and the borrowers' financial conditions. The adequacy of the allowance for loan losses is evaluated based on an assessment of the losses inherent in the loan portfolio. This assessment results in an allowance consisting of two components, allocated and unallocated. The allocations are made for analytical purposes. The total allowance is available to absorb losses from any segment of the portfolio. Management maintains a watch list of substandard loans for monthly review. Although these loans may not be delinquent and may be adequately secured, management believes that due to location, size, or past payment history, it is necessary to monitor these loans monthly. The allowance for loan losses totaled $7,667,000, or 5.9% of total loans and leases at December 31, 2000. At the end of the previous year, the allowance for loan losses was $9,702,000, or 5.8% of total loans and leases. The provision for loan losses charged to expense during 2000 was $242,000 compared to $15,877,000 in the year ago period. As previously disclosed, the Bank has taken charge-offs beginning with the fourth quarter of 1998 due principally to its relationship with Schwartz Homes, Inc., a defunct retailer of mobile homes formerly based in New Philadelphia, Ohio and retail customers of Schwartz Homes. The Bank made loans to Schwartz Home's retail customers under recourse agreements with Schwartz Homes. Under these recourse agreements, Schwartz Homes 19 agreed to repay any loans not repaid by retail customers. Schwartz Homes apparently used the funds advanced by the Bank to fund its own operations or for other improper purposes, without the knowledge of the Bank's board. In many instances, Schwartz Homes failed to perform on the retail sales contracts it entered into with its customers even though the Bank had provided the funds to Schwartz Homes for this purpose. In addition, Schwartz Homes often failed to repay the floor-plan lenders on homes purchased, which further impacted the Bank's collateral position with respect to the homes. In April 1999, Schwartz Homes unexpectedly ceased operations and in June 1999 other creditors of Schwartz Homes placed it in involuntary bankruptcy. In March 2000, a confirmation order was approved by the court in the Schwartz Homes, Inc. bankruptcy. For the year ended December 31, 2000, the Bank received settlement proceeds of $3.2 million of which $1.2 million was applied to the remaining credit exposure for the Schwartz homebuilder loans, $1.8 million was recorded as recoveries in the allowance for loan losses, and the remaining funds were recorded as recovery of legal expenses. Of the $2.3 million in net charge-offs for the year ended December 31, 2000, $1.5 were related to the Schwartz Homes loan relationship. There are no remaining loans outstanding related to Schwartz Homes or its customers at December 31, 2000. Of the $11.6 million in net charge-offs for the year ended December 31, 1999, $7.5 million were related to Schwartz Homes loans. Of this $7.5 million amount, $3.4 million in net charge-offs were related to the indirect consumer loans to Schwartz Homes customers, and $4.1 million in net charge-offs were related to commercial loans made directly to Schwartz Homes. Of the $11.5 million in net charge-offs for the year ended December 31, 1998, $11.2 million were related to the Schwartz Homes consumer loans. Management's allocation of the allowance for loan losses based on estimates of incurred loan losses is set forth in the table below:
Allocation of the Allowance for Loan Losses (Expressed in thousands) 2000 1999 1998 1997 1996 -------------------------------------------------------------------------------------------------------------- Domestic: Commercial, financial and agricultural $4,096 $4,692 $2,254 $2,564 $1,823 Commercial real estate 2,207 1,154 507 313 269 Residential mortgage 301 371 295 358 338 Consumer 94 3,485 2,329 370 313 Foreign - - - - - Unallocated 969 - 90 529 410 -------------------------------------------------------- Total $7,667 $9,702 $5,475 $4,134 $3,153 ========================================================
Loans outstanding as a percentage of each loan category are depicted in the following table:
2000 1999 1998 1997 1996 --------------------------------------------------------------- Commercial, financial and agricultural 35.3% 58.6% 56.5% 47.6% 40.3% Real estate-construction 9.9% 0.1% 0.1% 0.6% 0.7% Real estate-mortgage 31.4% 27.8% 27.3% 34.4% 38.0% Commercial real estate 17.5% 5.5% 7.1% 8.9% 13.7% Installment loans to individuals 3.6% 6.1% 7.5% 7.1% 4.9% Obligations of political subdivisions in the U.S. 2.3% 1.9% 1.5% 1.4% 2.4% Lease financing 0.0% 0.0% 0.0% 0.0% 0.0% --------------------------------------------------------------- Total 100.0% 100.0% 100.0% 100.0% 100.0% ===============================================================
20 The following tables set forth the five-year historical and statistical information on the allowance for loan losses:
(Expressed in thousands) 2000 1999 1998 1997 1996 --------------------------------------------------------------------------------------------- Balance as of January 1 $ 9,702 $ 5,475 $ 4,134 $ 3,153 $ 2,703 Provision for loan losses 242 15,877 12,882 1,055 465 Adjustment incident to acquisition 0 0 0 0 0 Loans charged off: Real estate 119 151 133 24 30 Commercial 812 8,435 178 23 0 Consumer 3,369 3,831 11,245 43 32 Direct financing leases 0 0 0 0 0 ----------------------------------------------------- Total loans charged-off 4,300 12,417 11,556 90 62 Recoveries of loans previously charged-off: Real estate 6 282 11 2 2 Commercial 136 73 1 1 0 Consumer 1,881 412 3 13 45 Direct financing leases 0 0 0 0 0 ----------------------------------------------------- Total recoveries 2,023 767 15 16 47 ----------------------------------------------------- Net charge-offs 2,277 11,650 11,541 74 15 ----------------------------------------------------- Balance at December 31 $ 7,667 $ 9,702 $ 5,475 $ 4,134 $ 3,153 ===================================================== (Expressed in thousands) 2000 1999 1998 1997 1996 --------------------------------------------------------------------------------------------- Loans and leases outstanding at December 31 $129,876 $166,979 $208,186 $224,899 $188,783 Allowance as a percent of loans and leases outstanding 5.90% 5.81% 2.63% 1.84% 1.67% Average loans and leases $143,012 $193,295 $222,961 $208,265 $174,445 Net charge-offs as a percent of average loans and leases 1.59% 6.03% 5.18% 0.04% 0.01%
The following schedule depicts the five-year history of non-performing assets. (Expressed in thousands) 2000 1999 1998 1997 1996 ---------------------------------------------------------------------------- Nonaccrual loans and leases $8,518 $13,769 $8,569 $1,515 $ 143 Loans 90 days or more past due but accruing interest 2 541 4 44 74 Other real estate owned 766 - - 20 66 ---------------------------------------- Total $9,286 $14,310 $8,573 $1,579 $ 283 ========================================
Restructured loans in compliance with modified terms totaled $230,000 and $1,046,000 at December 31, 2000 and 1999, respectively. In addition to the above schedule of non-performing assets, Management prepares a watch list consisting of loans which management has determined require closer monitoring to further protect the Company against loss. The 21 balance of loans classified by management as substandard due to delinquency and a change in financial position and not included in non-performing assets was $14,687,000 and $19,246,000 at the December 31, 2000 and 1999, respectively. Loan classified as doubtful and not included in non-performing assets totaled $224,000 at December 31, 2000. There were no loans classified as doubtful at December 31, 1999. DEPOSITS Primarily, core deposits are used to fund interest-earning assets. The accompanying tables show the relative composition of the Company's average deposits and the change in average deposit sources during the last three years:
(Expressed in thousands) Average Deposits 2000 1999 1998 ------------------------------------------------------------------------------------------- Demand $ 24,749 $ 28,865 $ 29,910 Interest bearing checking 24,464 40,649 45,864 Savings 68,652 82,919 82,196 Other time 95,608 106,599 107,398 Certificates-$100,000 and over 16,997 26,820 27,087 ---------------------------------------------- Total average deposits $ 230,470 $285,852 $292,455 ============================================== Distribution of Average Deposits 2000 1999 1998 ------------------------------------------------------------------------------------------- Demand 10.7% 10.1% 10.2% Interest bearing checking 10.6% 14.2% 15.7% Savings 29.8% 29.0% 28.1% Other time 41.5% 37.3% 36.7% Certificates-$100,000 and over 7.4% 9.4% 9.3% ---------------------------------------------- Total 100.0% 100.0% 100.0% =============================================== Change in Average 1999 1998 1997 Deposit Sources to 2000 to 1999 to 1998 ------------------------------------------------------------------------------------------- Demand ($4,116) ($1,045) $ 32 Interest bearing checking (16,185) (5,215) 2,388 Savings (14,267) 723 3,560 Other time (10,991) (799) 5,993 Certificates-$100,000 and over (9,823) (267) 13,188 ---------------------------------------------- Total ($55,382) ($6,603) $ 25,161 ===============================================
The decline in average deposits during 1999 and 2000 is attributable to a number of factors. The negative publicity resulting from the Bank's loan losses had an adverse impact on bank deposits. In addition, the Bank actively reduced deposits to shrink its asset size thereby reducing the amount of capital required to meet the terms of its regulatory agreements. There was also a sale of $10 million in deposits during January of 1999. Deposit trends have increased during the last half of 2000. Average deposits for the fourth quarter of 2000 were $229 million, up $4 million from the third quarter of 2000. BORROWINGS Other sources of funds for the Company include short-term repurchase agreements and Federal Home Loan Bank borrowings. 22 LIQUIDITY AND CAPITAL RESOURCES The Company meets its liability-based needs through the operation of the Bank's branch banking network that gathers demand and retail time deposits. The Bank also acquires funds through repurchase agreements and overnight federal funds that provide additional sources of liquidity. Total deposits decreased by $23.7 million, or 9.3%, from the end of 1999 to 2000 and $48.9 million, or 16.1%, from the end of 1998 to 1999. As discussed above, these trends were the result of adverse publicity surrounding the Bank's financial condition, planned reductions in deposit levels to facilitate capital restoration and a branch sale. Average deposits decreased $55.4 million, or 19.4%, during 2000 compared to 1999. Average deposits decreased $6.6 million, or 2.3%, during 1999 compared to 1998. Deposit trends stabilized midyear during 2000 and increased during the third and fourth quarters of 2000. The Bank also has lines of credit with various correspondent banks totaling $5,100,000 that may be used as an alternative funding source; none of these lines were drawn upon at December 31, 2000. The Bank has an unused credit line with the Federal Home Loan Bank for $20 million. All borrowings at the Federal Home Loan Bank are subject to eligible collateral requirements. Liquidity may be impacted by the ability of the Company to generate future earnings. At December 31, 2000, shareholders' equity was $25.6 million compared to $11.2 million at December 31, 1999, an increase of $14.4 million. The increase in capital occurred as a result of the sale of common stock during 2000 and an improvement in the market value of securities classified as available for sale. The Federal Reserve Board has adopted risk-based capital guidelines that assign risk weightings to assets and off-balance sheet items. The guidelines also define and set minimum capital requirements (risk-based capital ratios). Bank holding companies are required to have core capital (Tier 1) of at least 4.0% of risk-weighted assets and total capital of 8.0% of risk-weighted assets. Tier 1 capital consists principally of shareholders' equity less goodwill, and may include a portion of deferred tax assets. However, presently none of the Company's deferred tax assets are included as Tier 1 capital. Total capital consists of Tier I capital, plus certain debt instruments and a portion of the allowance for loan losses. The following table shows several capital and liquidity ratios for the Company for the last two years: December 31 2000 1999 -------------------------------------------------------------------------- Average shareholders' equity to: Average assets 6.4% 4.9% Average deposits 7.7% 6.8% Average loans and leases 12.5% 10.0% Primary capital 11.8% 6.6% Risk-based capital ratio: Tier 1 12.7% 5.6% Total 13.9% 6.9% Tier 1 leverage ratio 7.8% 3.5% The Bank's capital ratios are detailed in Footnote 20 of the Notes to the Consolidated Statements in the Company's financial statements beginning on page F-1. As previously described under Item 3, the Bank entered into an agreement with the Office of the Comptroller of the Currency to maintain a Tier 1 leverage ratio of at least 6.0%. As a result of its recapitalization efforts, the Bank was formally notified that it had achieved an adequately capitalized designation under Prompt Corrective Action regulations as of June 30, 2000 in a letter 23 from the Office of the Comptroller of the Currency dated July 27, 2000. There are no conditions or events since that notification that management believes has changed the Bank's capital category. See also Notes 2 and 20 to the Company's consolidated financial statements. DIVIDENDS The following table presents dividend payout ratios for the past three years: 2000 1999 1998 Total dividends declared as a percentage of net income 0.00% * * Common dividends declared as a percentage of earnings per common share 0.00% * * * not applicable because the Company reported losses for 1999 and 1998. Cash dividends were declared and paid in the amount of $0.12 per share in 1999 prior to the Company's determination that it would not realize positive earnings for the year. Dividends of $0.385 per share were paid in 1998. Future dividends will require approval of the Company's regulators. The subsidiary Bank is the primary source of funds to pay dividends to the shareholders of the Company. The approval of the Comptroller of the Currency will be required for future dividends from the Bank to the Company because previously paid dividends have exceeded the total of the Bank's retained net profits for the current and preceding two years. The Board of Governors of the Federal Reserve Bank has issued a policy statement stating that a bank holding company generally should not maintain its existing rate of cash dividends on common stock unless (1) the organization's net income available to common shareholders over the past year has been sufficient to fully fund the dividends and (2) the prospective rate of earnings retention appears consistent with the organization's capital needs, asset quality, and overall financial condition. RECENT ACCOUNTING PRONOUNCEMENTS Currently, there are no recent accounting pronouncements that, if adopted, would have a material effect on the Company's financial position. FORWARD-LOOKING STATEMENTS Various statements made in this Report concerning the manner in which Belmont intends to conduct its future operations, and potential trends that may impact future results of operations, are forward-looking statements. Belmont may be unable to realize its plans and objectives due to various important factors, including, but not limited to, the factors described below. These and other factors are more fully discussed elsewhere in this Report. . Belmont has entered into consent agreements with the Federal Reserve Bank of Cleveland and the Office of the Comptroller of the Currency that require it to take various actions and meet various requirements. If Belmont fails to satisfy all of these requirements, the Comptroller of the Currency and Federal Reserve Bank could potentially assume complete or significantly greater control of Belmont's operations. . Belmont has recognized substantial loan losses in recent years, principally related to loans made under the direction of prior management. While Belmont has created what it believes are appropriate loan loss reserves, Belmont could incur significant additional loan losses in future periods, particularly if general economic conditions or conditions in particular industries in which its loans are concentrated deteriorate. 24 . Belmont is subject to increasingly vigorous and intense competition from other banking institutions and from various financial institutions and other nonbank or non-regulated companies or firms that engage in similar activities. Many of these institutions have significantly greater resources than Belmont. . Belmont is currently engaged in certain significant lawsuits. In addition to making significant expenditures for legal fees, adverse judgments in one or more of these lawsuits could have a materially adverse impact on Belmont's financial condition. ITEM 7A-QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates and equity prices. The Company's market risk is composed primarily of interest rate risk. Interest rate risk results from timing differences in the repricing of assets, liabilities and off-balance sheet instruments, changes in relationships between rate indices and the potential exercise of explicit or embedded options. The Asset/Liability Management Committee ("ALCO") meets regularly to review the interest rate sensitivity position of the Company and to monitor and limit exposure to interest rate risk. The goal of asset/liability management is to maximize net interest income and the net value of the Company's future cash flows within the interest rate risk limits established by the Board of Directors. Interest rate risk is monitored primarily through the use of two complementary measures: earnings simulation modeling and net present value estimation. While each of these interest rate risk measurements has limitations, taken together they represent a reasonably comprehensive view of the magnitude of interest rate risk in the Company. The key assumptions underlying these measures are periodically reviewed by ALCO. The earnings simulation model forecasts the effects on income under a variety of scenarios. This model includes assumptions about how the balance sheet is likely to evolve through time in different interest rate environments. Loan and deposit growth rate assumptions are derived from historical analysis and management's outlook, as are the assumptions used to project yields and rates for new loans and deposits. Securities portfolio maturities and prepayments are assumed to be reinvested in similar instruments. Mortgage loan prepayment assumptions are developed from industry median estimates of prepayment speeds. Based on the earnings simulation model at December 31, 2000, changes in net interest income were projected as follows given a parallel shift in the yield curve: Change in % Change Net Interest in Net Interest (Expressed in thousands) Income Income ----------------------------------------------------------------- Down 200 basis points ($654) -7.1% Down 100 basis points (170) -1.8% Up 100 basis points 163 1.8% Up 200 basis points 210 2.3% Based on the earnings simulation model at December 31, 1999, changes in net interest income were projected as follows given a parallel shift in the yield curve: Change in % Change Net Interest in Net Interest (Expressed in thousands) Income Income ------------------------------------------------------------------- Down 200 basis points ($173) -1.9% Down 100 basis points 7 0.1% Up 100 basis points (70) -0.8% Up 200 basis points (153) -1.7% 25 The net present value estimation ("NPV") measure is used for discerning levels of risk present in the balance sheet that might not be taken into account in the earnings simulation model due to the shorter time horizon used by that model. The NPV of the balance sheet, at a point in time, is defined as the discounted present value of asset cash flows minus the discounted value of liability cash flows. The NPV measure also assumes a static balance sheet, versus the growth assumptions that are incorporated into the earnings simulation measure and an unlimited time horizon instead of the one-year horizon applied in the earnings simulation. As with earnings simulation modeling, assumptions about the timing and variability of balance sheet cash flows are important to NPV analysis. The estimated decline in the present value of equity as a percentage of the total market value of equity at December 31, 2000 would be 21% given a 200 basis point increase in interest rates. ITEM 8 - FINANCIAL STATEMENTS & SUPPLEMENTARY DATA The financial statements and schedules are set forth beginning on page F-1. Supplementary Data Summarized Quarterly Financial Information ($000's except per share data)
First Second Third Fourth Quarter Quarter Quarter Quarter -------------------------------------------------------------------------------------------------- 2000 -------------------------------------------------------------------------------------------------- Interest income $ 4,815 $ 4,614 $ 4,921 $ 4,787 Interest expense 2,831 2,632 2,560 2,679 -------------------------------------------------------------------------------------------------- Net interest income 1,984 1,982 2,361 2,108 Provision for loan losses 242 - - - Securities gains (losses) (1) 1 - 4 Net overhead (1) 1,983 1,523 1,908 2,077 -------------------------------------------------------------------------------------------------- Income (loss) before income taxes (242) 460 453 35 Income tax benefit (302) (66) (57) (255) -------------------------------------------------------------------------------------------------- Net income $ 60 $ 526 $ 510 $ 290 Basic earnings per common share $ 0.01 $ 0.07 $ 0.05 $ 0.03 -------------------------------------------------------------------------------------------------- 1999 -------------------------------------------------------------------------------------------------- Interest income $ 7,468 $ 6,621 $ 6,274 $ 5,507 Interest expense 4,247 4,099 3,966 3,297 -------------------------------------------------------------------------------------------------- Net interest income 3,221 2,522 2,308 2,210 Provision for loan losses 5,735 1,871 5,784 2,487 Securities gains (losses) 40 (57) (65) (798) Net overhead (1) 1,792 2,038 2,527 3,732 -------------------------------------------------------------------------------------------------- Loss before income taxes (4,266) (1,444) (6,068) (4,807) Income tax benefit (1,657) (499) (2,202) (1,196) -------------------------------------------------------------------------------------------------- Net income ($2,609) ($945) ($3,866) ($3,611) Basic loss per common share ($0.50) ($0.18) ($0.74) ($0.69)
(1) Noninterest income exclusive of securities gains (losses) less noninterest expense. 26 ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On October 18, 1999, the Company filed a current report on Form 8-K to disclose its dismissal of S.R. Snodgrass A.C. as its independent auditors and its appointment of Crowe, Chizek and Company, LLP to serve as its new independent auditors. On October 20, 1999, the Company filed an amendment to this report to disclose that S.R. Snodgrass A.C. had advised the Company that it agreed with the Company's disclosure in such 8-K concerning the dismissal of S.R. Snodgrass A.C. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this section will be included in the Company's Proxy Statement to be filed with the Securities and Exchange Commission on or before April 30, 2001. Such information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this section will be included in the Company's Proxy Statement to be filed with the Securities and Exchange Commission on or before April 30, 2001. Such information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this section will be included in the Company's Proxy Statement to be filed with the Securities and Exchange Commission on or before April 30, 2001. Such information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this section will be included in the Company's Proxy Statement to be filed with the Securities and Exchange Commission on or before April 30, 2001. Such information is incorporated herein by reference. PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements as listed on page 29. 2. Financial Statement Schedules as listed on page 29. 3. Exhibits as listed on page E-1. (b) Reports on Form 8-K. None. 27 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 19, 2001. By /s/ Wilbur R. Roat BELMONT BANCORP. -------------------------------- President & Chief Executive Officer (Registrant) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the date indicated.
SIGNATURE TITLE DATE -------------------------------------------------------------------------------------------------------------------- /s/ W. Quay Mull, II Chairman of the Board and Director March 19, 2001 -------------------------------------------------------------------------------------------------------------------- /s/ Wilbur R. Roat Director, President & Chief Executive Officer March 19, 2001 -------------------------------------------------------------------------------------------------------------------- /s/ Jane R. Marsh Secretary (principal financial and accounting officer) March 19, 2001 -------------------------------------------------------------------------------------------------------------------- /s/ Joseph F. Banco Director March 19, 2001 -------------------------------------------------------------------------------------------------------------------- /s/ Jay A. Beck Director March 19, 2001 -------------------------------------------------------------------------------------------------------------------- /s/ David R. Giffin Director March 19, 2001 -------------------------------------------------------------------------------------------------------------------- /s/ John H. Goodman, II Director March 19, 2001 -------------------------------------------------------------------------------------------------------------------- /s/ Charles J. Kaiser, Jr. Director March 19, 2001 -------------------------------------------------------------------------------------------------------------------- /s/ Terrence A. Lee Director March 19, 2001 -------------------------------------------------------------------------------------------------------------------- /s/ Tom Olszowy Director March 19, 2001 -------------------------------------------------------------------------------------------------------------------- /s/ Keith A. Sommer Director March 19, 2001 -------------------------------------------------------------------------------------------------------------------- /s/ Robert W. Whiteside Director March 19, 2001 -------------------------------------------------------------------------------------------------------------------- /s/ Charles A. Wilson, Jr. Director March 19, 2001 --------------------------------------------------------------------------------------------------------------------
28 INDEX TO FINANCIAL STATEMENTS Consolidated Balance Sheets at December 31, 2000 and 1999 F-1 Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998 F-2 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2000, 1999 and 1998 F-3 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 F-4 Notes to Financial Statements F-5 Report on Management's Responsibilities F-19 Report of Crowe, Chizek and Company, LLP F-20 Report of S.R. Snodgrass A.C. F-20 29 Belmont Bancorp. and Subsidiaries Consolidated Balance Sheets ($000's) ------------------------------------------------------------------------------- December 31, Assets 2000 1999 --------------------------- Cash and due from banks $ 11,270 $ 15,439 Federal funds sold 14,730 2,025 Loans held for sale -- 1,845 Securities available for sale at fair value 109,684 110,692 Loans 129,876 165,134 Less allowance for loan losses (7,667) (9,702) --------------------------- Net loans 122,209 155,432 Premises and equipment, net 6,792 7,263 Deferred federal tax assets 7,346 8,551 Cash surrender value of life insurance 4,419 4,196 Federal taxes receivable -- 5,696 Accrued income receivable 1,658 1,751 Other assets 3,680 2,877 --------------------------- Total Assets $ 281,788 $ 315,767 =========================== Liabilities and Shareholders' Equity Liabilities Noninterest bearing deposits: Demand $ 25,123 $ 28,685 Interest bearing deposits: Demand 26,136 28,456 Savings 66,857 77,403 Time 113,570 120,888 --------------------------- Total deposits 231,686 255,432 Securities sold under repurchase agreements 1,204 6,093 Federal funds purchased and other short-term borrowings -- 19,740 Long-term borrowings 20,000 20,000 Accrued interest on deposits and other borrowings 820 747 Other liabilities 2,476 2,524 --------------------------- Total liabilities 256,186 304,536 --------------------------- Shareholders' Equity Preferred stock - authorized 90,000 shares with no par value; issued and outstanding, 16,500 shares of Series A convertible preferred stock at 12/31/99 -- 1,650 Common stock - $0.25 par value, 17,800,000 shares authorized; 11,153,195 shares issued at 12/31/00, 5,288,326 shares issued at 12/31/99 2,788 1,321 Additional paid-in capital 17,414 7,904 Treasury stock at cost (51,792 shares) (1,170) (1,170) Retained earnings 8,515 7,129 Accumulated other comprehensive loss (1,945) (5,603) --------------------------- Total shareholders' equity 25,602 11,231 --------------------------- Total liabilities and shareholders' equity $ 281,788 $ 315,767 =========================== The accompanying notes are an integral part of the financial statements. F-1 Belmont Bancorp. and Subsidiaries Consolidated Statements of Income For the Years Ended December 31, 2000, 1999 and 1998 ($000's) ------------------------------------------------------------------------------- Interest Income 2000 1999 1998 --------------------------------------- Loans: Taxable $ 11,867 $ 16,223 $ 20,923 Tax-exempt 255 284 271 Securities: Taxable 4,254 6,642 7,720 Tax-exempt 2,139 1,985 1,241 Dividends 231 381 336 Interest on trading securities -- 86 68 Interest on federal funds sold 391 269 228 --------------------------------------- Total interest income 19,137 25,870 30,787 --------------------------------------- Interest Expense Deposits 9,165 10,894 11,671 Other borrowings 1,537 4,715 4,809 --------------------------------------- Total interest expense 10,702 15,609 16,480 --------------------------------------- Net interest income 8,435 10,261 14,307 Provision for Loan Losses 242 15,877 12,882 --------------------------------------- Net interest income (loss) after provision for loan losses 8,193 (5,616) 1,425 --------------------------------------- Noninterest Income Trust fees 419 484 463 Service charges on deposits 848 921 752 Interest on federal tax refund 256 -- -- Other operating income 896 817 824 Trading gains (losses) -- (10) 62 Securities gains (losses) 4 (880) 1,338 Gain (loss) on sale of loans and loans held for sale (40) 341 144 Gain on sale of real estate -- -- 383 --------------------------------------- Total noninterest income 2,383 1,673 3,966 --------------------------------------- Noninterest Expense Salary and employee benefits 4,066 3,826 4,633 Net occupancy expense of premises 839 898 824 Equipment expenses 865 891 933 Other operating expenses 4,100 7,027 3,106 --------------------------------------- Total noninterest expense 9,870 12,642 9,496 --------------------------------------- Income (loss) before income taxes 706 (16,585) (4,105) Income Tax Benefit (680) (5,554) (2,186) --------------------------------------- Net income (loss) $ 1,386 $ (11,031) $ (1,919) ======================================= Weighted Average Number of Shares Outstanding 8,778,621 5,235,431 5,252,161 ======================================= Basic Earnings (loss) Per Common Share $ 0.16 $ (2.11) $ (0.37) ======================================= The accompanying notes are an integral part of the financial statements. F-2 Belmont Bancorp. and Subsidiaries Consolidated Statements of Changes in Shareholders' Equity For the Years Ended December 31, 2000, 1999 and 1998 ($000's) -------------------------------------------------------------------------------
Accumulated Other Additional Compre- Compre- Preferred Common Paid-in- Retained Treasury hensive hensive Total Stock Stock Capital Earnings Stock Income (Loss) Income (Loss) -------------------------------------------------------------------------------------------------- Balance, December 31, 1997 $ 31,899 $ -- $ 1,321 $ 7,781 $22,729 $ (131) $ 199 Comprehensive income Net loss (1,919) (1,919) $ (1,919) Other comprehensive income, net of tax Unrealized loss on securities net of reclassification adjustment (1,398) (1,398) (1,398) ---------- Comprehensive income (loss) $ (3,317) ========== Cash dividends declared: Common stock ($.385 per share) (2,022) (2,022) Purchase of treasury stock (1,308) (1,308) Issuance of treasury stock 112 73 39 ------------------------------------------------------------------------------- Balance, December 31, 1998 $ 25,364 -- $ 1,321 $ 7,854 $18,788 $(1,400) $(1,199) Comprehensive income Net loss (11,031) (11,031) $ (11,031) Other comprehensive income, net of tax Unrealized loss on securities net of reclassification adjustment (4,404) (4,404) (4,404) ---------- Comprehensive income (loss) $ (15,435) ========== Cash dividends declared: Common stock ($.12 per share) (628) (628) Issuance of Series A convertible preferred stock 1,650 1,650 Issuance of treasury stock 280 50 230 ------------------------------------------------------------------------------- Balance, December 31, 1999 $ 11,231 $ 1,650 $ 1,321 $ 7,904 $ 7,129 $(1,170) (5,603) Comprehensive income Net income 1,386 1,386 $ 1,386 Other comprehensive income, net of tax Unrealized gain on securities net of reclassification adjustment 3,658 3,658 3,658 ---------- Comprehensive income $ 5,044 ========== Conversion of Series A preferred stock to common stock -- (1,650) 206 1,444 Issuance of common stock 9,327 1,261 8,066 ------------------------------------------------------------------------------- Balance, December 31, 2000 $ 25,602 $ -- $ 2,788 $17,414 $ 8,515 $(1,170) $(1,945) ===============================================================================
The accompanying notes are an integral part of the financial statements. F-3 Belmont Bancorp. and Subsidiaries Consolidated Statements of Cash Flows For the Years Ended December 31, 2000, 1999 and 1998 ($000's) -------------------------------------------------------------------------------
2000 1999 1998 -------------------------------------- Operating Activities Net income (loss) $ 1,386 $ (11,031) $ (1,919) Adjustments to reconcile net income (loss) to net cash flows from operating activities: Provision for loan losses 242 15,877 12,882 Depreciation and amortization expense 675 710 743 Amortization of investment security premiums 593 2,419 2,403 Accretion of investment security discounts (610) (648) (302) Amortization of intangibles 10 439 196 Securities (gains) losses (4) 880 (1,338) Trading (gains) losses -- 10 (63) Deferred taxes (680) (4,668) 83 Proceeds from sale of trading securities -- 13,592 12,893 Purchase of securities for trading account -- (15,516) (14,865) Gain (loss) on sale of fixed assets (4) -- (384) Gain (loss) on sale of loans 40 (341) (144) Changes in: Interest receivable 93 980 (144) Interest payable 73 (149) 165 Loans held for sale 1,805 (111) (850) Federal tax refund 5,696 -- -- Others, net (280) (3,478) (1,382) -------------------------------------- Cash from operating activities 9,035 (1,035) 7,974 -------------------------------------- Investing Activities Proceeds from: Maturities and calls of securities 4,557 6,237 4,370 Sale of securities available for sale 5,667 73,846 87,580 Principal collected on mortgage-backed securities 11,046 40,897 37,964 Sale of loans 2,178 9,008 20,144 Redemption of life insurance contracts -- 1,741 -- Sales of other real estate owned 97 155 39 Sales of premises and equipment 9 -- 612 Purchases of: Securities available for sale (14,698) (39,289) (193,441) Life insurance contracts -- (81) (413) Premises and equipment (209) (596) (947) Changes in: Federal funds sold (12,705) (2,025) -- Loans, net 29,902 20,516 (13,998) -------------------------------------- Cash from investing activities 25,844 110,409 (58,090) -------------------------------------- Financing Activities Proceeds from: Advances of long-term debt -- -- 35,000 Issuance of preferred stock -- 1,650 -- Issuance of common stock 9,327 -- -- Issuance of treasury stock -- 280 112 Payments on long-term debt -- (71,401) (13,233) Dividends paid on common stock -- (628) (2,022) Purchase of treasury stock -- -- (1,308) Sale of branch deposits -- (10,311) -- Changes in: Deposits (23,746) (38,608) 40,443 Repurchase agreements (4,889) (146) 983 Short-term borrowings (19,740) 15,790 (10,685) -------------------------------------- Cash from financing activities (39,048) (103,374) 49,290 -------------------------------------- Increase (Decrease) in Cash and Cash Equivalents (4,169) 6,000 (826) Cash and Cash Equivalents, Beginning of Year 15,439 9,439 10,265 -------------------------------------- Cash and Cash Equivalents, End of Year $ 11,270 $ 15,439 $ 9,439 ======================================
The accompanying notes are an integral part of the financial statements. F-4 Belmont Bancorp. and Subsidiaries Notes to the Consolidated Financial Statements For the Years Ended December 31, 2000, 1999 and 1998 ------------------------------------------------------------------------------- 1. Summary of Significant Accounting Policies The accounting and reporting policies and practices of Belmont Bancorp. (the "Company") and its subsidiaries are in accordance with generally accepted accounting principles and conform to general practices within the banking industry. The more significant of these policies and practices are summarized below. Nature of Operations: Belmont Bancorp. provides a variety of banking services to individuals and businesses through the branch network of its wholly-owned subsidiary, Belmont National Bank (BNB). BNB operates twelve full-service banking facilities located in Belmont, Harrison, and Tuscarawas Counties in Ohio, and Wheeling, West Virginia. Principles of Consolidation: The consolidated financial statements include the accounts of Belmont Bancorp. and its wholly-owned subsidiaries, Belmont National Bank and Belmont Financial Network, Inc. Material intercompany accounts and transactions have been eliminated. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates particularly subject to change would include the allowance for loan losses, deferred taxes, fair values of financial instruments, and loss contingencies. Securities Held to Maturity: These securities are purchased with the original intent to hold to maturity. Events which may be reasonably anticipated are considered when determining the Company's intent and ability to hold to maturity. Securities meeting such criteria at date of purchase and as of the balance sheet date are carried at cost, adjusted for amortization of premiums and accretion of discounts. Securities Available for Sale: Debt and equity securities to be held for indefinite periods of time and not intended to be held to maturity are classified as available for sale and carried at fair value with net unrealized gains and losses, net of tax, reflected as a component of other comprehensive income until realized. Securities held for indefinite periods of time include securities that may be sold to meet liquidity needs or in response to significant changes in interest rates or prepayment risks as part of the Company's overall asset/liability management strategy. Trading Securities: Trading securities are held for resale within a short period of time and are stated at fair value. Trading gains and losses include the net realized gain or loss and market value adjustments of the trading account portfolio. These gains and losses are reported in current earnings. Securities with a fair value of $3,998,000 were transferred from the Trading portfolio to the Available for Sale portfolio during 1999. There were no transfers of securities between classifications in 2000 or 1998. The Financial Accounting Standards Board (FASB) issued the Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities in June 1998. The Company adopted SFAS No. 133 as of April 1, 1999. As permitted in SFAS No. 133, on April 1 1999, the Company transferred securities with an amortized cost of $11,861,000 and a fair value of $12,085,000 from the Held to Maturity portfolio to the Available for Sale portfolio. The Company does not have any derivative instruments nor does the Company have any hedging activities. Loans Held for Sale: Residential mortgage loans which management does not intend to hold to maturity or for which sales are pending are reported as loans held for sale. Such loans are carried at the lower of aggregate cost or market. Income Recognition: Income earned by the Company and its subsidiaries is recognized principally on the accrual basis of accounting. Certain fees, principally service, are recognized as income when billed. The subsidiary bank suspends the accrual of interest on loans when, in management's opinion, the collection of all or a portion of interest has become doubtful. Generally, when a loan is placed on nonaccrual, the Bank charges all previously accrued and unpaid interest against income. In future periods, interest will be included in income to the extent received only if complete principal recovery is reasonably assured. The Company adopted the provisions of Statement of Financial Accounting Standards No. 114 and No. 118, "Accounting for Creditors for Impairment of a Loan." It is the Company's policy not to recognize interest income on specific impaired loans unless the likelihood of future loss is remote. Interest payments received on such loans are applied as a reduction of the loan principal balance. The Company defers and amortizes loan fees and related origination costs. These fees and costs are amortized into interest or other income over the estimated life of the loan using a method which approximates the interest method. For securities, interest income includes amortization of purchase premium or discount. Gains and losses on sales are based on the amortized cost of the security sold. Securities are written down to fair value when a decline in fair value is not temporary. Allowance For Loan Losses: The allowance for loan losses is maintained at a level which, in management's judgment, is adequate to absorb credit losses incurred in the loan portfolio. The amount of the allowance is based on management's evaluation of the collectibility of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, and economic conditions. F-5 Belmont Bancorp. and Subsidiaries Notes to the Consolidated Financial Statements For the Years Ended December 31, 2000, 1999 and 1998 ------------------------------------------------------------------------------- 1. Summary of Significant Accounting Policies (continued) Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows. A loan is impaired when, based on current information and events, it is probable that all scheduled payments of principal and interest will not be collected according to the loan agreement. Factors in determining impairment include payment status, collateral value, and the probability of collecting scheduled payments. Insignificant payment delays and payment shortfalls generally do not result in impairment. Impairment for individual commercial and construction loans is measured by either the present value of expected future cash flows discounted at the loan's effective rate or the fair value of the collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as residential mortgage, credit card, and consumer loans, are collectively evaluated for impairment. The allowance is increased by a provision for loan losses, which is charged to expense and reduced by charge-offs, net of recoveries. Changes in the allowance relating to impaired loans are charged or credited to the provision for loan losses. Because of uncertainties inherent in the estimation process, management's estimate of credit losses inherent in the loan portfolio and the related allowance may change in the near term. Premises and Equipment: Premises and equipment are stated at cost, less accumulated depreciation and amortization. Provisions for depreciation and amortization are computed generally using the straight line method over the estimated useful lives of the assets. Leasehold improvements are amortized on the straight line basis over the lease period. When units of property are disposed, the premises and equipment accounts are relieved of the cost and the accumulated depreciation related to such units. Any resulting gains or losses are credited to or charged against income. Costs of repairs and maintenance are charged to expense as incurred. Major renewals and betterments are capitalized at cost. Foreclosed Assets: Assets acquired through or instead of loan foreclosure are initially recorded at fair value when acquired, establishing a new cost basis. If fair value declines, a valuation allowance is recorded through expense. Costs after acquisition are expensed. Servicing Rights: Servicing rights are recognized as assets for purchased rights and for the allocated value of retained servicing rights on loans sold. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to interest rates and then, secondarily, as to geographic and prepayment characteristics. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Any impairment of a grouping is reported as a valuation allowance. Long-term Assets: Premises and equipment and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at discounted amounts. Repurchase Agreements: Substantially all repurchase agreement liabilities represent amounts advanced by various customers. Securities are pledged to cover these liabilities, which are not covered by federal deposit insurance. Benefit Plans: Profit-sharing and 401k plan expense is the amount contributed determined by formula and by board decision. Deferred compensation plan expense allocates the benefits over years of service. Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. Financial Instruments: Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and standby letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Dividend Restriction: Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the holding company or by the holding company to shareholders. Neither the Company nor the Bank can currently pay dividends without regulatory approval. See notes 16 and 20. Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgement regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. F-6 Belmont Bancorp. and Subsidiaries Notes to the Consolidated Financial Statements For the Years Ended December 31, 2000, 1999 and 1998 ------------------------------------------------------------------------------- 1. Summary of Significant Accounting Policies (continued) Business Segments: Internal financial information is primarily reported and aggregated in the banking line of business. Earnings Per Common Share: Earnings per common share are calculated based on net income after preferred dividend requirements and the weighted average number of shares of common stock outstanding during the year. The Company's preferred stock was not dilutive for 1999. The preferred stock was converted to common stock during 2000. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options. These options were anti-dilutive in 1999 and 2000. Excess of Cost Over Net Assets Acquired: In 1999, the Company wrote off the remaining balance of intangible assets associated with branches purchased in 1991 and 1992 due to the sale of one of the branches and an evaluation of the Bank's position within the marketplace for the remaining branches. Amortization charged to expense was $439,000 in the period ended December 31, 1999 and $196,000 in the period ended December 31, 1998. Reclassifications: Certain prior year amounts have been reclassified to conform with current year presentation. 2. Financial Results and Management's Plan For the five years ending December 31, 1997, the Company's reported average return on assets was 1.31%, resulting in average net income of $4.2 million. During this same period, the reported provision for loan losses averaged $810,000 per year. During 1998 and 1999, the Corporation recorded provisions for loan losses of $12.9 million and $15.9 million respectively, resulting in a net loss of $1.9 million in 1998 and $11.0 million in 1999. These recent results were in large part the result of substantial loan losses relating to the bankruptcy of a large commercial borrower of the Bank, an indirect consumer lending program through the now-bankrupt borrower, other loan losses including loans to companies in the amusement industry, and the legal and collection expenses associated with such losses. In addition, the Company incurred additional expenses associated with the retention of interim senior management, consulting work performed in connection with detailed loan analyses, increased federal deposit insurance premiums and other expenses. Management believes that it has made significant progress in identifying the losses in the loan portfolio and taking appropriate action to improve future credit quality. During 1999, management initiated a process of loan review which covers all commercial loans greater than $50,000. This process is an ongoing activity and continued throughout 2000. Some loans which had been considered performing credits were adversely classified as part of this process. In addition, certain loans were found to have incomplete underwriting documentation. Addressing these problems has been a high priority for Bank management. The Company continues to meet its obligations on a continuing basis, and there remains available credit in the event that additional funding is needed. As of December 31, 2000, the Bank has unused short-term lines of credit with the Federal Home Loan Bank and other correspondent banks of approximately $24 million to meet its liquidity requirements. As more fully described in Note 20, formal regulatory action by the Federal Reserve Bank and the Office of the Comptroller of the Currency (OCC) have required the Company and Bank to meet minimum capital requirements including improving and maintaining its Tier 1 capital as a percent of average assets (or Tier 1 leverage ratio) at 6% so long as the regulatory agreements remain in place. The Bank achieved this requirement by June 30, 2000. 3. Shareholders' Equity On June 30, 2000, the Company completed a recapitalization plan it began in November 1999 with the sale of $1.65 million of convertible preferred stock to its Board of Directors, which stock was subsequently converted into 825,000 shares of the Company's common stock based on a common stock price of $2.00 per share. The shares of common stock issued in the conversion are "restricted securities" as that term is defined in Rule 144 under the Securities Act of 1933. In February 2000, the Company commenced the first of two successive public offerings. In the initial offering, which closed in April 2000, the Company sold 2,039,869 shares of common stock at $2.00 per share and received $4.1 million in gross offering proceeds. In the second offering, which began in May 2000 and closed in June 2000, the Company sold 3,000,000 shares of common stock, also at $2.00 per share. The Company received $6.0 million in gross offering proceeds in this fully subscribed follow-on offering. In this recapitalization, the Company issued a total of 5,864,869 shares of its common stock and received $11.7 million in aggregate gross offering proceeds. After payment of aggregate offering costs of approximately $700,000, the Company applied the net offering proceeds of $11.0 million to increase the Bank's capital. The following table represents the change in the Company's outstanding shares:
Preferred Common Stock Stock --------------------------- Shares outstanding, December 31, 1998 -- 5,222,152 Shares issued 16,500 -- Treasury shares reissued -- 14,382 ------------------------ Shares outstanding, December 31, 1999 16,500 5,236,534 Preferred shares converted into common stock (16,500) 825,000 Shares issued -- 5,039,869 ----------------------- Shares outstanding, December 31, 2000 -- 11,101,403 =======================
F-7 Belmont Bancorp. and Subsidiaries Notes to the Consolidated Financial Statements For the Years Ended December 31, 2000, 1999 and 1998 ------------------------------------------------------------------------------- 4. Securities At December 31, 2000 and 1999, all securities were classified as available for sale. The estimated fair value of securities as of December 31 are depicted in the following tables:
2000 ---------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair (Expressed in thousands) Cost Gains Losses Value ---------------------------------------------------- U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 5,632 $ -- $ (221) $ 5,411 Obligations of states and political subdivisions 43,398 120 (1,930) 41,588 Mortgage-backed securities 35,130 51 (490) 34,691 Collateralized mortgage obligations 21,166 101 (166) 21,101 Corporate debt 3,102 -- (357) 2,745 --------------------------------------------------- Total debt securities 108,428 272 (3,164) 105,536 Marketable equity securities 4,203 83 (138) 4,148 --------------------------------------------------- Total available for sale $112,631 $355 $(3,302) $109,684 =================================================== 1999 ---------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair (Expressed in thousands) Cost Gains Losses Value ---------------------------------------------------- U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 12,130 $ -- $ (790) $ 11,340 Obligations of states and political subdivisions 44,246 54 (6,132) 38,168 Mortgage-backed securities 37,403 52 (860) 36,595 Collateralized mortgage obligations 16,130 32 (562) 15,600 Corporate debt 3,107 -- (244) 2,863 ---------------------------------------------------- Total debt securities 113,016 138 (8,588) 104,566 Marketable equity securities 6,165 101 (140) 6,126 ---------------------------------------------------- Total available for sale $119,181 $239 $(8,728) $110,692 ====================================================
The amortized cost and estimated fair value of securities at December 31, 2000, by contractual maturity, follow. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Estimated Amortized Fair (Expressed in thousands) Cost Value ------------------------------- Due in one year or less $ 147 $ 147 Due after one year through five years 2,515 2,406 Due after five years through ten years 3,464 3,409 Due after ten years 46,006 43,782 Mortgage-backed securities 35,130 34,691 Collateralized mortgage obligations 21,166 21,101 Equity securities 4,203 4,148 ------------------------------ Total $112,631 $ 109,684 ==============================
Sales and write-downs of securities resulted in the following:
(Expressed in thousands) 2000 1999 1998 -------------------------------- Proceeds from sales $ 5,667 $73,846 $87,580 Gross gains 78 118 1,355 Gross losses (18) (992) (18) Realized losses on market declines (56) -- -- Losses on securities called -- (7) (1) Gains on securities called -- 1 1 Gross trading gains -- 69 101 Gross trading losses -- (79) (39)
Assets carried at $26,078,000 and $20,654,000 at December 31, 2000 and 1999, respectively, were pledged to secure United States Government and other public funds, and for other purposes as required or permitted by law. Certain other securities were pledged to secure Federal Home Loan Bank advances as disclosed below under the caption "Borrowings." 5. Loans and Allowance for Loan Losses Loans outstanding at December 31 are as follows:
(Expressed in thousands) 2000 1999 ------------------- Real estate-construction $ 12,856 $ 9,732 Real estate-mortgage 40,794 45,944 Real estate-secured by nonfarm, nonresidential property 22,738 17,478 Commercial, financial and agricultural 45,838 78,661 Obligations of political subdivisions in the U.S 2,951 3,181 Installment and credit card loans to individuals 4,699 10,138 ------------------- Loans receivable $129,876 $165,134 ===================
Mortgage loans serviced for others approximated $38,097,000 and $38,558,000, at December 31, 2000 and 1999, respectively. Non-accruing loans and leases amounted to $8,518,000 and $13,769,000 at December 31, 2000 and 1999, respectively. The after-tax effect of the interest that would have been accrued on these loans was $533,000 in 2000 and $992,000 in 1999. Loans past due 90 days and still accruing interest were $2,000 and $541,000 at year-end 2000 and 1999. F-8 Belmont Bancorp. and Subsidiaries Notes to the Consolidated Financial Statements For the Years Ended December 31, 2000, 1999 and 1998 ------------------------------------------------------------------------------- 5. Loans and Allowance for Loan Losses (continued) At December 31, impaired loans were as follows:
(Expressed in thousands) 2000 1999 ---------------------- Year-end loans with no allocated allowance for loan losses $ 2 $ 352 Year-end loans with allocated allowance for loan losses 9,020 13,930 ---------------------- Total $ 9,022 $ 14,282 Amount of the allowance for loan losses allocated $ 2,673 $ 5,157 Average impaired loans $ 11,545 $ 12,839 Interest income recognized during impairment -- -- Cash-basis interest income recognized -- --
Management believed there were no impaired loans during 1998. Activity in the allowance for loan losses is summarized as follows:
December 31 (Expressed in thousands) 2000 1999 1998 ------------------------------------- Balance at beginning of year $ 9,702 $ 5,475 $ 4,134 Additions charged to operating expense 242 15,877 12,882 Recoveries on loans previously charged-off 2,023 767 15 Loans charged-off (4,300) (12,417) (11,556) ------------------------------------- Balance at end of year $ 7,667 $ 9,702 $ 5,475 =====================================
The entire allowance represents a valuation reserve which is available for future charge-offs. 6. Premises and Equipment Premises and equipment are as follows:
Original December 31 Useful Life (Expressed in thousands) 2000 1999 Years -------------------------------------- Land and land improvements $ 1,189 $ 1,187 Buildings 5,864 5,855 30 - 50 Furniture, fixtures and equipment 6,436 6,260 5 - 12 Leasehold improvements 787 787 5 - 20 -------------------------------------- Total 14,276 14,089 Less accumulated depreciation and amortization 7,484 6,826 -------------------------------------- Premises and equipment, net $ 6,792 $ 7,263 ======================================
7. Deposits At December 31, 2000, the aggregate maturities of time deposits are summarized as follows: (Expressed in thousands) 2001 $ 72,513 2002 17,888 2003 5,260 2004 1,735 2005 6,107 Thereafter 10,067 -------- Total $113,570 ======== Time deposits include certificates of deposit issued in denominations of $100,000 or more which amounted to $17,378,000 at December 31, 2000, and $20,794,000 at December 31, 1999. A maturity distribution of time certificates of deposit of $100,000 or more follows:
(Expressed in thousands) 2000 1999 -------------------------------- Due in three months or less $ 4,397 $ 6,677 Due after three months through six months 4,592 6,135 Due after six months through twelve months 3,017 2,791 Due after one year through five years 3,597 2,127 Due after five years 1,775 3,064 ------------------------------ Total $17,378 $20,794 ==============================
8. Securities Sold Under Repurchase Agreements Securities sold under agreements to repurchase represent primarily overnight borrowings except for one agreement for $2,200,000 that matured in March 2000. For all repurchase agreements, the securities underlying the agreements were under the subsidiary bank's control. Information related to these borrowings is summarized below: (Expressed in thousands) 2000 1999 ------------------ Balance at year-end $1,204 $6,093 Average during the year $2,463 $5,877 Maximum month-end balance $4,308 $6,093 Weighted average rate during the year 5.38% 5.00% Weighted average rate at December 31 4.89% 4.77% F-9 Belmont Bancorp. and Subsidiaries Notes to the Consolidated Financial Statements For the Years Ended December 31, 2000, 1999 and 1998 ------------------------------------------------------------------------------- 9. Borrowings The Company uses both short and long-term borrowings to meet its liquidity and funding needs consisting primarily of federal funds purchased and advances from the Federal Home Loan Bank (FHLB). All FHLB advances, including short and long- term borrowings, are secured by collateral consisting of a blanket pledge of residential mortgage loans, securities, and shares of stock of the FHLB. The carrying value of residential mortgage loans available as collateral for FHLB advances was $22,206,000 and $34,613,000 at December 31, 2000 and 1999, respectively. The carrying value of FHLB stock and securities that secure the FHLB debt was $27,391,000 and $34,859,000 at December 31, 2000 and 1999, respectively. FHLB advances are made under agreements which allow for maximum borrowings of $40 million subject to collateral requirements. Advances can be made at fixed or variable rates of interest. Information related to these borrowings at December 31, 2000 and 1999, is summarized below. Short-term borrowings (Expressed in thousands) FHLB Advances 2000 1999 ------------- ------------------ Balance at year-end $ -- $19,740 Average balance during the year $ 6,421 $ 1,712 Maximum month-end balance $19,155 $19,740 Weighted average rate during the year 6.20% 5.41% Interest rate at December 31 N/A 5.24% Federal Funds Purchased 2000 1999 ----------------------- ------------------ Balance at year-end $ -- $ -- Average during the year $ 16 $ 693 Maximum month-end balance $ -- $ 4,200 Weighted average rate during the year 6.29% 5.15% Weighted average rate at December 31 N/A N/A Long-term borrowings Long term borrowings consist of two $10 million advances from the Federal Home Loan Bank of Cincinnati (the "FHLB") with initial fixed interest rates of 4.78% and 4.54% for three years. These advances have a ten year final maturity and are due in 2008. The FHLB has the option at the end of the first three year term and every quarter thereafter to convert the advances to a floating rate based on the 3 month LIBOR rate. If this option is exercised by the FHLB, the Bank may repay the advance without penalty in full or in part. During 1999, $60,000,000 of long term debt was paid off prior to the scheduled maturity date, and penalties of $342,000 were required to be paid. Scheduled principal payments on long-term debt in each of the five years subsequent to December 31, 2000, are as follows: (Expressed in thousands) 2001 $ 0 2002 0 2003 0 2004 0 2005 0 Thereafter 20,000 10. Income Tax The components of income taxes are as follows:
(Expressed in thousands) 2000 1999 1998 -------------------------- Current payable (refundable) $ -- $ (886) $(2,269) Deferred (680) (5,668) 83 Change in valuation allowance -- 1,000 -- -------------------------- Income tax (benefit) $(680) $(5,554) $(2,186) ==========================
The following temporary differences gave rise to the deferred tax asset at December 31, 2000 and 1999:
(Expressed in thousands) 2000 1999 ------------------ Deferred tax assets: Allowance for loan losses $ 1,264 $ 1,792 Interest on non-accrual loans 104 511 Deferred compensation liability for employees' future benefits 283 323 Intangible assets 368 422 Unrealized losses on investments 1,002 2,887 Other deferred tax assets 72 97 Net operating loss carryforward 4,857 3,179 Tax credit carryforwards 1,460 1,263 ----------------- Total deferred tax assets 9,410 10,474 Valuation allowance (1,000) (1,000) ----------------- Total deferred tax assets, net of valuation allowance 8,410 9,474 ----------------- Deferred tax liabilities: Federal Home Loan Bank stock dividends (546) (471) Other deferred tax liabilities (518) (452) ----------------- Total deferred tax liabilities (1,064) (923) ----------------- Net deferred tax asset $ 7,346 $ 8,551 =================
A reconciliation between the amount of reported income tax expense and the amount computed by applying the statutory federal income tax rate to income before income taxes is as follows:
2000 1999 1998 --------------------------------------------------------- (Expressed in thousands) Amount Percent Amount Percent Amount Percent --------------------------------------------------------- Tax at statutory rate $ 240 34.0 $(5,639) (34.0) $(1,396) (34.0) Tax exempt interest on investments and loans (684) (96.9) (794) (4.8) (450) (11.0) Tax credits (197) (27.9) (169) (1.0) (74) (1.8) Earnings on life insurance policies (79) (11.2) (24) -- (93) (2.3) Others - net 40 5.7 72 -- (173) (4.1) Change in valuation allowance -- -- 1,000 6.3 -- -- --------------------------------------------------------- Actual tax expense (benefit) $(680) (96.3) $(5,554) (33.5) $(2,186) (53.2) =========================================================
F-10 Belmont Bancorp. and Subsidiaries Notes to the Consolidated Financial Statements For the Years Ended December 31, 2000, 1999 and 1998 ------------------------------------------------------------------------------- 10. Income Tax (continued) During 1998 and 1999, the Company generated taxable losses aggregating approximately $22,063,000 which were carried back to prior years. The taxable income in all open taxable years has been eliminated and the remaining net operating loss of approximately $9,349,000 is being carried forward. The carryforward expires in 2019. During 2000, the Company generated additional taxable losses of $4,758,000 which can be carried forward through 2020. The Company also has a low income housing credit carryforward of $950,000 and an alternative minimum tax carryforward of $509,000. The low income housing credit expires $485,000 in 2017, $99,000 in 2018, $169,000 in 2019, and $197,000 in 2020. The alternative minimum tax credit can be carried forward indefinitely. A valuation allowance has been established reducing the Company's deferred tax asset to reflect management's estimate of that portion of the asset that may not be realized. Tax expense (benefit) related to securities gains and losses were $1,000, $(303,000) and $476,000 for 2000, 1999 and 1998, respectively. 11. Employee Benefit Plans The Company has a profit-sharing retirement plan which includes all full-time employees who have reached the age of twenty-one and have completed at least one year of service. Each participant can elect to contribute to the plan an amount not to exceed 10% of their salary. The plan provides for an employer matching contribution on the first 4% of the participant's elective contribution. In addition to the matching contribution, the plan provides for a discretionary contribution to be determined by the Bank's Board of Directors. Total profit-sharing expense for 2000, 1999, and 1998 was $52,000, $55,000, and $295,000, respectively. In addition to providing the profit-sharing plan, the Company sponsors two defined benefit post-retirement plans that cover both salaried and nonsalaried employees. Employees must be fifty-five years old and have ten years of service to qualify for the plans. One plan provides medical and dental benefits, and the other provides life insurance benefits. The post-retirement health care plan is contributory, with retiree contributions adjusted annually; the life insurance plan is noncontributory. The expense, liability, and contributions under the plans are not material in any period presented. 12. Leases The subsidiary bank utilized certain bank premises and equipment under long-term leases expiring at various dates. In certain cases, these leases contain renewal options and generally provide that the Company will pay for insurance, taxes and maintenance. As of December 31, 2000 the future minimum rental payments required under noncancelable operating leases with initial terms in excess of one year are as follows: (Expressed in thousands) Operating Leases ------------------------- Year ending December 31, 2001 $123 2002 124 2003 121 2004 70 2005 58 Thereafter 36 ---- Total minimum lease payments $532 ==== Rental expense under operating leases approximated $119,000 in 2000, $139,000 in 1999, and $139,000 in 1998. 13. Related Party Transactions Certain directors and executive officers and their associates were customers of, and had other transactions with, the subsidiary bank in the ordinary course of business in 2000 and 1999. The following is an analysis of loan activity to directors, executive officers, and their associates: (Expressed in thousands) 2000 1999 ------------------ Balance previously reported $ 5,459 $ 6,235 New loans during the year 34 877 ------------------ Total 5,493 7,112 Less repayments during the year (486) (1,575) Effect of changes in related parties (1,023) (78) ------------------ Balance, December 31 $ 3,984 $ 5,459 ================== Related party deposits totaled $2,018,000 and $579,000 at December 31, 2000 and 1999, respectively. F-11 Belmont Bancorp. and Subsidiaries Notes to the Consolidated Financial Statements For the Years Ended December 31, 2000, 1999 and 1998 ------------------------------------------------------------------------------- 14. Commitments and Contingencies The subsidiary bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. The following represents financial instruments whose contract amounts represent credit risk at December 31: Contract Amount ---------------- (Expressed in thousands) 2000 1999 ---------------- Commitments to extend credit $15,389 $16,444 Standby letters of credit 466 686 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the counter party. Collateral held varies, but may include accounts receivable, inventory, property, plant, and equipment, and income-producing properties. At December 31, 2000, $11,252,000 in commitments to extend credit were issued at an adjustable rate of interest; the remaining $4,137,000 in commitments were issued at fixed rates. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. Of the standby letters of credit, $406,000 expire in 2001, while the remaining $60,000 expire in 2002. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. 15. Concentrations of Credit Risk The subsidiary bank extends commercial, consumer, and real estate loans to customers primarily located in Belmont, Harrison, Jefferson, and Tuscarawas Counties in Ohio and Ohio and Marshall Counties in West Virginia. While the loan portfolios are diversified, the ability of the borrowers to meet their contractual obligations partially depends upon the general economic condition of Southeastern Ohio and the Northern Panhandle of West Virginia. The subsidiary bank measures concentration of credit based on categorizing loans by the Standard Industry Classification codes. Loans and commitments equal to or exceeding 25% of Tier 1 capital are considered concentrations of credit. At year end, the bank had concentrations of credit in the following industries: (Expressed in thousands) 2000 Loan balance and Percent of Industry available credit Tier 1 Capital ------------------------------------------------------------------------------- Amusement industry $ 6,864 35.8% Services-hotel/motel 5,549 29.0% (Expressed in thousands) 1999 ------------------------------------ Loan balance and Percent of Industry available credit Tier 1 Capital ------------------------------------------------------------------------------- Amusement industry $14,551 159.6% Commercial apartments and rentals 6,582 72.2% Commercial office buildings and rentals 5,466 60.0% Contracting-general building 5,324 58.4% Contractors-commercial construction 4,908 53.8% Services-hotel/motel 4,448 48.8% Miscellaneous fabricated metal products 3,695 40.5% Services-physicians 3,422 37.5% Bituminous coal mining 3,419 37.5% Services-car washes 3,200 35.1% Tire recycling 2,480 27.2% Retailers-fast food 2,396 26.3% 16. Limitations on Dividends The approval of the Comptroller of the Currency is required to pay dividends if the total of all dividends declared by a national bank in any calendar year exceeds the total of its retained net profits for the current year plus the two preceding years. Under this formula, the bank cannot declare dividends in 2001 without approval of the Comptroller of the Currency. The subsidiary bank is the primary source of funds to pay dividends to the shareholders of Belmont Bancorp. As discussed later, the Company is prohibited from paying dividends without regulatory approval. F-12 Belmont Bancorp. and Subsidiaries Notes to the Consolidated Financial Statements For the Years Ended December 31, 2000, 1999 and 1998 ------------------------------------------------------------------------------- 17. Other Operating Expenses Other operating expenses include the following: (Expressed in thousands) 2000 1999 1998 ----------------------- Taxes other than payroll and real estate $ 24 $ 254 $ 496 Supplies and printing 165 233 299 Insurance, including federal deposit insurance 774 169 127 Amortization of intangibles 10 439 196 Legal fees 1,153 1,671 52 Consulting expense 139 1,442 111 Examinations and audits 359 385 213 Prepayment penalties on Federal Home Loan Bank advances -- 342 -- Legal settlements 12 295 -- Other (individually less than 1% of total income) 1,464 1,797 1,612 ----------------------- Total $4,100 $7,027 $3,106 ======================= 18. Restrictions on Cash The subsidiary bank is required to maintain a reserve balance with the Federal Reserve Bank. The amounts of the reserve balance at December 31, 2000 and 1999, were $2,162,000 and $3,290,000, respectively. 19. Cash Flows Information The Company's policy is to include cash on hand and amounts due from banks in the definition of cash and cash equivalents. Cash payments for interest in 2000, 1999, and 1998 were $10,629,000, $15,758,000, and $16,316,000, respectively. Cash payments for income taxes for 2000, 1999, and 1998, were $0, $383,000, and $2,168,000, respectively. In 2000, the Company received a tax refund of $5,696,000. Non-cash transfers during 2000 involved the conversion of preferred stock to common stock for $1,650,000 and the transfer of loans to other real estate of $901,000. 20. Regulatory Matters The Company and Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company's and Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of the Company's and Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's and Bank's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk, weighting, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Under the Federal Deposit Insurance Corporation (FDIC) Improvement Act of 1991, the federal banking regulators are required to take prompt corrective action if an insured depository institution fails to satisfy certain minimum capital requirements. An institution that fails to meet the minimum level to be considered adequately capitalized (an "undercapitalized institution") may be: (i) subject to increased monitoring by the appropriate federal banking regulator; (ii) required to submit an acceptable capital restoration plan within 45 days; (iii) subject to asset growth limits; and (iv) required to obtain prior regulatory approval for acquisitions, branching and new lines of businesses. In addition, the federal banking regulators may impose discretionary actions including, but not limited to, requiring recapitalization, restricting transactions with affiliates, restricting asset growth and interest rates paid, and divestiture of the insured institution by any company having control of the institution. The capital restoration plan required in item (ii) above must include a guarantee by the institution's holding company that the institution will comply with the plan until it has been adequately capitalized on average for four consecutive quarters, under which the holding company would be liable up to the lesser of 5% of the institution's total assets or the amount necessary to bring the institution into capital compliance as of the date it failed to comply with its capital restoration plan. The capital ratios and the regulatory framework for adequately capitalized institutions are depicted as set forth in the following table: For Capital Actual Adequacy Purposes (1) (Expressed in thousands) Amount Ratio Amount Ratio --------------------------------------- As of December 31, 2000: Total risk based capital to risk weighted assets: Consolidated $23,327 13.9% $13,360 8.0% Bank 21,277 12.9% 13,196 8.0% Tier I capital to risk weighted assets: Consolidated 21,171 12.7% 6.680 4.0% Bank 19,146 11.6% 6,598 4.0% Tier I capital to average assets: Consolidated 21,171 7.8% 10,898 4.0% Bank 19,146 7.1% 10,820 4.0% (2) F-13 Belmont Bancorp. and Subsidiaries Notes to the Consolidated Financial Statements For the Years Ended December 31, 2000, 1999 and 1998 ------------------------------------------------------------------------------- 20. Regulatory Matters (continued) For Capital Actual Adequacy Purposes (1) (Expressed in thousands) Amount Ratio Amount Ratio --------------------------------------- As of December 31, 1999: Total risk based capital to risk weighted assets: Consolidated $14,090 6.9% $16,428 8.0% Bank 11,738 5.8% 16,220 8.0% Tier I capital to risk weighted assets: Consolidated 11,435 5.6% 8,214 4.0% Bank 9,115 4.5% 8,110 4.0% Tier I capital to average assets: Consolidated 11,435 3.5% 13,118 4.0% Bank 9,115 2.8% 13,012 4.0% (2) (1) These are also the standards to be "adequately capitalized" under Prompt Corrective Action Provisions. (2) The Consent Order requires a 6% Tier 1 leverage ratio. Consent Order: In August, 1999, the Bank received the written report of an examination of the Bank by the OCC, the Bank's principal federal regulatory agency. At the same time, the Bank entered into a consent order with the OCC relating to the results of the examination, which contains certain required actions and certain restrictions. The consent order requires the bank to formulate new plans, policies, procedures and programs relating to long-term strategy, organizational structure, management, loans, loan loss reserves, overdrafts, loan interest accrual and non-accrual loans, loan diversification, internal audit and periodic loan review by certain dates and then to implement and follow those plans, policies, and procedures and programs. The Bank is also required to review and evaluate certain groups of loans and correct deficiencies, and going forward to properly document commercial extensions of credit and comply with law and regulations relating to lending. In addition, the consent order mandates that the Bank must achieve and maintain a 6% Tier 1 leverage ratio. Through its recapitalization efforts, the Company and the Bank achieved the minimum Tier 1 leverage ratio mandated by the consent order by June 30, 2000. Under the terms of the consent order, the board of directors of the Bank is responsible for the proper and sound management of the Bank, must appoint a compliance committee from among their independent members, and report monthly to the OCC on progress in complying with the consent order. The board has appointed a compliance committee and has filed its monthly reports with the OCC. Federal Reserve Bank Agreement: In August 1999, the board of directors also entered into an agreement with the Federal Reserve Bank of Cleveland, under authority given it by the Board of Governors of the Federal Reserve System, the federal regulatory agency for the Company. As with the consent agreement of the OCC, the Federal Reserve agreement necessitates certain actions and restrictions. Without prior Federal Reserve approval, the agreement prohibits the Company from paying dividends, incurring debt, redeeming stock, receiving dividends from the Bank, imposing charges on the Bank, and engaging in any transaction with the bank in violation of federal law. To date, the Company has taken, and intends to continue to take, all appropriate steps to comply with the Federal Reserve requirements. Subsequent Notification: In February 2000, the Bank was notified by the OCC that its capital category at December 31, 1999 under Prompt Corrective Action regulations was significantly undercapitalized. As a result of its recapitalization efforts described in Note 3, the Bank was formally notified that it had achieved an adequately capitalized designation under Prompt Corrective Action regulations as of June 30, 2000 in a letter from the OCC dated July 27, 2000. There are no conditions or events since that notification that management believes has changed the Bank's capital category. 21. Fair Value of Financial Instruments Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlements of the instruments. Statement 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. The fair value of off-balance sheet instruments is not considered material. In addition, the value of long- term relationships with depositors and other customers is not reflected. The value of these items is significant. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The following methods and assumptions were used in estimating fair values of financial instruments as disclosed herein: Cash and Cash Equivalents: For those short-term instruments, the carrying amount is a reasonable estimate of fair value. F-14 Belmont Bancorp. and Subsidiaries Notes to the Consolidated Financial Statements For the Years Ended December 31, 2000, 1999 and 1998 ------------------------------------------------------------------------------- 21. Fair Value of Financial Instruments (continued) Securities: For debt securities and marketable equity securities, fair values are based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Loans: For certain homogeneous categories of loans, such as some residential mortgages, fair value is estimated using the quoted market prices for securities backed by similar loans. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The fair value of impaired loans was estimated at book value, net of related reserves. Deposit Liabilities: The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. Short-Term Borrowings: These liabilities represent primarily overnight borrowings and debt maturing within ninety days of issuance with interest rates adjusted daily or weekly. Accordingly, the carrying amount is a reasonable estimate of fair value. Long-Term Borrowings: The fair values of long-term borrowings are estimated using discounted cash flow analyses based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. The estimated fair values of the Company's financial instruments are as follows:
2000 1999 ---------------------------------------------------------- Carrying Estimated Carrying Estimated (Expressed in thousands) Amount Fair Value Amount Fair Value ------------------------------------------------------------ Financial assets: ----------------- Cash due from banks $ 11,270 $ 11,270 $ 15,439 $ 15,439 Federal funds sold 14,730 14,730 2,025 2,025 Securities available for sale 109,684 109,684 110,692 110,692 Loans, net 122,209 123,836 157,277 157,004 Accrued interest receivable 1,658 1,658 1,751 1,751 Financial liabilities: ---------------------- Deposits 231,686 226,514 255,432 257,184 Repurchase agreements 1,204 1,204 6,093 6,096 Accrued interest payable 820 820 747 747 Short-term borrowings -- -- 19,740 19,740 Long-term borrowings 20,000 19,780 20,000 19,445
22. Condensed Parent Company Financial Statements Presented below are the condensed balance sheets, statements of income, and statements of cash flows for Belmont Bancorp. Balance Sheets (Expressed in thousands) December 31, 2000 1999 ------------------------ Assets Cash $ 1,402 $ 1,141 Investment in subsidiaries (at equity in net assets) 23,418 8,950 Equity securities 400 473 Advances to subsidiaries 447 271 Prepaid expenses -- 509 Other assets 1,062 762 ------------------------ Total assets $ 26,729 $ 12,106 ======================== Liabilities Payable to subsidiary $ 560 $ 348 Deferred compensation 567 527 ------------------------ Total liabilities 1,127 875 Shareholders' Equity 25,602 11,231 ------------------------ Total liabilities and shareholder's equity $ 26,729 $ 12,106 ======================== Statements of Income 2000 1999 1998 ------------------------------- Operating income Dividends from subsidiaries $ -- $ 628 $ 3,921 Realized loss in market decline on equity securities (56) -- -- Other income 71 51 108 ------------------------------- Total income 15 679 4,029 Operating expenses 141 79 143 ------------------------------- Income (loss) before income tax and equity in undistributed income of subsidiaries (126) 600 3,886 Income tax (benefit) (43) (57) (41) Equity in undistributed income (loss) of subsidiaries 1,469 (11,688) (5,846) ------------------------------- Net income (loss) $ 1,386 $(11,031) $(1,919) =============================== F-15 Belmont Bancorp. and Subsidiaries Notes to the Consolidated Financial Statements For the Years Ended December 31, 2000, 1999 and 1998 ------------------------------------------------------------------------------- Statements of Cash Flows 2000 1999 1998 ----------------------------- Operating activities Net income (loss) $ 1,386 $(11,031) $(1,919) Adjustments to reconcile net income to net cash provided by operating activities: Realized loss in market decline on equity securities 56 -- -- Undistributed (earnings) loss of affiliates (1,469) 11,688 5,846 Changes in operating assets and liabilities: Prepaid expenses 508 (354) 92 Accrued expenses and dividends 40 33 94 Other (295) (88) (95) ----------------------------- Cash from operating activities 226 248 4,018 ----------------------------- Investing activities Payments from subsidiaries 212 1,083 -- Payments to subsidiaries (175) (149) (274) Additional investment in subsidiary (9,329) (1,650) -- Investment purchases -- -- (446) ----------------------------- Cash from investing activities (9,292) (716) (720) ----------------------------- Financing activities Issuance of preferred stock -- 1,650 -- Issuance of common stock 9,327 -- -- Purchase of treasury stock -- -- (1,308) Issuance of treasury stock -- 280 112 Dividends -- (628) (2,022) ----------------------------- Cash from financing activities 9,327 1,302 (3,218) ----------------------------- Increase (decrease) in cash & cash equivalents 261 834 80 Cash and cash equivalents at beginning of year 1,141 307 227 ----------------------------- Cash and cash equivalents at end of year $ 1,402 $ 1,141 $ 307 ============================= 23. Comprehensive Income The components of other comprehensive income were as follows: (Expressed in thousands) 2000 1999 1998 ------------------------------ Unrealized holding gains/losses arising during the period $ 5,546 $ (7,776) $ (780) Adoption of SFAS No. 133 -- 224 -- Reclassification adjustment (4) 880 (1,338) ------------------------------ Net gains/losses arising during the period 5,542 (6,672) (2,118) Tax effect (1,884) 2,268 720 ------------------------------ Other comprehensive income (loss) $ 3,658 $ (4,404) $(1,398) ============================== 24. Litigation The Company and its subsidiaries have been named as defendants in legal actions. Management believes, based on the advice of counsel, that no accrual for loss is necessary. The Company is a defendant in a suit for damages brought in the Court of Common Pleas for Belmont County, Ohio in April 1999 by George Michael Riley and others against the Bank and certain former officers, among others, alleging torts to have occurred in connection with the Bank's denial of a loan to a third party to finance the sale of a business owned by plaintiffs. In another case filed in the same Court in May 1999, Charles J. and Rebecca McKeegan, the beneficial owners of the potential purchaser of the business in the same transaction claim damages in excess of $500,000 based upon alleged tortuous conduct as to them by defendants. In both cases it is claimed that a former loan officer of the Bank later purchased the business at a lower price with financial assistance from the Bank's former chief operating officer. Based on the advice of counsel, the Company believes its exposure to liability, if any, is minimal in each case. In August 1999, the Company's directors unanimously approved and entered into a consent order with the Office of the Comptroller of the Currency and entered into a written agreement with the Federal Reserve Bank of Cleveland under which the Company and the Bank agreed to meet specified conditions relating to its future operations and capital requirements. The consent order requires the Bank to, among other things, formulate new plans, policies, procedures and programs relating to long-term strategy, organizational structure, management, loans, loan loss reserves, overdrafts, loan interest accrual and non-accrual loans, loan diversification, internal audit and periodic loan review by certain dates. Management believes that it has satisfied or is in the process of satisfying all of the conditions of the order. In August 1999, the Company also entered into an agreement with the Federal Reserve Bank of Cleveland, under authority given it by the Board of Governors of the Federal Reserve System, the federal regulatory agency for Belmont. As with the consent order of the Comptroller of the Currency, the Federal Reserve Bank agreement necessitates certain actions and restrictions. Without prior Federal Reserve Bank approval, the agreement prohibits the Company from paying dividends, incurring debt, redeeming stock, receiving dividends from the Bank, imposing charges on the Bank, and engaging in any transaction with the Bank in violation of federal law. The Company is required to report quarterly on progress in complying with the Federal Reserve Bank agreement. Management believes that it has satisfied or is in the process of satisfying all of the terms of the agreement. F-16 Belmont Bancorp. and Subsidiaries Notes to the Consolidated Financial Statements For the Years Ended December 31, 2000, 1999 and 1998 ------------------------------------------------------------------------------- 24. Litigation (continued) In August 1999, the Bank was named as a defendant in a lawsuit filed in the Belmont County Common Pleas Court by Joseph C. Heinlein, Jr. against his former secretary, the Bank, other financial institutions and individuals with whom the secretary did business. The complaint alleges that the secretary embezzled funds from the plaintiff's account over a period of several years by forging his signature to checks and alleges negligence on the part of the Bank for honoring such checks. The complaint has been amended to claim damages of $1,250,000. This secretary has entered into a pleas agreement under which she has paid $500,000 in restitution and received a prison sentence. The Bank believes that it has valid defenses against the claim and intends to defend it vigorously. The Bank has also filed cross-claims against the secretary and a third party it believes benefited from the misappropriation of funds. In addition, the Company believes that any liability on the Bank's part would be covered under its insurance policy. However, the insurance carrier, Progressive Casualty Insurance Company, has filed a declaratory judgment and interpleader action raising issues of coverage and indemnification on this claim, as more fully discussed below. In October 1999, the Company filed suit in the Court of Common Pleas of Tuscarawas County, Ohio, alleging that it had been the victim of an "elaborate fraud" that has resulted in more than $15 million in losses to the Bank. Following an extensive internal review of its loan portfolio, the Bank filed claims against Steven D. Schwartz, President of Schwartz Homes, Inc., the now- closed New Philadelphia retailer of manufactured homes. At the same time, the Bank filed claims against three additional people: Linda Reese, Schwartz Homes' Chief Financial Officer; William Wallace, the Bank's former Executive Vice- President and Chief Operating Officer; and Christine Wallace, his wife. In addition, as more fully discussed below, because of Mr. Wallace's alleged conduct as a bank officer and director, the Bank is seeking to recover from its indemnity bond insurance carrier, Progressive Casualty Insurance Company, the full amount of its bond. The Wallaces have filed counterclaims in an indeterminate amount upon various bases, including invasion of privacy, defamation and failure to distribute moneys allegedly due them under a deferred and certain other compensation plans. Steven Schwartz also requested leave to file counterclaims. The case has been scheduled for trial in May 2001. The Company intends to vigorously prosecute its case and defend against these claims. In October 1999, James John Fleagane, a shareholder of the Company, filed an action against the Company, the Bank and certain of the Company's and the Bank's current and former officers and directors in the Circuit Court of Ohio County, West Virginia. The plaintiff alleges, among other things, that the Bank and its directors and officers negligently transacted and administered various loans with respect to Schwartz Homes, Inc. and customers of Schwartz. The plaintiff seeks damages for the loss in value of his stock and other compensatory and punitive damages in an unspecified amount and requests class action certification for the common shareholders of the Company. The court denied the Company's motion to dismiss this case in July 2000. In August 2000, the plaintiff filed an amended complaint, as to which the Company has filed an answer, affirmative defenses and cross-claims against the Company's former accountants, S.R. Snodgrass, A.C. and a principal thereof, and against J. Vincent Ciroli, Jr., formerly the Company's President and Chief Executive Officer. In February 2000, the court granted leave to the plaintiff to file a second amended complaint. The second amended complaint eliminates the direct claims against the Company and the Bank and the request for class action certification. Accordingly, as amended, this action constitutes a derivative suit against current and former officers and directors of the Company and the Bank, which is being defended by the Company and the Bank on their behalf. The parties are currently in the discovery phase of this case. The Company intends to vigorously defend this action. Progressive Casualty Insurance Company sold to the Company a directors and officers liability policy providing for $3 million of coverage and a separate financial institution fidelity bond in the face amount of $4.75 million. In May 1999, the Company filed a claim under the fidelity bond policy to recover the losses incurred in connection with the Schwartz Homes loan relationship. The Company has also claimed coverage under the directors and officers liability policy. Progressive declined to honor these claims and, in December 1999, filed an action in the United States District Court for the Southern District of Ohio, Eastern Division asking the court to issue a declaratory judgment declaring that Progressive is not liable under either the directors and officers liability policy or the fidelity bond policy. In September 2000, the court granted the Company's motion to dismiss the declaratory judgment action. Progressive had also asked this court, if Progressive is found to be liable under these policies, to determine whether the Bank or other parties who have sued the Bank in separate actions are entitled to the insurance proceeds. Progressive has deposited with the court bonds in the aggregate amount of $7.75 million, which amount Progressive believes is sufficient to satisfy any liabilities under the policies in respect of this interpleader claim. This interpleader claim remains before the court. The Company intends to vigorously seek recoveries under the insurance policies sold to the Company by Progressive. F-17 Belmont Bancorp. and Subsidiaries Notes to the Consolidated Financial Statements For the Years Ended December 31, 2000, 1999 and 1998 ------------------------------------------------------------------------------- 24. Litigation (continued) The Company is a defendant in litigation brought in October 1999 by Beall Homes, Inc., John B. Beall, and Peggy F. Beall in the Court of Common Pleas, Belmont County, Ohio. Plaintiffs seek a declaratory judgment that certain warrants of attorney which appear on promissory notes evidencing loans between the Bank and Beall Homes, Inc. (and guaranteed by John B. Beall and Peggy F. Beall) are invalid. Plaintiffs assert claims of breach of a duty of good faith in connection with the Bank's grant of three loans to Beall Homes, fraud and breach of fiduciary duty allegedly through floor plan financing, dominating and controlling plaintiff's business, wrongful set-off and conversion of the Beall Homes account, wrongful dishonor of certain customer checks of plaintiff, wrongful set-off and conversion of the mortgage account of John B. Beall, and intentional infliction of emotional distress. Plaintiffs seek compensatory and punitive damages in an amount in excess of $25,000 and a declaration that they are not in default of any of their loans, that the warrants of attorney are invalid, that the Bank is required to provide plaintiffs with an accounting of the manner in which payments made by plaintiffs have been applied by the Bank, and other relief. The Bank has filed a counterclaim for monetary damages and foreclosure of collateral securing indebtedness in the amount of $765,000 and has filed a petition for involuntary bankruptcy against Beall Homes. In February 2001, the bankruptcy court lifted the stay it had placed on the Bank's counterclaims against Beall Homes, thereby permitting the proceeding in the Court of Common Pleas, Belmont County, Ohio to continue. The Bank intends to vigorously defend this action and prosecute its own claims. In September 1999, the Bank filed a lawsuit against Otterbacher Manufacturing, Inc. ("Manufacturing") and Gary and Karen Otterbacher regarding default by Manufacturing on a loan guaranteed by the Otterbachers. The Otterbachers filed a counterclaim against the Bank for lender liability claims relating to the Bank's declaration of default by Manufacturing and the Bank's refusal to extend additional or renew existing credit to Manufacturing. In January 2001, the Bank entered into a settlement agreement with the Otterbachers under which they agreed to pay $200,000 to the Bank, $100,000 of which was paid in January 2001, $60,000 of which is required to be paid in 2001 and the balance of which is required to be paid in five equal annual installments beginning in 2002. Under the terms of settlement, the Otterbachers agreed to dismiss all claims they had asserted against the Bank, including all lender liability claims. F-18 Belmont Bancorp. and Subsidiaries Management's Report ------------------------------------------------------------------------------- Management of Belmont Bancorp. is responsible for the accurate and objective preparation of the consolidated financial statements and the estimates and judgements upon which certain financial statements are based. Management is also responsible for preparing the other financial information included in this annual report. In our opinion, the financial statements on the preceding pages have been prepared in conformity with generally accepted accounting principles and other financial information in this annual report is consistent with the financial statements. Management is also responsible for establishing and maintaining an adequate internal control system which encompasses policies, procedures and controls directly related to, and designed to provide reasonable assurance as to the integrity and reliability of the financial reporting process and the financial statements generated therefrom. The concept of reasonable assurance is based on the recognition that there are inherent limitations in all systems of internal control, and that the cost of such systems should not exceed the benefits to be derived therefrom. The systems and controls and compliance therewith are reviewed by an extensive program of internal audits and by our independent auditors. Their activities are coordinated to obtain maximum audit coverage with a minimum of duplicate effort and cost. Management believes the system of internal control effectively meets its objectives of reliable financial reporting. The Board of Directors pursues its responsibility for the quality of the Company's financial reporting primarily through its Audit Committee which is comprised solely of outside directors. The Audit Committee meets regularly with management, personnel responsible for the contract internal audit function, and the independent auditors to ensure that each is meeting its responsibilities and to discuss matters concerning internal controls, accounting and financial reporting. The above parties have full and free access to the Audit Committee. /s/ W. Quay Mull, II /s/ W. R. Roat W. Quay Mull, II Wilbur R. Roat Chairman President and Belmont Bancorp. Chief Executive Officer Belmont National Bank Belmont Bancorp. Belmont National Bank /s/ Jane R. Marsh Jane R. Marsh Secretary, Belmont Bancorp. Senior Vice President, Controller and Cashier Belmont National Bank F-19 Belmont Bancorp. and Subsidiaries Opinion of Independent Certified Public Accountants ----------------------------------------------------------------------------- Board of Directors Belmont Bancorp. St. Clairsville, Ohio We have audited the accompanying consolidated statements of income, changes in shareholders' equity, and cash flows of Belmont Bancorp. for the year ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of Belmont Bancorp., for the year ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ S.R. Snodgrass A.C. S.R. Snodgrass A.C. Wheeling, West Virginia May 19, 1999 Independent Auditor's Report ------------------------------------------------------------------------------- To the Shareholders and Board of Directors of Belmont Bancorp. We have audited the accompanying consolidated balance sheets of Belmont Bancorp. and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. The financial statements of Belmont Bancorp. and subsidiaries for the year ended December 31, 1998 were audited by other auditors whose report dated May 19, 1999, expressed an unqualified opinion on those statements. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Belmont Bancorp. and subsidiaries at December 31, 2000 and 1999, and the results of its operations and its cash flows, for the years then ended in conformity with generally accepted accounting principles. /s/ Crowe, Chizek and Company LLP Crowe, Chizek and Company LLP Columbus, Ohio January 30, 2001 F-20 EXHIBIT INDEX Exhibit Number Description ------ ----------- 4.1 -- Charter (1) 4.2 -- Charter Amendment regarding Series A Preferred Stock (2) 4.3 -- Bylaws as currently in effect (1) 10.1 -- Employment Agreement dated December 15, 1999 between Wilbur R. Roat, Belmont Bancorp. and Belmont National Bank (3) 10.2 -- Belmont Bancorp. 2001 Stock Option Plan (4) 21.1 -- List of Subsidiaries (4) 23.1 -- Consent of Crowe, Chizek and Company LLP (4) 23.2 -- Consent of S.R. Snodgrass A.C. (4) ______________________ (1) Filed as an exhibit to the Company's Registration Statement on Form S-2 filed with the Securities and Exchange Commission (Registration No. 333- 91035) on November 16, 1999 and incorporated herein by reference. (2) Filed as an exhibit to Amendment No. 1 to the Company's Registration Statement on Form S-2 filed with the Securities and Exchange Commission (Registration No. 333-91035) on January 12, 2000 and incorporated herein by reference. (3) Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1999 (Registration No. 0-12724) and incorporated herein by reference. (4) Filed herewith. E-1