-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OFJGYjSQa9RYC6V5SRUg0oREvR6KUj7vI6J/xq7duTHuqr0VEt8VzUyED/4hQedH HKa+5crkACOXmaNxYhAfKA== 0000950132-98-000316.txt : 19980401 0000950132-98-000316.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950132-98-000316 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST BELL BANCORP INC CENTRAL INDEX KEY: 0000932697 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 251752651 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 033-86160 FILM NUMBER: 98581030 BUSINESS ADDRESS: STREET 1: 532 LINCOLN AVE CITY: PITTSBURGH STATE: PA ZIP: 15202 BUSINESS PHONE: 4127342700 MAIL ADDRESS: STREET 1: 532 LINCOLN AVE CITY: PITTSBURGH STATE: PA ZIP: 15202 10-K405 1 FORM 10-K405 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K Annual report pursuant to Section 13 of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1997 Commission File No.: 0-25172 FIRST BELL BANCORP, INC. (exact name of registrant as specified in its charter) DELAWARE 25-1752651 (State or other jurisdiction of (I.R.S. Employer I.D. No.) incorporation or organization) Suite 1704, 300 Delaware Avenue, Wilmington, Delaware 19801 (Address of principal executive offices) Registrant's telephone number, including area code: (302) 427-7883 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 per share (Title of class) 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 . --------- --------- 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 the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant, i.e., persons other than directors and executive officers of the registrant is $117,867,206 and is based upon the last sales price as quoted on The Nasdaq Stock Market for March 2, 1998. As of March 2, 1998, the Registrant had 6,523,920 shares outstanding (excluding treasury shares). DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Stockholders for the year ended December 31, 1997 is incorporated by reference into Part II of this Form 10-K. Portions of the Proxy Statement for the 1998 Annual Meeting of Stockholders is incorporated by reference into Part III of this Form 10-K. INDEX PART I PAGE ---- Item 1. Business........................................... 1 Item 2. Properties......................................... 33 Item 3. Legal Proceedings.................................. 33 Item 4. Submission of Matters to a Vote of Security Holders 33 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................................ 34 Item 6. Selected Financial Data............................ 34 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 34 Item 7A. Quantitive and Qualitative Disclosure about Market Risk........................................ 34 Item 8. Financial Statements and Supplementary Data........ 34 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............. 34 PART III Item 10. Directors and Executive Officers of the Registrant. 35 Item 11. Executive Compensation............................. 35 Item 12. Security Ownership of Certain Beneficial Owners and Management..................................... 35 Item 13. Certain Relationships and Related Transactions..... 35 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................................ 36 SIGNATURES..................................................... 38 PART I Item 1. Business General First Bell Bancorp, Inc. (the "Company") was organized by the Board of Directors of Bell Federal Savings and Loan Association of Bellevue (the "Association") for the purpose of acquiring all of the capital stock of the Association to be issued in connection with the Association's conversion from mutual to stock form, which was consummated on June 29, 1995, (the "Conversion"). At December 31, 1997, the Company had consolidated total assets of $675.7 million and total equity of $73.0 million. The Company was incorporated under Delaware law and is a savings and loan holding company subject to regulation by the Office of Thrift Supervision ("OTS"), the Federal Deposit Insurance Corporation ("FDIC") and the Securities and Exchange Commission ("SEC"). Currently, the Company does not transact any material business other than through its subsidiary, the Association. All references to the Company include the Association unless otherwise indicated, except that references to the Company prior to June 29, 1995 are to the Association. Bell Federal Savings and Loan Association of Bellevue was originally founded in 1891 as the Commercial Building and Loan Association, a state chartered building and loan association. In 1941, the Association converted to a federally chartered mutual savings and loan association and changed its name to First Federal Savings and Loan Association of Bellevue. The Association again changed its name in 1971 to Bell Federal Savings and Loan Association of Bellevue. The Association's deposits are insured up to applicable limits by the Savings Association Insurance Fund ("SAIF"). The Association's business is primarily conducted through six branch offices located throughout the suburban Pittsburgh, Pennsylvania area and its principal office in the borough of Bellevue. The Company's principal executive office is located at Suite 1704, 300 Delaware Avenue, Wilmington, Delaware 19801 and its executive office telephone number is (302) 427-7883. The principal business of the Company is to operate a traditional customer oriented savings and loan association. The Company attracts retail deposits from the general public and invests those funds primarily in fixed-rate, owner- occupied, single family conventional mortgage loans and, to a much lesser extent, residential construction loans, multi-family loans, and consumer loans. The Company's revenues are derived principally from interest on conventional mortgage loans, and, to a much lesser extent, interest and dividends on investment securities and short-term investments, and other fees and service charges. The Company's primary source of funds is deposits and borrowings from the Federal Home Loan Bank ("FHLB"). The Association is subject to extensive regulation, supervision and examination by the OTS, its primary regulator, and the FDIC, which insures its deposits. The Association is a member of the FHLB. Private Securities Litigation Reform Act Safe Harbor Statement In addition to historical information, this 10-K includes certain forward looking statements based on current management expectations. Examples of this forward looking information can be found in, but are not limited to, the allowance for losses discussion and certain sections of the 1997 Annual Report incorporated herein. The Company's actual results could differ materially from those management expectations. Factors that could cause future results to vary from current management expectations include, but are not limited to, general economic conditions, legislative and regulatory changes, monetary and fiscal policies of the federal government, changes in tax policies, rates and regulations of federal, state and local tax authorities, changes in interest rates, deposit flows, the cost of funds, demand for loan products, demand for financial services, competition, changes in the quality or composition of the Company's loan and investment portfolios, changes in accounting principles, policies or guidelines, and other economic, competitive, governmental and technological factors affecting the Company's operations, markets, products, services and prices. Market Area and Competition The Association has been, and continues to be, a community-oriented savings institution offering a variety of financial services to meet the needs of the communities it serves. Its primary market area is in the areas surrounding its offices, while its lending activities extend throughout Allegheny County and parts of Beaver, Butler, Washington and Westmoreland Counties, in Pennsylvania. In addition to its principal office in Bellevue, the Association operates six other retail offices, all of which are located in Allegheny County. The communities in Allegheny County are composed mostly of stable, residential neighborhoods of predominantly one-and two-family residences and middle-to-upper-income families. Management believes that, to a large degree, the economic vitality of these communities depends on the economic vitality of the City of Pittsburgh. The Greater Pittsburgh area has been in the process of restructuring over the past decade. Once centered on heavy manufacturing, primarily steel, its economic base is now more diverse, including technology, health and business services. Several "Fortune 500" industrial firms are headquartered in the Greater Pittsburgh area, including USX Corp. and Aluminum Company of America. The largest employers in Pittsburgh, by the number of local employees, include University of Pittsburgh Medical Center, USAirways, the University of Pittsburgh and Mellon Bank Corp. Seven colleges and universities are located in the Greater Pittsburgh area. The Association serves its market area with a wide selection of residential loans and other retail financial services. Management considers the Association's reputation for customer service as its major competitive advantage in attracting and retaining customers in its market area. The Association also believes it benefits from its community orientation, as well as its established deposit base and level of core deposits. 2 Lending Activities Loan and Mortgage-Backed Securities Portfolio Composition. The loan portfolio consists primarily of conventional mortgage loans secured by one- to four-family, owner-occupied residences, and, to a much lesser extent, residential construction loans, multi-family loans and consumer loans. Mortgage loans are originated to be held in the portfolio. At December 31, 1997, total loans receivable were $596.0 million, of which $568.4 million, or 95.4%, were conventional mortgage loans. Of the conventional mortgage loans outstanding at that date, 97.0% were fixed-rate loans. At December 31, 1997, the loan portfolio also included $25.6 million of residential construction loans; $860,000 of multi-family loans; $268,000 of residential second mortgage loans; and $907,000 of other consumer loans. The Association also offers FHA/VA qualifying one-to four-family residential mortgage loans. The types of loans originated are regulated by federal law and regulations. Interest rates charged on loans are affected principally by the demand for such loans and the supply of money available for lending purposes. These factors are, in turn, affected by general and economic conditions, monetary policies of the federal government, legislative and tax policies and governmental budgetary matters. 3 Set forth below is a table showing the loan origination, purchase and sales activity for the periods indicated.
For the Year Ended December 31, ------------------------------- 1997 1996 1995 ------------------------------- (In thousands) Loans receivable at beginning of period...... $547,210 $432,863 $322,914 -------- -------- -------- Additions: Originations of mortgages(1)(2)............ 129,043 168,915 112,264 Purchase of conventional mortgages......... -- -- 24,361 -------- -------- -------- 676,253 601,778 136,625 -------- -------- -------- Reductions: Transfer of mortgage loans to foreclosed real estate............................... 104 229 287 Repayments................................. 50,157 54,339 26,389 Loan sales................................. 29,989 -- -- -------- -------- -------- Total reductions........................... 80,250 54,568 26,676 -------- -------- -------- Total loans receivable at end of period.... $596,003 $547,210 $432,863 ======== ======== ======== Mortgage-backed securities at beginning of period................................... $ -- $ -- $ 4,870 Purchases.................................. 92,528 -- -- Sales...................................... 46,676 -- 3,990 Repayments................................. 14,000 -- 878 Premium amortization....................... 197 -- 2 Unrealized gain or loss.................... 230 -- -- -------- -------- -------- Mortgage-backed securities at end of period.. $ 31,885 $ -- $ -- ======== ======== ========
_______________________________ (1) Includes conventional mortgages and residential construction loans. (2) The Association originated no multi-family or second mortgage loans during the periods shown. 4 The following table sets forth the composition of the loan portfolio and mortgage-backed securities portfolio in dollar amounts and in percentages of the portfolio at the dates indicated.
At December 31, ------------------------------------------------------------------------------------------ 1997 1996 1995 1994 --------------------- --------------------- ---------------------- --------------------- Percent of Percent of Percent of Percent of Amount Total Amount Total Amount Total Amount Total -------- ---------- -------- ---------- -------- ---------- -------- ---------- (Dollars in thousands) Real estate loans: Conventional mortgages.............. $568,405 95.37% $524,867 95.92% $409,807 94.67% $304,760 94.38% Residential construction loans...... 25,563 4.29 19,877 3.63 19,692 4.55 14,090 4.36 Multi-family loans.................. 860 0.14 1,220 0.22 2,075 0.48 2,646 0.82 Second mortgage loans............... 268 0.05 297 0.06 330 0.08 354 0.11 -------- ------ -------- ------ -------- ------ -------- ------ Total real estate loans........... 595,096 99.85 546,261 99.83 431,904 99.78 321,850 99.67 Consumer loans: Loans on deposit accounts........... 899 0.15 938 0.17 937 0.22 1,018 0.32 Home improvement loans.............. 8 .-- 11 .-- 22 .-- 46 0.01 -------- ------ -------- ------ -------- ------ -------- ------ Total consumer loans.............. 907 0.15 949 0.17 959 0.22 1,064 0.33 -------- ------ -------- ------ -------- ------ -------- ------ Total loans receivable................ 596,003 100.00% 547,210 100.00% 432,863 100.00% 322,914 100.00% ====== ====== ====== ====== Less: Undisbursed portion of loans in process........................ 12,072 11,120 11,182 8,834 Deferred net loan origination fees.. 3,822 4,610 5,537 5,510 Allowance for loan losses........... 715 665 575 575 -------- -------- -------- -------- Loans receivable, net............. $579,394 $530,815 $415,569 $307,995 ======== ======== ======== ======== Mortgage-backed securities: GNMA................................ $ 26,958 84.55% $ -- .--% $ -- .--% $ 702 14.42% FHLMC............................... -- .-- -- .-- -- .-- 2,103 43.18 FNMA................................ 4,927 15.45 -- .-- -- .-- 2,065 42.40 Others.............................. -- .-- -- .-- -- .-- -- .-- -------- ------ -------- ------ -------- ----- -------- ------ Total mortgage-backed securities.. $ 31,885 100.00% $ -- .--% $ -- .--% $ 4,870 100.00% ======== ====== ======== ======= ======== ===== ======== ====== At December 31, --------------------- 1993 --------------------- Percent of Amount Total -------- ---------- (Dollars in thousands) Real estate loans: Conventional mortgages.............. $242,849 94.59% Residential construction loans...... 9,052 3.53 Multi-family loans.................. 3,497 1.38 Second mortgage loans............... 340 0.13 -------- ------ Total real estate loans........... 255,738 99.63 Consumer loans: Loans on deposit accounts........... 869 0.34 Home improvement loans.............. 79 0.03 -------- ------ Total consumer loans.............. 948 0.37 -------- ------ Total loans receivable................ 256,686 100.00% ====== Less: Undisbursed portion of loans in process........................ 4,251 Deferred net loan origination fees.. 4,393 Allowance for loan losses........... 598 -------- Loans receivable, net............. $247,444 ======== Mortgage-backed securities: GNMA................................ $ 868 13.14% FHLMC............................... 3,070 46.48 FNMA................................ 2,616 39.61 Others.............................. 51 0.77 -------- ------ Total mortgage-backed securities.. $ 6,605 100.00% ======== ======
5 Loan Maturity Schedule. The following table sets forth certain information at December 31, 1997 regarding the dollar amount of loans maturing in the portfolio based on their original contractual terms to maturity. The table does not include the effect of prepayments or scheduled principal amortization. Prepayments and scheduled principal amortization on loans totalled $50.2 million, $54.3 million and $26.4 million for the years ended December 31, 1997, 1996 and 1995, respectively.
At December 31, 1997 --------------------------------------------------------------------------------------------- More than More than More than More than More than Three Three Six Months One Year Three Years Five Years Months Months to to Twelve to Three to Five to Ten More than or Less Six Months Months Years Years Years Ten Years Total --------------------------------------------------------------------------------------------- (In Thousands) Interest-earning Assets: Real estate loans: One-to four-family adjustable- rate loans................... $ -- $ -- $ -- $ -- $ 42 $ 151 $ 17,017 $ 17,210 One-to four-family fixed-rate 172 -- 14 93 1,860 29,743 519,313 551,195 loans........................ Residential construction loans.. -- -- -- -- -- -- 25,563 25,563 Multi-family.................... 55 -- 19 63 95 354 274 860 Second mortgage loans........... 268 -- -- -- -- -- -- 268 ------- ---- ---- ----- ------- -------- --------- -------- Total real estate loans........ 495 -- 33 156 1,997 30,248 562,167 595,096 ======= ==== ==== ===== ======= ======== ========= ======== Consumer loans...................... 899 -- 2 6 -- -- -- 907 ------- ---- ---- ----- ------- -------- --------- -------- Total loans.................... $ 1,394 $ -- $ 35 $ 162 $ 1,997 $ 30,248 $ 562,167 $596,003 ======= ==== ==== ===== ======= ======== ========= ========
6 The following table sets forth the dollar amount of all loans at December 31, 1997 which have fixed or adjustable interest rates, and which are due after December 31, 1998.
Due After December 31, 1998 Fixed Adjustable Total --------- ---------- --------- (In thousands) Real estate loans: Conventional mortgages.... $551,009 $17,210 $568,219 Residential construction.. 23,628 1,935 25,563 Multi-family.............. 780 6 786 Consumer loans.............. 6 -- 6 -------- ------- -------- Total loans............ $575,423 $19,151 $594,574 ======== ======= ========
One-to Four-Family Residential Mortgage Lending. The residential mortgage loans are primarily secured by owner-occupied, one-to four-family, residences. Loan originations are generally obtained from existing or past customers, members of the local communities served, or referrals from local real estate agents, attorneys and builders. The Association primarily originates fixed-rate loans, but also offers adjustable-rate mortgage ("ARM") loans. At December 31, 1997, conventional mortgage loans totalled $568.4 million, or 95.4%, of total loans at such date. Of the Association's conventional mortgage loans secured by one-to four-family residences, $551.2 million, or 97.0%, were fixed-rate loans. Originated mortgage loans are held in the loan portfolio and are secured by properties located within the Association's primary market area. Historically, the market interest rates of mortgage loans in the Pittsburgh area have been below national averages. The mortgage loan portfolio has increased from $255.7 million at December 31, 1993 to $595.1 million at December 31, 1997. The Association from time to time purchases one-to four-family mortgage loans and loan participations. A number of these loans are secured by properties located outside the Association's market area, such as other regions of Pennsylvania, California, Illinois, Maryland, New York, Texas, Virginia, Utah, North Carolina, Tennessee and Georgia. The Association did not purchase any mortgage loans or participations in 1997. At December 31, 1997, the Association had $24.0 million in purchased mortgage loans and loan participations serviced by others, totalling 4.0% of the total loan portfolio at that date, primarily secured by one-to four-family residences. The Association intends to continue purchasing loans to supplement reduced loan demand as needed. Loans purchased by the Association generally must meet the same underwriting criteria as loans originated by the Association. 7 During 1997, the Association sold $30.0 million in conventional mortgages. Most of the loan portfolio is underwritten in conformity with Federal National Mortgage Association ("FNMA") secondary market requirements. Although the Association has been approved by the FNMA to sell loans in the secondary market, there is no assurance that the Association will be able to originate loans for sale in the secondary market or, that if originated, such loans will be sold in the secondary market in the future. Should the Association decide to sell mortgage loans in the future, the lower interest rates on such loans, characteristic of the Pittsburgh market, may tend to diminish the demand for such loans in the secondary market. With the exception of Community Reinvestment Act ("CRA") loans, the Association's maximum loan-to-value ratio on conventional mortgage loans is 80%. As a result, a majority of borrowers are previous homeowners, whom the Association believes to be relatively stable borrowers. The Association also offers FHA/VA qualifying one-to four-family residential mortgage loans. One-to four-family residential mortgage loans do not provide for negative amortization. Mortgage loans in the portfolio generally include due-on-sale clauses, which provide the Association with the contractual right to demand the loan immediately due and payable in the event that the borrower transfers ownership of the property that is subject to the mortgage. It is the Association's policy to enforce due-on-sale clauses. The residential mortgage loans originated are generally for terms to maturity from 15 to 30 years. At December 31, 1997, the maximum one-to four-family loan amount is $500,000, unless otherwise approved by the Board of Directors. Presently, four (4) ARM loans are offered; a one-year, three-year, five- year and 7/1 ARM loan. The one-year ARM loan has an interest rate that adjusts annually based on a spread of 2.50 percentage points above the rate on one-year United States Treasury securities. The one-year ARM loan is subject to a limitation on interest rate increases and decreases of 2.0% per year, a lifetime ceiling on interest rate increases of 6.0% above the origination rate, and a floor rate equal to the origination interest rate. This mortgage can convert to a fixed-rate loan at specified times during the first five years. The three- year ARM loan has an interest rate that adjusts every three years based on a spread of 2.75 percentage points above the rate on the three year United States Treasury securities. The three-year ARM is subject to a limitation on interest rate increases and decreases of 2% per change, a lifetime ceiling on the interest rate of 6.0% above the origination rate and a floor rate equal to the origination interest rate. The five-year ARM loan has an interest rate that adjusts every five years based on a spread of 2.75 percentage points above the rate on five-year United States Treasury securities. The five-year ARM loan is subject to a limitation on interest rate increases and decreases of 3.0% per change, a lifetime ceiling on the interest rate of 6.0% above the origination rate, and a floor rate equal to the origination interest rate. The 7/1 ARM loan has an interest rate that remains constant for the first seven years and then the interest rate adjusts annually based on a spread of 2.50 percentage points above the rate on one-year United States Treasury securities. After the initial seven years, this ARM loan is subject to a limitation on interest rate increases and decreases of 2.0% per year, a lifetime ceiling on interest rate increases of 6.0% above the origination rate, and a floor equal to the origination interest rate. The mortgage can convert to a fixed-rate loan at the first change date. 8 The volume and types of ARM loans originated are affected by such market factors as the level of interest rates, competition, consumer preferences and the availability of funds. In recent years, demand for ARM loans has been weak due to the low interest rate environment and consumer preference for fixed rate loans. In addition, management's strategy has been to emphasize fixed-rate loans. In 1997, only $7.4 million of the $129.0 million, or 5.7%, of loans originated were adjustable mortgages. Although ARM loans will continue to be offered, there can be no assurance that in the future ARM loans will be originated in sufficient volume to constitute a significant portion of the loan portfolio. In an effort to provide financing for low and moderate income home buyers, additional single family residential mortgage loans are offered to moderate income borrowers and residents of the CRA neighborhoods, with terms of up to 30 years. Such loans must be secured by a single family, owner-occupied unit. These loans are originated using modified underwriting guidelines with reduced down payments and expenses. Private mortgage insurance is normally required. Because the Association typically charges a lower rate of interest, lower mortgage origination fees and a discount on closing costs on its CRA loans, a lower rate of return is expected on such loans, as compared to other residential mortgage loans. For the years ended December 31, 1997, 1996 and 1995, the Association originated 24, 24 and 71 loans under the CRA loan program, respectively, totalling $1.2 million, $1.1 million and $2.9 million, respectively. Residential Construction Loans. The Association originates loans for the construction of one-to four-family residential properties. Such loans are made on contract directly to the home buyer. Residential construction loans are subject to the same maximum loan amounts as conventional mortgage loans. Residential construction loans are made for terms of up to one year, at which time the loans convert to permanent conventional mortgage financing. Residential construction loans are generally offered at the Association's prevailing interest rate. An additional fee may be charged for construction servicing. Advances are made to builders as phases of construction of the property are completed. As of December 31, 1997, the Association's residential construction loans totalled $25.6 million, or 4.3% of the total loan portfolio. Of these construction loans, $12.1 million had been committed, but were undisbursed as of that date. Construction lending involves greater risks than other loans due the fact that loan funds are advanced upon the security of the project under construction, predicated on the future value of the property upon completion of construction. Moreover, because of the uncertainties inherent in estimating construction costs, delays resulting from labor problems, material shortages or weather conditions and other unpredictable contingencies, it is relatively difficult to evaluate accurately the total funds required to complete a project and to establish the related loan-to-value ratio. Because of these factors, the analysis of prospective construction loan projects requires an expertise that is different in significant respects from that which is required for residential mortgage lending. 9 Multi-Family Loans. In prior years, the Association also originated multi- family loans. As of December 31, 1997, the Association's total loan portfolio contained 21 multi-family loans, totalling $860,000, or 0.1%, of total loans. Since 1991, the Association has not originated any multi-family mortgage loans. In the future, the Association may originate a limited number of multi-family loans on a case-by-case basis. The multi-family loans in the Association's portfolio consist of both fixed-rate and adjustable-rate loans which were originated at prevailing market rates. The Association's policy has been to originate multi-family loans only in its market area. In making multi-family loans, the Association considers primarily the ability of net operating income generated by the real estate to support the debt service, the financial resources and income level and managerial expertise of the borrower, the marketability of the property, and the Association's lending experience with the borrower. Second Mortgage Loans. The Association has in the past originated second mortgage loans on owner-occupied, one-to four-family residences where the Association holds the first mortgage. These loans generally are originated as adjustable-rate loans with terms of up to 10 years. The Association offers second mortgage loans with maximum combined loan-to-value ratios of up to 80%. At December 31, 1997, the Association had $268,000, or 0.1% of total loans, in second mortgage loans. Consumer Loans. The Association also offers secured consumer loans. At December 31, 1997, the Association's consumer loans totalled $907,000, or 0.2% of the Association's total loan portfolio. Of that amount, loans secured by deposit accounts totalled $899,000, or 99.1%, and home improvement loans totalled $8,000, or 0.9%, of total consumer loans. Loan Servicing and Loan Fees. Servicing on all of the loans that have been sold has been retained. Fees are received for these servicing activities, which include collecting and remitting loan payments, inspecting the properties and making certain insurance and tax payments on behalf of the borrowers. At December 31, 1997, the Association was servicing $31.4 million of loans for others. Loan servicing income was $37,000, $14,000 and $17,000 for the years ended December 31, 1997, 1996 and 1995, respectively. The Association receives income in the form of service charges and other fees on loans. For the years ended December 31, 1997, 1996 and 1995, the Association earned $214,000, $192,000 and $154,000, respectively, in service charges and other fees. Mortgage-backed Securities. In 1997, the Association purchased $92.5 million adjustable mortgage-backed securities. These securities were classified as available-for-sale. Subsequently, the Association sold $46.7 million of the securities. At December 31, 1997, mortgage-backed securities totaled $31.9 million. The Association had no mortgage-backed securities during 1996. During 1995, the Association reclassified all of its mortgage-backed securities as available-for-sale and subsequently sold them at a gain of $68,000. The sale was the result of the Financial Accounting Standard Board giving a one time exclusion to companies under the 10 Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Debt and Equity Securities." This exclusion allowed companies to reclassify their portfolio into the three different categories: trading, available-for-sale, or held-to-maturity without affecting the remaining portfolio. The Association may invest in mortgage-backed securities in the future to offset any significant decrease in demand for one- to four-family loans. Loan Approval Procedures and Authority. Loan approval authority has been granted by the Board of Directors to the Association's Loan Committee. All mortgage loans must be approved by the Loan Committee. As of December 31, 1997, any loan application over $500,000 must be approved by the Board of Directors. Upon receipt of a completed loan application from a prospective borrower, the Association generally orders a credit report, verifies employment, income and other information, and, if necessary, obtains additional financial or credit related information. An appraisal of the real estate used for collateral is also obtained. All appraisals are performed by licensed or certified third party appraisers. The Board of Directors annually approves the independent appraisers used by the Association and reviews the Association's appraisal policy. When the information is obtained and an appraisal is completed, loans are presented for approval to the Association's Loan Committee. The Loan Committee must approve all one-to four-family mortgage loans originated by the Association. The Association's policy is to require either title insurance or an attorney's opinion of title, and hazard insurance on all real estate loans. Borrowers are required to advance funds together with each payment of principal and interest to a mortgage escrow account from which the Association makes disbursements for items such as real estate taxes, hazard insurance premiums and private mortgage insurance premiums, if required. Asset Quality Loan Collection. When a borrower fails to make a required payment on a loan, the Association takes a number of steps to induce the borrower to cure the delinquency and restore the loan to a current status. The borrower is sent a written notice of non-payment when the loan is 15 days past due. In the event payment is not then received, additional letters and phone calls generally are made. If the loan is still not brought current and it becomes necessary to take legal action, which typically occurs after a loan is delinquent 120 days or more, the Association may commence foreclosure proceedings against the real property that secures the loan. Decisions as to when to commence foreclosure actions are made on a case by case basis. If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced within 30 days of delivery of the notice of default and intent to foreclose, the real property securing the loan is generally sold at foreclosure or by the Association as soon thereafter as practicable. 11 On purchased mortgage loans or loan participations, monthly reports are received from loan servicers in order to monitor the loan portfolio. Based upon servicing agreements with the servicers of the loans, the Association relies upon the servicer to contact delinquent borrowers, collect delinquent amounts and to initiate foreclosure proceedings, when necessary, all in accordance with applicable laws, regulations and the terms of the servicing agreements between the Association and its servicing agents. 12 Delinquent Loans. At December 31, 1997, 1996 and 1995, delinquencies in the loan portfolio were as follows:
At December 31, 1997 At December 31, 1996 ------------------------------------------------------------------------------------------------- 60 - 89 Days 90 Days or More 60 - 89 Days 90 Days or More ---------------------- ----------------------- ----------------------------------------------- Principal Number Principal Principal Principal Number of Balance of of Balance of Number Balance of Number of Balance of Loans Loans Loans Loans of Loans Loans Loans Loans --------- ----------- ----------- ---------- --------- ----------- ---------- ----------- (Dollars in thousands) (Dollars in thousands) Conventional mortgage loans.. 8 $ 436 13 $ 634 4 $ 258 8 $ 400 Multi-family loans........... -- -- -- -- -- -- -- -- Consumer loans............... -- -- -- -- -- -- -- -- --------- ----- --------- ----- --------- ----------- ---------- ---------- Total loans............. 8 $ 436 13 $ 634 4 $ 258 8 $ 400 ========= ===== ========= ===== ========= =========== ========== ========== Delinquent to total loans.... 0.07% 0.11% 0.05% 0.08% ===== ===== =========== ==========
At December 31, 1995 -------------------------------------------------------------------- 60 - 89 Days 90 Days or More ---------------------------- ---------------------------- Principal Principal Number of Balance of Number of Balance of Loans Loans Loans Loans ----------- ----------- ----------- ----------- (Dollars in thousands) Conventional mortgage loans.. 2 $ 54 7 $ 333 Multi-family loans........... -- -- -- -- Consumer loans............... -- -- -- -- ----- ------- ---- ------ Total loans............. 2 $ 54 7 $ 333 ===== ======= ==== ====== Delinquent loans to total loans 0.01% 0.08% ======= ======
13 Non-Performing Loans and Real Estate Owned. The following table sets forth information regarding non-accrual mortgage and other loans and real estate owned ("REO"). Interest is not accrued on loans past due 90 days or more. The Association had no investments in real estate or in substance foreclosure at December 31, 1997. During the years ended December 31, 1997, 1996 and 1995, the amounts of interest income that would have been recorded on non-accrual loans, had they been current, totalled $29,000, $24,000 and $25,000, respectively. Interest income recorded on non-accrual loans was $36,000, $22,000 and $16,000 for each of the years ended December 31, 1997, 1996 and 1995, respectively.
At December 31, --------------------------------------- 1997 1996 1995 1994 1993 --------------------------------------- (Dollars in Thousands) Non-accrual delinquent mortgage loans........ $ 634 $ 400 $ 333 $ 726 $ 621 Non-accrual delinquent other loans........... -- -- -- 15 63 ----- ----- ----- ----- ----- Total non-performing loans................. 634 400 333 741 684 Real estate owned............................ -- 229 178 30 -- ----- ----- ----- ----- ----- Total non-performing assets............... $ 634 $ 629 $ 511 $ 771 $ 684 ===== ===== ===== ===== ===== Total non-performing loans to total loans.... 0.11% 0.08% 0.08% 0.23% 0.27% Total non-performing assets to total assets.. 0.09% 0.10% 0.10% 0.19% 0.18%
Classified Assets. Federal regulations and the Association's policy require the classification of loans and other assets, such as debt and equity securities considered to be of lesser quality, as "Substandard," "Doubtful" or "Loss" assets. An asset is considered "Substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Assets classified as "Doubtful" have all of the weaknesses inherent in those classified "Substandard," with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. At December 31, 1997, classified assets totalled $634,000, or 0.09% of total assets, and consisted of thirteen conventional mortgage loans classified as "Substandard". 14 Allowance for Loan Losses, Investments in Real Estate and Real Estate Owned. The allowance for loan losses is established and maintained through a provision for loan losses based on management's evaluation of the risk inherent in the loan portfolio and the condition of the local economy in the Company's market area. Such evaluation, which includes a review of all loans on which full collectibility is not reasonably assured, considers among other matters, the estimated fair value of the underlying collateral, economic and regulatory conditions, and other factors that warrant recognition of an adequate loan loss allowance. Management believes that the allowance for loan losses is adequate to cover losses inherent in the portfolio as of December 31, 1997. Although management believes it uses the best information available to make determinations with respect to the allowance for loan losses, future adjustments may be necessary if economic and other conditions differ substantially from the economic and other conditions in the assumptions used in making the initial determinations, such as a material increase in the balance of the loan portfolio. In addition, the OTS and FDIC, as an integral part of their examination process, periodically review the allowance for loan losses and real estate owned and investments in real estate valuations. Such agencies may require the recognition of additions to the allowance or additional write-downs based on their judgments about information available to them at the time of their examination. The OTS, in conjunction with the other federal banking agencies, adopted an interagency policy statement on the allowance for loan and lease losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines. Generally, the policy statement recommends that institutions have effective systems and controls to identify, monitor and address asset quality problems; that management analyze all significant factors that affect the collectibility of the portfolio in a reasonable manner; and that management establish acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. As a result of the declines in local and regional real estate market values and the significant losses experienced by many financial institutions, there has been a greater level of scrutiny by regulatory authorities of the loan portfolios of financial institutions undertaken as part of the examination of institutions by the OTS and the FDIC. While management believes that it has established an adequate allowance for loan losses, there can be no assurance that regulators, in reviewing the loan portfolio, will not request a material increase at that time in the allowance for loan losses, thereby negatively affecting the financial condition and earnings at such time. 15 The following table sets forth the allowance for loan losses at the dates indicated.
For the Years Ended December 31, ----------------------------------------- 1997 1996 1995 1994 1993 ----------------------------------------- (Dollars in thousands) Allowance for loan losses: Balance at beginning of period........... $ 665 $ 575 $ 575 $ 598 $ 602 Charge-offs: Conventional mortgages............... -- -- -- (23) (53) Residential construction............. -- -- -- -- -- Multi-family......................... -- -- -- -- (44) Consumer............................. -- -- -- -- -- ----- ----- ----- ------ ------ Total charge-offs.................. -- -- -- (23) (97) Total recoveries......................... 5 -- -- 4 -- Provision for (recovery of) loan losses............................... 45 90 -- (4) 93 ----- ----- ----- ------ ------ Balance at end of period(1).............. $ 715 $ 665 $ 575 $ 575 $ 598 ===== ===== ===== ====== ====== Ratio of net charge-offs during the period to average loans outstanding during the period........ --% --% .--% 0.01% 0.04% Ratio of allowance for loan losses to total loans at the end of the period........................... 0.12% 0.12% 0.13% 0.18% 0.23% Ratio of allowance for loan losses to non-performing assets at the end of the period............. 1.13x 1.06x 1.13x 74.58% 87.43%
_______________ (1) The total amount of the allowance for loan losses for each of the periods shown was allocated to mortgage loans. At the end of each reported period, mortgage loans represented in excess of 99.5% of total loans. Investment Activities As a member of the FHLB System, the Association is required to maintain liquid assets at minimum levels which vary from time to time. The Association increases or decreases its liquid investments depending on the availability of funds, the comparative yields on liquid investments in relation to the return on loans and in response to its interest rate risk management. To meet liquidity obligations, federally chartered savings institutions have authority to invest in various types of assets, including U.S. Treasury obligations, securities of various federal agencies, mortgage-backed and mortgage-related securities, certain certificates of deposit of insured banks and savings institutions, certain bankers acceptances, repurchase agreements, loans of federal funds and, subject to certain limits, corporate securities, 16 commercial paper and mutual funds. The Association's liquid investments primarily consist of federal funds sold, U.S. Government securities, federal agency securities and interest-bearing deposits. Historically, the Association has maintained its liquid assets at levels well above the minimum regulatory requirements. At December 31, 1997, $61.4 million, or 9.1%, of the Association's total assets were invested in liquid assets. The Company's Investment Committee, which is appointed by the Chief Executive Officer, formulates the investment policy of the Company. The Company's Investment Committee reports all purchases and sales of investments to the Board of Directors. The policy of the Association is to invest funds among various categories of investments and maturities to meet the day-to-day, cyclical and long-term changes in assets and liabilities. In establishing its investment strategies, the Company considers its cash position, the condition of its loans, the stability of deposits, its capital position, its interest rate risk and other factors. Investment Securities. OTS guidelines regarding investment portfolio policy and accounting require insured institutions to categorize securities and certain other assets as held for "investment," "sale," or "trading." The Association's investment policy provides for "held for investment" and "available for sale" portfolios. Although the Association's investment policy allows that some investments and loans will qualify to be held-to-maturity, the policy enables for the sale of investments in certain specific instances, such as when the quality of an asset deteriorates, or when regulatory changes require that an asset be disposed. At December 31, 1997, the Association had total investments of $31.0 million, of which $15.9 million was classified as available-for-sale and $15.0 million was classified as held to maturity. The $15.9 million investment classified as available-for-sale consisted of collateralized mortgage obligations ("CMO's"). The $15.0 million investment classified as held to maturity consisted of $10.0 million in U.S. government securities, which have maximum terms to maturity of up to seven years, and $5.0 million in FHLB stock. 17 The following table sets forth certain information regarding the carrying and market values of the portfolio of investment securities at the dates indicated:
At December 31, ------------------------------------------------------------- 1997 1996 1995 ----------------- ------------------- -------------------- Carrying Market Carrying Market Carrying Market Value Value Value Value Value Value -------- ------- -------- ------- ------- ------- (In thousands) Investment securities: U.S. Treasury securities............. $ 9,969 $10,485 $14,960 $15,384 $19,949 $20,927 Collateralized mortgage obligations.. 15,902 15,902 -- -- -- -- Other investments.................... 4 68 4 45 4 41 FHLB Stock........................... 5,148 5,148 3,999 3,999 3,009 3,009 ------- ------- ------- ------- ------- ------- Total investments.................. $31,023 $31,603 $18,963 $19,428 $22,962 $23,977 ======= ======= ======= ======= ======= =======
The following table sets forth the carrying values, market values and average yields for the Association's investment portfolio by maturity, call date or repricing date, whichever is first, at December 31, 1997.
One Year or Less One to Five Years Five to Ten Years Total Securities ------------------ ------------------ ------------------ -------------------------- Weighted Weighted Weighted Weighted Carrying Average Carrying Average Carrying Average Carrying Market Average Value Yield Value Yield Value Yield Value Value Yield -------- -------- -------- -------- -------- -------- -------- ------ -------- (Dollars in thousands) Investment Securities: U.S. Treasury securities... $ -- --% $4,993 6.97% $4,976 7.35% $9,969 $10,485 7.16%
18 Sources of Funds General. The lending and investment activities are predominantly funded by savings deposits, borrowings, interest and principal payments on loans and other investments and loan origination fees. Deposits. Deposits serve as the predominant source of funds. The Association offers interest rates on deposits that are usually among the highest rates offered in the Greater Pittsburgh market area to maintain a strong depositor base. Deposits consist of savings and club accounts, interest-bearing and non-interest-bearing demand deposit accounts, money market deposit accounts and certificates of deposit. The Association relies on its competitive pricing policies and customer service to maintain deposit growth. In addition, the Association has sought to increase its deposit base by emphasizing certificates of deposit with terms ranging from three months to 10 years. The Association's policy of offering aggressively priced deposit products has produced an overall increase in total deposits of 41.8%, from $349.0 million at December 31, 1993 to $495.1 million at December 31, 1997. The flow of deposits is influenced significantly by general economic conditions, changes in money market and prevailing interest rates and competition. The following table presents the deposit activity for the periods indicated.
For the Years Ended December 31, -------------------------------- 1997 1996 1995 ---------- -------- -------- (In thousands) Deposits.......................................... $720,943 $805,469 $730,809 Withdrawals....................................... 725,033 725,862 714,030 -------- -------- -------- Net increase (decrease) before interest credited.. (4,090) 79,607 16,779 Interest credited................................. 15,204 12,923 10,951 -------- -------- -------- Net increase in deposits.......................... $ 11,114 $ 92,530 $ 27,730 ======== ======== ========
The following table indicates the amount of the certificates of deposit of $100,000 or more by the time remaining until maturity as of December 31, 1997.
Amount --------------- (In thousands) Maturity Period: Three months or less........... $ 9,348 Over three through six months.. 5,391 Over six through 12 months..... 11,971 Over 12 months................. 11,118 ------- Total....................... $37,828 =======
19 The following table sets forth the distribution of the average deposit accounts and borrowings for the periods indicated and the weighted average nominal interest rates on each category of deposits presented.
Year Ended December 31, ---------------------------------------------------------------------------------------------------- 1997 1996 1995 ------------------------------ -------------------------------- --------------------------------- Weighted Weighted Weighted Average Average Average Average Nominal Average Nominal Average Nominal Balance Interest Rate Balance Interest Rate Balance Interest Rate -------- -------- -------- -------- -------- -------- -------- -------- -------- (Dollars in Thousands) Money market and NOW deposits.................. $ 46,798 $ 1,092 2.33% $ 42,088 $ 1,040 2.47% $ 40,388 $ 1,069 2.65% Savings deposits............ 78,400 2,288 2.92 81,715 2,314 2.83 85,020 2,371 2.79 Certificates of deposit..... 388,660 23,306 6.00 323,199 $18,504 5.73 256,350 14,992 5.85 Borrowings.................. 103,250 5,643 5.47 5,833 191 3.27 -- -- -- -------- ------- -------- ------- -------- ------- Total interest-bearing liabilities........... $617,108 $32,329 5.24% $452,825 $22,409 4.87% $381,758 $18,432 4.83% ======== ======= ======== ======= ======== =======
20 The following table presents the amount of certificate accounts outstanding based upon original contractual periods to maturity, at December 31, 1997, and based upon contracted rates, at December 31, 1996 and 1995.
Period to Maturity from December 31, 1997 At December 31, ----------------------------------------------------------------------------------------- Three Four Less One to Two to to to Five to Total Than One Two Three Four Five Ten December Year Years Years Years Years Years 31, 1997 1996 1995 ----------------------------------------------------------------------------------------- (In thousands) Certificate Accounts: 3.00% to 5.50%....... $41,292 $ 22,091 $ 3,853 $ 3,674 $ 2 $ 4,020 $ 74,932 $113,357 $118,737 5.501% to 6.00%...... 29,919 85,835 9,673 22,649 253 8,556 156,885 121,968 60,213 6.001% to 6.50%...... -- 51,708 16,178 26,234 213 21,158 115,491 98,368 60,420 6.501% to 7.50%...... -- -- -- 11,429 148 14,623 26,200 30,860 30,460 7.501% to 8.50%...... -- -- -- -- -- 2,855 2,855 3,630 5,259 8.501% to 9.50%...... -- -- -- -- -- 3,559 3,559 4,345 4,579 9.501% to 10.50%..... -- -- -- -- -- 282 282 266 573 ------- -------- ------- ------- ---- ------- -------- -------- -------- $71,211 $159,634 $29,704 $63,986 $616 $55,053 $380,204 $372,794 $280,241 ======= ======== ======= ======= ==== ======= ======== ======== ========
Borrowings Borrowings are used in conjunction with deposits in funding the operating and investment activity of the Association. At December 31, 1997, the Association had borrowings of $90.0 million. Of these borrowings, $70.0 million had a contractual maturity of five years at a rate of 5.46%. The remaining $20.0 million in borrowings had an overnight rate of 6.50%. The borrowings are secured by the assets of the Association. Subsidiary Activities The Association does not maintain any subsidiaries. REGULATION AND SUPERVISION General The Company, as a savings and loan holding company, is required to file certain reports with, and otherwise comply with the rules and regulations of the OTS under the Home Owners' Loan Act, as amended (the "HOLA"). In addition, the activities of savings institutions, such as the Association, are governed by the HOLA and the Federal Deposit Insurance Act ("FDI Act"). 21 The Association is subject to extensive regulation, examination and supervision by the OTS, as its primary federal regulator, and the FDIC, as the deposit insurer. The Association is a member of the FHLB System and its deposit accounts are insured up to applicable limits by the SAIF managed by the FDIC. The Association must file reports with the OTS and the FDIC concerning its activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of, other savings institutions. The OTS and/or the FDIC conduct periodic examinations to test the Association's safety and soundness and compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulatory requirements and policies, whether by the OTS, the FDIC or the United States Congress, could have a material adverse impact on the Company, the Association and their operations. Certain of the regulatory requirements applicable to the Association and to the Company are referred to below or elsewhere herein. The description of statutory provisions and regulations applicable to savings institutions and their holding companies set forth in this Form 10-K does not purport to be a complete description of such statutes and regulations and their effects on the Association and the Company. Holding Company Regulation The Company is a non-diversified unitary savings and loan holding company within the meaning of the HOLA. As a unitary savings and loan holding company, the Company generally is not restricted under existing laws as to the types of business activities in which it may engage, provided that the Association continues to be a qualified thrift lender ("QTL"). See "Federal Savings Institution Regulation - QTL Test." Upon any non-supervisory acquisition by the Company of another savings institution or savings bank that meets the QTL test and is deemed to be a savings institution by the OTS, the Company would become a multiple savings and loan holding company (if the acquired institution is held as a separate subsidiary) and would be subject to extensive limitations on the types of business activities in which it could engage. The HOLA limits the activities of a multiple savings and loan holding company and its non-insured institution subsidiaries primarily to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act ("BHC Act"), subject to the prior approval of the OTS, and certain activities authorized by OTS regulation. No multiple savings and loan holding company may acquire more than 5% of the voting stock of a company engaged in impermissible activities. The HOLA prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of the voting stock of another savings institution or holding company thereof, without prior written approval of the OTS or acquiring or retaining control of a depository institution that is not insured by the FDIC. In evaluating applications by holding companies to acquire savings institutions, the OTS must consider the financial and managerial resources and future prospects of the company and 22 institution involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community and competitive factors. The OTS is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions: (i) the approval of interstate supervisory acquisitions by savings and loan holding companies and (ii) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions. Although savings and loan holding companies are not subject to specific capital requirements or specific restrictions on the payment of dividends or other capital distributions, HOLA does prescribe such restrictions on subsidiary savings institutions as described below. The Association must notify the OTS 30 days before declaring any dividend to the Company. In addition, the financial impact of a holding company on its subsidiary institution is a matter that is evaluated by the OTS and the agency has authority to order cessation of activities or divestiture of subsidiaries deemed to pose a threat to the safety and soundness of the institution. Federal Savings Institution Regulation Capital Requirements. The OTS capital regulations require savings institutions to meet three minimum capital standards: a 1.5% tangible capital ratio, a 3% Tier I capital (to total assets) ratio and an 8% total capital (to risk-weighted assets) ratio. In addition, the prompt corrective action standards discussed below also establish, in effect, a minimum 2% tangible capital standard, a 4% leverage Tier I capital ratio (3% for institutions receiving the highest rating on the CAMELS financial institution rating system), and, together with the total capital standard itself, a 4% Tier I risk-based capital standard. Core capital is defined as common stockholders' equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus, and minority interests in equity accounts of consolidated subsidiaries less intangibles other than certain purchased mortgage servicing rights and credit card relationships. The OTS regulations also require that, in meeting the tangible, leverage (core) and total risk-based capital standards, institutions must generally deduct investments in and loans to subsidiaries engaged in activities not permissible for a national bank. The risk-based capital standard for savings institutions requires the maintenance of Tier I (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%, as assigned by the OTS capital regulation based on the risks OTS believes are inherent in the type of asset. The components of Tier I (core) capital are equivalent to those discussed earlier. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock and the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital. 23 The OTS regulatory capital requirements also incorporate an interest rate risk component. Savings institutions with "above normal" interest rate risk exposure are subject to a deduction from total capital for purposes of calculating their risk-based capital requirements. A savings institution's interest rate risk is measured by the decline in the net portfolio value of its assets (i.e., the difference between incoming and outgoing discounted cash flows from assets, liabilities and off-balance sheet contracts) that would result from a hypothetical 200 basis point increase or decrease in market interest rates divided by the estimated economic value of the institution's assets. In calculating its total capital under the risk-based capital rule, a savings institution whose measured interest rate risk exposure exceeds 2% must deduct an amount equal to one-half of the difference between the institution's measured interest rate risk and 2%, multiplied by the estimated economic value of the institution's assets. The Director of the OTS may waive or defer a savings institution's interest rate risk component on a case-by-case basis. A savings institution with assets of less than $300 million and risk-based capital ratios in excess of 12% is not subject to the interest rate risk component, unless the OTS determines otherwise. For the present time, the OTS has deferred implementation of the interest rate risk component. At December 31, 1997, the Association met each of its capital requirements and it is anticipated that the Association will not be subject to the interest rate risk component. The following table presents the Association's capital position at December 31, 1997 relative to fully phased-in regulatory requirements.
To Be Well Capitalized Under For Capital Prompt Adequacy Correction Action Actual Purposes Provisions ---------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio ------- ------ ------- ------ --------- ------- As of December 31, 1997 Total Capital (to risk-weighted assets)... $72,523 23.39% $24,810 8.00% $31,012 10.00% Tier I Capital (to risk-weighted assets).. 71,808 23.15% N/A N/A 18,607 6.00% Tier I Capital (to total assets).......... 71,808 10.59% 20,341 3.00% 33,902 5.00% Tangible Capital.......................... 71,808 10.59% 10,171 1.50% N/A N/A
Liquidation Account In accordance with OTS conversion regulations, a liquidation account was established in an amount equal to the retained earnings of the Association as of June 30, 1995, which approximated $37.4 million. In the unlikely event of liquidation of the Association, eligible account holders would be entitled to receive distributions of any assets remaining after payment of all creditors' claims, but before any distributions are made to the Association's stockholders, equal to their proportionate interests at that time in the liquidation account. Prompt Corrective Regulatory Action. Under the OTS prompt corrective action regulations, the OTS is required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution's degree of undercapitalization. Generally, a savings institution is considered "well capitalized" if its ratio of total capital to risk-weighted assets is at least 10%, its ratio of Tier I capital to risk-weighted assets is at least 6%, 24 its ratio of Tier I to total assets is at least 5%, and it is not subject to any order or directive by the OTS to meet a specific capital level. A savings institution generally is considered "adequately capitalized" if its ratio of total capital to risk-weighted assets is at least 8%, its ratio of Tier I (core) capital to risk-weighted assets is at least 4%, and its ratio of Tier 1 capital to total assets is at least 4% (3% if the institution receives the highest CAMELS rating). A savings institution that has a ratio of total capital to risk-weighted assets of less than 8%, a ratio of Tier I capital to risk-weighted assets of less than 4% or a ratio of Tier 1 capital to total assets of less than 4% (3% or less for institutions with the highest examination rating) is considered to be "undercapitalized." A savings institution that has a total capital ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio that is less than 3% is considered to be "significantly undercapitalized" and a savings institution that has a tangible capital to assets ratio less than 2% is deemed to be "critically undercapitalized." Subject to a narrow exception, the banking regulator is required to appoint a receiver or conservator for an institution that is "critically undercapitalized." The regulation also provides that a capital restoration plan must be filed with the OTS within 45 days of the date a savings institution receives notice that it is "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." Compliance with the plan must be guaranteed by any parent holding company. In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion. The OTS could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. Insurance of Deposit Accounts. Deposits of the Association are presently insured by the SAIF. On September 30, 1996, the President signed into law the Deposit Insurance Funds Act of 1996 (the "Funds Act") which, among other things, imposed a special one-time assessment on SAIF member institutions, including the Association, to recapitalize the SAIF. The SAIF was undercapitalized due primarily to a statutory requirement that SAIF members make payments on bonds issued in the last 1980's by the Financing Corporation ("FICO") to recapitalize the predecessor to the SAIF. As required by the Funds Act, the FDIC imposed a special assessment of 65.7 basis points on SAIF assessable deposits held as of March 31, 1995, payable November 27, 1996 (the "SAIF Special Assessment"). The SAIF Special Assessment was recognized by the Association as an expense in the quarter ended September 30, 1996 and was generally tax deductible. The SAIF Special Assessment recorded by the Association amounted to $2.5 million on a pre-tax basis and $1.5 million on an after-tax basis. The Funds Act also spread the obligations for payment of the FICO bonds across all SAIF and Bank Insurance Fund ("BIF") members. The BIF is the fund which primarily insures commercial bank deposits. Beginning on January 1, 1997, BIF deposits were assessed for a FICO payment of approximately 1.3 basis points, while SAIF deposits pay approximately 6.4 basis points. Full pro rate sharing of the FICO payments between BIF and SAIF members will occur on the earlier of January 1, 2000 or the date the BIF and SAIF are merged. The Funds Act specifies that the BIF and SAIF will be merged on January 1, 1999, provided no savings associations remain as of that time. 25 As a result of the Funds Act, the FDIC voted to effectively lower SAIF assessments to 0 to 27 basis points as of January 1, 1997, a range comparable to that of BIF members. SAIF members will also continue to make the FICO payments described above. Management cannot predict the level of FDIC insurance assessments on an on-going basis, whether the savings association charter will be eliminated or whether the BIF and SAIF will eventually be merged. The Association's assessment rate for fiscal 1997 was 6.5 basis points and the premium paid for this period was $261,000. A significant increase in SAIF insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Association. Under the FDI Act, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the OTS. The management of the Association does not know of any practice, condition or violation that might lead to termination of deposit insurance. Thrift Rechartering Legislation. The Funds Act provides that the BIF and SAIF will merge on January 1, 1999 if there are no more savings associations as of that date. Various proposals to eliminate the federal thrift charter, create a uniform financial institutions charter and abolish the OTS were introduced in Congress. Some bills would require federal savings institutions to convert to a national bank or some type of state charter by a specified date, or they would automatically become national banks. Under some proposals, converted federal thrifts would generally be required to conform their activities to those permitted for the charter selected and divestiture of nonconforming assets would be required over a two year period, subject to two possible one year extensions. State chartered thrifts would become subject to the same federal regulation as applies to state commercial banks. A more recent bill passed by the House Banking Committee would allow federal savings institutions to continue to exercise activities being conducted when they convert to a bank regardless of whether a national bank could engage in the activity. Holding companies for savings institutions would become subject to the same regulation as holding companies that control commercial banks, with some limited grandfathering, including savings and loan holding company activities. The grandfathering would be lost under certain circumstances such as a change in control of the Company. The Company is unable to predict whether such legislation would be enacted or the extent to which the legislation would restrict or disrupt its operations. Loans to One Borrower. Under the HOLA, savings institutions are generally subject to the limits on loans to one borrower applicable to national banks. Generally, savings institutions may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if such loan is secured by readily-marketable collateral, which is defined to include certain financial instruments and bullion. At December 31, 1997, the Association's limit on loans to one borrower was $5.8 million. At December 31, 1997, the Association's largest aggregate outstanding balance of loans to one borrower was $439,000. 26 QTL Test. The HOLA requires savings institutions to meet a QTL test. Under the QTL test, a savings and loan association is required to maintain at least 65% of its "portfolio assets" (total assets less: (i) specified liquid assets up to 20% of total assets; (ii) intangibles, including goodwill; and (iii) the value of property used to conduct business) in certain "qualified thrift investments" (primarily residential mortgages and related investments, including certain mortgage-backed securities) in at least 9 months out of each 12 month period. A savings institution that fails the QTL test is subject to certain operating restrictions and may be required to convert to a bank charter. As of December 31, 1997, the Association maintained 99.9% of its portfolio assets in qualified thrift investments and, therefore, met the QTL test. Limitation on Capital Distributions. OTS regulations impose limitations upon all capital distributions by savings institutions, such as cash dividends, payments to repurchase or otherwise acquire its shares, payments to shareholders of another institution in a cash-out merger and other distributions charged against capital. The rule establishes three tiers of institutions, which are based primarily on an institution's capital level. An institution that exceeds all fully phased-in capital requirements before and after a proposed capital distribution ("Tier 1 Association") and has not been advised by the OTS that it is in need of more than normal supervision, could, after prior notice but without obtaining approval of the OTS, make capital distributions during a calendar year equal to the greater of (i) 100% of its net earnings to date during the calendar year plus the amount that would reduce by one-half its "surplus capital ratio" (the excess capital over its fully phased-in capital requirements) at the beginning of the calendar year or (ii) 75% of its net income for the previous four quarters. Any additional capital distributions would require prior regulatory approval. In the event the Association's capital fell below its regulatory requirements or the OTS notified it that it was in need of more than normal supervision, the Association's ability to make capital distributions could be restricted. In addition, the OTS could prohibit a proposed capital distribution by any institution, which would otherwise be permitted by the regulation, if the OTS determines that such distribution would constitute an unsafe or unsound practice. In December 1994, the OTS proposed amendments to its capital distribution regulation that would generally authorize the payment of capital distributions without OTS approval provided that the payment does not cause the institution to be undercapitalized within the meaning of the prompt corrective action regulation. However, institutions in a holding company structure would still have a prior notice requirement. At December 31, 1997, the Association was a Tier 1 Association. Liquidity. The Association is required to maintain an average daily balance of specified liquid assets equal to a monthly average of not less than a specified percentage of its net withdrawable deposit accounts plus short-term borrowings. This liquidity requirement was 5% for fiscal 1997, but is subject to change from time to time by the OTS to any amount within the range of 4% to 10% depending upon economic conditions and the savings flows of member institutions. During 1997, OTS regulations also required each savings institution to maintain an average daily balance of short-term liquid assets of at least 1% of the total of its net withdrawable deposit accounts and borrowings payable in one year or less. Monetary penalties may be imposed for failure to meet these liquidity requirements. The OTS has recently lowered 27 the liquidity requirement from 5% to 4% and eliminated the 1% short term liquid asset requirement. The Association's liquidity ratio for December 31, 1997 was 19.1%, which exceeded the applicable requirements. The Association has never been subject to monetary penalties for failure to meet its liquidity requirements. Assessments. Savings institutions are required to pay assessments to the OTS to fund the agency's operations. The general assessments, paid on a semi- annual basis, are computed upon the savings institution's total assets, including consolidated subsidiaries, as reported in the Association's latest quarterly thrift financial report. The assessments paid by the Association for the fiscal year ended December 31, 1997 totalled $139,000. Branching. OTS regulations permit nationwide branching by federally chartered savings institutions to the extent allowed by federal statute. This permits federal savings institutions to establish interstate networks and to geographically diversify their loan portfolios and lines of business. The OTS authority preempts any state law purporting to regulate branching by federal savings institutions. Transactions with Related Parties. The Association's authority to engage in transactions with related parties or "affiliates" (e.g.., any company that controls or is under common control with an institution, including the Company and its non-savings institution subsidiaries) is limited by Sections 23A and 23B of the Federal Reserve Act ("FRA"). Section 23A limits the aggregate amount of covered transactions with any individual affiliate to 10% of the capital and surplus of the savings institution. The aggregate amount of covered transactions with all affiliates is limited to 20% of the savings institution's capital and surplus. Certain transactions with affiliates are required to be secured by collateral in an amount and of a type described in Section 23A and the purchase of low quality assets from affiliates is generally prohibited. Section 23B generally provides that certain transactions with affiliates, including loans and asset purchases, must be on terms and under circumstances, including credit standards, that are substantially the same or at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies. In addition, savings institutions are prohibited from lending to any affiliate that is engaged in activities that are not permissible for savings & loan holding companies and no savings institution may purchase the securities of any affiliate other than a subsidiary. The Association's authority to extend credit to executive officers, directors and 10% shareholders ("insiders"), as well as entities such persons control, is governed by Sections 22(g) and 22(h) of the FRA and Regulation O thereunder. Among other things, such loans are required to be made on terms substantially the same as those offered to unaffiliated individuals and to not involve more than the normal risk of repayment. Recent legislation created an exception for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to insiders over other employees. Regulation O also places individual and aggregate limits on the amount of loans the Association may make to insiders based, in part, on the Association's capital position and requires certain board approval procedures to be followed. 28 Enforcement. Under the FDI Act, the OTS has primary enforcement responsibility over savings institutions and has the authority to bring actions against the institution and all institution-affiliated parties, including stockholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors to institution of receivership, conservatorship or termination of deposit insurance. Civil penalties cover a wide range of violations and can amount to $25,000 per day, or even $1 million per day in especially egregious cases. Under the FDI Act, the FDIC has the authority to recommend to the Director of the OTS enforcement action to be taken with respect to a particular savings institution. If action is not taken by the Director, the FDIC has authority to take such action under certain circumstances. Federal law also establishes criminal penalties for certain violations. Standards for Safety and Soundness. The federal banking agencies have adopted Interagency Guidelines Prescribing Standards for Safety and Soundness ("Guidelines") and a final rule to implement safety and soundness standards required under the FDI Act. The Guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The standards set forth in the Guidelines address internal controls and information systems; internal audit system; credit underwriting; loan documentation; interest rate risk exposure; asset growth; asset quality, earnings and compensation, fees and benefits. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the Guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard, as required by the FDI Act. The final rule establishes deadlines for the submission and review of such safety and soundness compliance plans when such plans are required. Federal Reserve System The Federal Reserve Board regulations require savings institutions to maintain non-interest earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The Federal Reserve Board regulations generally required for most of 1997 that reserves be maintained against aggregate transaction accounts as follows: for accounts aggregating $49.3 million or less (subject to adjustment by the Federal Reserve Board) the reserve requirement was $1.48 million plus 10% (subject to adjustment by the Federal Reserve Board between 8% and 14%) against that portion of total transaction accounts in excess of $49.3 million. The first $4.4 million of otherwise reservable balances (subject to adjustments by the 29 Federal Reserve Board) were exempted from the reserve requirements. The Association maintained compliance with the foregoing requirements. For 1998, the Federal Reserve Board has decreased from $49.3 million to $47.8 million the amount of transaction accounts subject to the 3% reserve requirement and to increase the amount of exempt reservable balances from $4.4 million to $4.7 million. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy liquidity requirements imposed by the OTS. 30 FEDERAL AND STATE TAXATION Federal Taxation General. The Company and the Association report their income on a consolidated basis and the accrual method of accounting, and are subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly the Association's reserve for bad debts discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Association or the Company. The Association has not been audited by the IRS during the last five years. For its 1997 taxable year, the Company is subject to a maximum federal income tax rate of 35%. Bad Debt Reserves. For fiscal years beginning prior to December 31, 1995, thrift institutions which qualified under certain definitional tests and other conditions of the Internal Revenue Code of 1986 (the "Code") were permitted to use certain favorable provisions to calculate their deductions from taxable income for annual additions to their bad debt reserve. A reserve could be established for bad debts on qualifying real property loans (generally secured by interests in real property improved or to be improved) under (i) the Percentage of Taxable Income Method (the "PTI Method") or (ii) the Experience Method. The reserve for non-qualifying loans was computed using the Experience Method. The Small Business Job Protection Act of 1996 (the "1996 Act"), which was enacted on August 20, 1996, requires savings institutions to recapture (i.e., take into income) certain portions of their accumulated bad debt reserves. The 1996 Act repeals the reserve method of accounting for bad debts effective for tax years beginning after 1995. Thrift institutions that would be treated as small banks are allowed to utilize the Experience Method applicable to such institutions, while thrift institutions that are treated as large banks (those generally exceeding $500 million in assets) are required to use only the specific charge-off method. Thus, the PTI method of accounting for bad debts is no longer available for any financial institution. A thrift institution required to change its method of computing reserves for bad debts will treat such change as a change in method of accounting, initiated by the taxpayer, and having been made with the consent of the IRS. Any Section 481(a) adjustment required to be taken into income with respect to such change generally will be taken into income ratably over a six-taxable period beginning after 1995, subject to the residential loan requirement. Under the residential loan requirement provision, the recapture required by the 1996 Act will be suspended for each of two successive taxable years, beginning with the Association's current taxable year, in which the Association originates a minimum of certain residential loans based upon the average of the principal amounts of such loans made by the Association during its six taxable years preceding its current taxable year. 31 Under the 1996 Act, for its current and future taxable years, the Association is not permitted to make additions to its tax bad debt reserves. In addition, the Association is required to recapture (i.e., take into income) over a six year period the excess of the balance of its tax bad debt reserves as of December 31, 1995 over the balance of such reserves as of December 31, 1987. As a result of such recapture, the Association will incur an additional tax liability of approximately $1.2 million. Distributions. Under the 1996 Act, if the Association makes "non-dividend distributions" to the Company, such distributions will be considered to have been made from the Association's unrecaptured tax bad debt reserves (including the balance of its reserves as of December 31, 1987) to the extent thereof, and then from the Association's supplemental reserve for losses on loans, to the extent thereof, and an amount based on the amount distributed (but not in excess of the amount of such reserves) will be included in the Association's income. Non-dividend distributions include distributions in excess of the Association's current and accumulated earnings and profits, as calculated for federal income tax purposes, distributions in redemption of stock, and distributions in partial or complete liquidation. Dividends paid out of the Association's current or accumulated earnings and profits will not be so included in the Association's income. The amount of additional taxable income triggered by a non-dividend is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, if the Association makes a non-dividend distribution to the Company, approximately one and one-half times the amount of such distribution (but not in excess of the amount of such reserves) would be includable in income for federal income tax purposes, assuming a 35% federal corporate income tax rate. The Association does not intend to pay dividends that would result in a recapture of any portion of its bad debt reserves. Corporate Alternative Minimum Tax. The Internal Revenue Code (the "Code") imposes a tax on alternative minimum taxable income ("AMTI") at a rate of 20%. The excess of the tax bad debt reserve deduction using the percentage of taxable income method over the deduction that would have been allowable under the Experience Method is treated as a preference item for purposes of computing the AMTI. Only 90% of AMTI can be offset by net operating loss carryovers. AMTI is increased by an amount equal to 75% of the amount by which the Association's adjusted current earnings exceeds its AMTI (determined without regard to this preference and prior to reduction for net operating losses). SAIF Recapitalization Assessment. The Funds Act levied a 65.7-cent fee on every $100 of thrift deposits held on March 31, 1995. For financial statement purposes, this assessment was reported as an expense for the quarter ended September 30, 1996. The Funds Act includes a provision which states that the amount of any special assessment paid to capitalize SAIF under this legislation is deductible under section 162 of the Code in the year of payment. 32 Dividends Received Deduction and Other Matters. The Company may exclude from its income 100% of dividends received from the Association as a member of the same affiliated group of corporations. The corporate dividends received deduction is generally 70% in the case of dividends received from unaffiliated corporations with which the Company and the Association will not file a consolidated tax return, except that if the Company owns more than 20% of the stock of a corporation distributing a dividend, 80% of any dividends received may be deducted. State and Local Taxation The Association is subject to the Mutual Thrift Institutions Tax of the Commonwealth of Pennsylvania based on the Association's financial net income determined in accordance with generally accepted accounting principles with certain adjustments. The tax rate under the Mutual Thrift Institutions Tax is 11.5%. Interest on state and federal obligations is excluded from net income. An allocable portion of net interest expense incurred to carry the obligations is disallowed as a deduction. Three year carryforwards of losses are allowed. The Company is subject to the Capital Stock Tax of the Commonwealth of Pennsylvania and the Franchise Tax of the state of Delaware. Personnel As of December 31, 1997, the Association had 52 full-time employees and 7 part-time employees. The employees are not represented by a collective bargaining unit, and the Association considers its relationship with its employees to be good. Item 2. Properties The Company conducts its business by maintaining an office at 300 Delaware Avenue, Suite 1704, Wilmington, Delaware 19801. The Association conducts its business through its main office located at 532 Lincoln Avenue, Pittsburgh, Pennsylvania 15202 and six full-service branch offices, all of which are located in Allegheny County. Four of the Association's branch offices are leased. Loan originations are processed at the administrative office. The Association believes that its current facilities are adequate to meet the present and immediately foreseeable needs of the Association and the Company. Item 3. Legal Proceedings Neither the Company nor its subsidiary are involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business, which in the aggregate involve amounts which are believed by management to be immaterial to the financial condition and results of the operations of the Association. Item 4. Submission of Matters to a Vote of Security Holders See the proxy for submission of matters to a vote of security holders. 33 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Information relating to the market for Registrant's common equity and related stockholder matters appears under "Shareholder Information" on page 50 in the Registrant's 1997 Annual Report to Stockholders and is incorporated herein by reference. Information relating to the dividend restrictions for Registrant's common stock appears under Note 12 to the "Notes to Consolidated Financial Statements Years Ended December 31, 1997, 1996 and 1995" on page 35 in the Registrant's 1997 Annual Report to stockholders and is incorporated herein by reference. Item 6. Selected Financial Data The above-captioned information appears under "Selected Financial and Other Data of the Company" in the Registrant's 1997 Annual Report to Stockholders on pages 2 and 3 is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The above-captioned information appears under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Registrant's 1997 Annual Report to Stockholders on pages 8 through 20 and is incorporated herein by reference. Item 7.a. Quantitative and Qualitative Disclosure About Market Risks. The above-captioned information appears under the headings "Interest Rate Sensitivity Analysis" and "Net Portfolio Value" in the registrant's 1997 Annual Report to Stockholders on pages 10 through 12 and is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data The Consolidated Financial Statements of First Bell Bancorp, Inc. and its subsidiary, together with the report thereon by Deloitte & Touche LLP appears in the Registrant's 1997 Annual Report to Stockholders on pages 21 through 47 and are incorporated herein by reference. Item 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosure None. 34 PART III Item 10. Directors and Executive Officers of the Registrant The information relating to Directors and Executive Officers of the Registrant is incorporated herein by reference to the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on April 27, 1998, at pages 5 and 6. Item 11. Executive Compensation The information relating to directors' compensation and executives' compensation is incorporated herein by reference to the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on April 27, 1998, at pages 8 through 16 (excluding the Compensation Committee Report and Stock Performance Graph). Item 12. Security Ownership of Certain Beneficial Owners and Management The information relating to security ownership of certain beneficial owners and management is incorporated herein by reference to the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on April 27, 1998, at pages 3, 5 and 6. Item 13. Certain Relationships and Related Transactions The information relating to certain relationships and related transactions is incorporated herein by reference to the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on April 27, 1998, at page 16. 35 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) The following documents are filed as a part of this report: (1) Consolidated Financial Statements of the Company are incorporated by reference to the following indicated pages of the 1997 Annual Report to Stockholders. PAGE Independent Auditors Report................................. 21 Consolidated Balance Sheets for the December 31, 1997 and 1996................................ 24 Consolidated Statements of Income for the Years Ended December 31, 1997, 1996 and 1995.............. 25 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1997, 1996 and 1995...... 26 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995.............. 27 Notes to Consolidated Financial Statements for the Years Ended December 31, 1997, 1996 and 1995.............. 28-47 The remaining information appearing in the 1997 Annual Report to Stockholders is not deemed to be filed as part of this report, except as expressly provided herein. (2) All schedules are omitted because they are not required or applicable, or the required information is shown in the consolidated financial statements or the notes thereto. (3) Exhibits (a) The following exhibits are filed as part of this report. 3.1 Certificate of Incorporation of First Bell Bancorp, Inc.* 3.2 Bylaws of First Bell Bancorp, Inc.* 4.0 Stock Certificate of First Bell Bancorp, Inc.* 10.1 First Bell Bancorp, Inc. 1995 Master Stock Option Plan** 10.2 Bell Federal Savings and Loan Association of Bellevue Master Stock Compensation Plan** 10.5 Form of Bell Federal Savings and Loan Association of Bellevue Supplemental Executive Retirement Plan* 36 10.6 Employment Agreement between First Bell Bancorp, Inc. and certain executive officers, including Messrs. Eckert and Hinds* 10.7 Employment Agreement between Bell Federal Savings and Loan Association of Bellevue and certain executive officers, including Messrs. Eckert and Hinds* 11.0 Computation of earnings per share (filed herewith) 13.0 Portions of the 1997 Annual Report to Stockholders (filed herewith) 23.0 Consent of Independent Accountant (filed herewith) 27.0 Financial Data Schedule (filed herewith) 99.0 Proxy Statement for 1998 Annual Meeting of Stockholders to be held on April 27, 1988 and previously filed on March 20, 1998 is herein incorporated by reference. (b) Reports on Form 8-K None. __________________________________ * Incorporated herein by reference into this document from the Exhibits to the Form S-1, Registration Statement, originally filed on November 9, 1994, as amended and declared effective on May 9, 1995, Registration No. 33-86160. ** Incorporated herein by reference into this document from the Exhibits (Appendices) to the Proxy Statement for the Annual Meeting of Stockholders held on April 29, 1996, filed on March 22, 1996. 37 SIGNATURES Pursuant to the requirements of Section 13 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. Date: March 17, 1997 By: /s/ Albert H. Eckert II ------------------------ ------------------------------------- Albert H. Eckert II, President, Chief Executive Officer and Director Date: March 17, 1997 By: /s/ Jeffrey M. Hinds ------------------------ -------------------------------------- Jeffrey M. Hinds Executive Vice President, Chief Financial Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated. /s/ Albert H. Eckert, II President, Chief Executive March 17, 1997 - ---------------------------- Officer and Director -------- Albert H. Eckert, II /s/ Jeffrey M. Hinds Executive Vice President, March 17, 1997 - ----------------------------- Chief Financial Officer and -------- Jeffrey M. Hinds Director /s/ David F. Figgins March 17, 1997 - ----------------------------- Vice President and -------- David F. Figgins Director /s/ Thomas J. Jackson, Jr. Director March 17, 1997 - ---------------------------- -------- Thomas J. Jackson, Jr. /s/ Robert C. Baierl Secretary and Director March 17, 1997 - ----------------------------- -------- Robert C. Baierl /s/ William S. McMinn Vice President and March 17, 1997 - -------------------------- Director -------- William S. McMinn 38 /s/ Peter E. Reinert Director March 17, 1997 - ----------------------------- -------- Peter E. Reinert /s/ Jack W. Schweiger Director March 17, 1997 - --------------------------- -------- Jack W. Schweiger /s/ Theodore R. Dixon Director March 17, 1997 - --------------------------- -------- Theodore R. Dixon 39 EX-11 2 COMPUTATION OF EARNINGS PER SHARE Exhibit 11 FIRST BELL BANCORP, INC. COMPUTATION OF EARNINGS PER SHARE DECEMBER 31, 1997
TWELVE TWELVE MONTHS MONTHS ENDED ENDED 12/31/97 12/31/97 ---------- ---------- BASIC FULLY DILUTED Net income applicable to common stock $7,574,787 $7,574,787 EARNINGS PER SHARE Weighted average shares outstanding 6,168,862 6,168,862 Add: Option common stock equivalents - 144,660 Less: MRP shares 307,798 307,798 Add: Granted MRP shares - 129,428 ---------- ---------- 5,861,064 6,135,152 Earnings per share $ 1.29 $ 1.23 ========== ==========
EX-13 3 PORTIONS OF THE 1997 ANNUAL REPORT FIRST BELL BANCORP, INC. 1997 ANNUAL REPORT Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- General First Bell Bancorp, Inc. (the "Company") is a Delaware corporation organized by the Board of Directors of Bell Federal Savings and Loan Association of Bellevue ("the Association") for the purpose of acquiring all of the capital stock of the Association issued in the Association's conversion from a feder- ally chartered mutual savings association to a federally chartered stock sav- ings association (the "Conversion"). The Conversion was completed on June 29, 1995. The only significant assets of the Company are the capital stock of the Association and the Company's loan to the Association's Employee Stock Owner- ship Plan ("ESOP"). Currently, the Company does not transact any material busi- ness other than through its subsidiary, the Association. All references to the Company include the Association unless otherwise indicated, except that refer- ences to the Company prior to June 29, 1995, are to the Association. Private Securities Litigation Reform Act Safe Harbor Statement In addition to historical information, this Annual Report includes certain forward looking statements based on current management expectations. Examples of this forward looking information can be found in, but are not limited to, the "President's Letter to Shareholders"; "The Challenges of Growth: Goals and Directions"; "Management's Discussion and Analysis of Financial Condition and Results of Operations", "Asset Quality", and, "Interest Rate Sensitivity Analy- sis"; and in the "Notes to Consolidated Financial Statements Years Ended Decem- ber 31, 1997, 1996 and 1995", "Note 5--Investment Securities Available for Sale", "Note 6--Mortgage-Backed Securities Available-For-Sale", "Note 17--Com- mitments and Contingencies" and "Note 18--Fair Values of Financial Instru- ments". The Company's actual results could differ materially from those manage- ment expectations. Factors that could cause future results to vary from current management expectations include, but are not limited to, general economic con- ditions, legislative and regulatory changes, monetary and fiscal policies of the federal government, changes in tax policies, rates and regulations of fed- eral, state and local tax authorities, changes in interest rates, deposit flows, the cost of funds, demand for loan products, demand for financial serv- ices, competition, changes in the quality or composition of the Company's loan and investment portfolios, changes in accounting principles, policies or guide- lines, and other economic, competitive, governmental and technological factors affecting the Company's operations, markets, products, services and prices. Further description of the risks and uncertainties to the business are included in detail in Item 1, "Business" of the Company's 1997 Form 10-K. Management Strategy The Company operates a traditional savings and loan institution and seeks to achieve profitability while maintaining a strong capital and liquidity posi- tion. As a community oriented savings and loan, the Company's primary invest- ment is in one- to four-family residential mortgage loans. The Company's pri- mary sources of funds are from retail deposit accounts and borrowings. The Company's results of operations are dependent primarily on net interest income, which is the difference between the income earned on its loan, mortgage-backed securities and investment securities portfolios, and its cost of funds, con- sisting primarily of the interest paid on its deposits and to a lesser extent, borrowings from the Federal Home Loan Bank ("FHLB"). The Company's results of operations are affected by its provision for loan losses and non-interest ex- penses. The Company's results of operations are also significantly affected by general economic and competitive conditions, particularly changes in market in- terest rates, government policies and actions of regulatory authorities. Future changes in applicable law, regulations or government policies may materially impact the Company. Conventional Residential Mortgage Lending The Company has emphasized, and plans to continue to emphasize, originating conventional one- to four-family residential mortgage loans for its portfolio in its primary market area, the greater Pittsburgh metropolitan area. The Com- pany originates primarily 15 and 30 year, fixed-rate mortgage loans. At Decem- ber 31, 1997, conventional mortgage loans totalled $568.4 million, or 95.4% of the total loan portfolio. At that date, $551.2 million, or 97.0% of the Company's total conventional loan portfolio consisted of fixed-rate mortgage loans. To a lesser extent, the Company also originates residential construction loans on one- to four-family properties. Such loans totalled $25.6 million, or 4.3% of total loans at December 31, 1997. - -------------------------------------------------------------------------------- 8 - -------------------------------------------------------------------------------- For the years ended December 31, 1997, 1996 and 1995, the Company originated $132.0 million, $168.9 million and $112.3 million, respectively, of conven- tional mortgage and residential construction loans. In 1997, the Company sold $30.0 million of fixed rate conventional mortgage loans to better manage the Company's interest rate risk. In 1995, the Company purchased $24.4 million in owner occupied single family conventional mortgage loans from outside the Company's local market area. Originations and purchases have generally exceeded prepayments and loan sales, resulting in an increase in the Company's total loan portfolio from $432.9 million at December 31, 1995 to $596.0 million at December 31, 1997. Deposit Growth as a Source of Funding Deposit growth has been the integral source of funds and the means of growth for the Company. In this regard, management has emphasized providing an in- creased level of service to its customers in its local market areas in order to retain the deposit relationships with such customers. At times, the Company has increased its deposit base by pricing its deposit products higher than other financial institutions in the greater Pittsburgh market area. The deposit base has increased steadily from $391.4 million at December 31, 1995 to $495.1 mil- lion at December 31, 1997. Considerable emphasis is placed on core deposit re- lationships, consisting of passbook accounts, club accounts and statement sav- ings accounts, which tend to be more stable and lower cost than other types of higher yielding deposits. However, the majority of the growth in deposit ac- counts has come from certificates of deposit. Certificates of deposit are of- fered with terms ranging from three months to 10 years. Certificates of deposit are priced at competitive rates. The growth of deposit accounts is monitored to match operating requirements. Asset Quality As a result of the Company's long-term policy of originating loans secured by one- to four-family, owner-occupied, primary residences that meet the Company's underwriting standards, management believes the Company has maintained high as- set quality. The Company originates mortgage loans almost entirely within its primary market area. Of the conventional mortgage and residential construction loan portfolio at December 31, 1997, 95.8% were secured by properties located within the Company's primary market area. At December 31, 1997 non-performing assets (defined as loans delinquent 90 days or more and real estate owned) rep- resented 0.09% of total assets. The Company has established a general loss al- lowance to provide for losses in its portfolio. The provision for loan losses increased by $45,000 for the year ended December 31, 1997 due to the 9.2% in- crease in the balance of conventional mortgage loans from December 31, 1996 to December 31, 1997. The provision for loan losses is $715,000 or 112.8% of total non-performing assets at December 31, 1997. The higher allowance ratio is due to management's assessment of prospective national and local economic condi- tions, the regulatory environment and inherent risks in the portfolio, not to specific problem loans existing in the portfolio. Management believes that the current level of reserves is adequate. However, the balance of reserves neces- sary can be greatly influenced by regulatory changes and economic conditions. Therefore, the level of future reserves and the related effect on net income cannot be assured. Low Operating Expenses The Company's non-interest expenses principally consist of compensation and employee benefits, federal deposit insurance premiums, occupancy and equipment expenses and other general and administrative expenses. The ratio of other ex- penses to average assets was 0.72%, 1.44% and 1.05% for the years ended Decem- ber 31, 1997, 1996 and 1995, respectively. The 1996 ratio was higher due to a one time charge of $2.5 million to replenish the Savings Association Insurance Fund ("SAIF"), the insurance fund which insures customer deposits. The ratio of other expenses to average assets would have been 1.00% without this assessment. Low operating costs are maintained by managing and monitoring overhead costs, primarily through controlling the growth in personnel. At December 31, 1997, the Company's seven offices and $675.7 million in assets were operated by a to- tal of 52 full-time employees and seven part-time employees, resulting in an average of $12.2 million in assets per employee. Expense ratios are controlled through an efficient and effective product delivery system and the Associa- tion's specialization in mortgage lending. - -------------------------------------------------------------------------------- 9 FIRST BELL BANCORP, INC. 1997 ANNUAL REPORT - -------------------------------------------------------------------------------- Maintaining High Liquidity The Association is required to maintain an average daily balance of liquid as- sets as a percentage of net withdrawable deposit accounts plus short-term borrowings as defined by Office of Thrift Supervision ("OTS") regulations. At December 31, 1997, the liquidity requirement stipulated that the Association must maintain an average liquidity ratio of 4%. The average liquidity ratio was 19.1% at December 31, 1997. The average short liquidity ratio requirement is eliminated as of December 31, 1997. For years prior to 1997 the minimum re- quired average liquidity and average short-term liquidity ratios were 5.0% and 1.0%, respectively. Each of the Association's average liquidity ratios were 10.3% and 14.9% at December 31, 1996 and 1995, respectively. The high level of liquidity reflects management's strategy to partially offset the interest rate risk associated with the predominantly fixed-rate mortgage loan portfolio and fluctuates depending on the operational needs of the Association. The Company's most liquid assets are cash and short-term investments. The level of the liquid assets are dependent on the operating, financing, lending and investing activities during any given period. At December 31, 1997, 1996 and 1995, assets qualifying for liquidity including cash and short-term invest- ments, totalled $61.4 million, $109.6 million and $91.0 million, respectively. Interest Rate Sensitivity Analysis The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by moni- toring an institution's interest rate sensitivity "gap." An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that same time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets anticipated, based upon certain assumptions, to mature or reprice within a spe- cific time period and the amount of interest-bearing liabilities anticipated, based upon certain assumptions, to mature or reprice within that same time pe- riod. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is con- sidered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. Accordingly, in a rising interest rate environment, an institution with a positive gap would be in a better posi- tion to invest in higher yielding assets, which would result in the yield on its assets increasing at a pace closer to the cost of its interest-bearing lia- bilities, than would be the case if it has a negative gap. During a period of falling interest rates, an institution with a positive gap would tend to have its assets repricing at a faster rate than one with a negative gap, which would tend to restrain the growth of its net interest income. The following table sets forth the amount of interest-earning assets and in- terest-bearing liabilities outstanding at December 31, 1997 which are antici- pated to reprice or mature in each of the future time periods shown. The amounts of assets and liabilities shown which reprice or mature during a par- ticular period were determined in accordance with the earlier of term to (i) repricing or (ii) the contractual terms of the asset or liability adjusted for historical prepayment rates. The prepayment rates utilized are based on the historical prepayment rates experienced by the Company, which management be- lieves to be reasonable. While a conventional gap measure may be useful, it is limited in its ability to predict trends in future earnings. It makes no pre- sumptions about changes in prepayment tendencies, deposit or loan maturity preferences or repricing time lags that may occur in response to a change in the interest rate environment. - -------------------------------------------------------------------------------- 10 - --------------------------------------------------------------------------------
AT DECEMBER 31, 1997 ----------------------------------------------------------------------------------------------- MORE MORE THAN MORE MORE MORE THREE THAN THREE SIX MONTHS THAN ONE THAN THREE THAN FIVE MORE MONTHS MONTHS TO TO TWELVE YEAR TO YEARS TO YEARS TO THAN OR LESS SIX MONTHS MONTHS THREE YEARS FIVE YEARS TEN YEARS TEN YEARS TOTAL --------- ---------- ---------- ----------- ---------- --------- --------- -------- (DOLLARS IN THOUSANDS) INTEREST EARNING ASSETS: Real Estate Loans: ARM Loans............. $ 2,714 $ 391 $ 1,996 $ 7,667 $ 4,258 $ 184 $ -- $ 17,210 Fixed Rates Loans..... 8,372 8,200 16,411 61,756 56,123 152,123 243,673 546,658 Residential Construction Loans... -- -- -- -- -- -- 13,491 13,491 Multi-Family.......... 55 -- 19 63 95 354 274 860 Second Mortgage Loans. 268 -- -- -- -- -- -- 268 Consumer Loans......... 899 -- 2 6 -- -- -- 907 Mortgage-backed securities............ 4,002 9,222 18,661 -- -- -- -- 31,885 Investment securities.. 39,395 -- -- 4,993 -- 4,976 4 49,368 FHLB Stock............. -- -- -- -- -- -- 5,148 5,148 --------- --------- --------- --------- --------- --------- -------- -------- Total Interest Earning Assets................. 55,705 17,813 37,089 74,485 60,476 157,637 262,590 665,795 INTEREST BEARING LIABILITIES: Passbook, Club and Other Accounts........ 2,366 2,366 4,731 15,136 11,194 16,837 14,957 67,587 Money Market and NOW Accounts.............. 2,466 2,466 4,933 13,556 8,331 9,887 5,625 47,264 Certificate Accounts... 92,377 60,714 122,760 68,290 19,627 16,436 -- 380,204 Borrowings............. 90,000 -- -- -- -- -- -- 90,000 Advances by Borrowers for Taxes and Insurance......... 12,226 -- -- -- -- -- -- 12,226 --------- --------- --------- --------- --------- --------- -------- -------- Total Interest Bearing Liabilities............ 199,435 65,546 132,424 96,982 39,152 43,160 20,582 597,281 --------- --------- --------- --------- --------- --------- -------- -------- Interest Sensitivity Gap.................... $(143,730) $ (47,733) $ (95,335) $ (22,497) $ 21,324 $ 114,477 $242,008 $ 68,514 ========= ========= ========= ========= ========= ========= ======== ======== Cumulative Interest Sensitivity Gap........ $(143,730) $(191,463) $(286,798) $(309,295) $(287,971) $(173,494) $ 68,514 $ 68,514 ========= ========= ========= ========= ========= ========= ======== ======== Cumulative Interest Sensitivity Gap as a Percentage of Total Assets........... (21.27%) (28.34%) (42.45%) (45.77%) (42.62%) (25.68%) 10.14% 10.14% Cumulative Net Interest Earning Assets as a Percentage of Cumulative Interest Bearing Liabilities.... 27.93% 27.75% 27.83% 37.44% 46.03% 69.92% 111.47% 111.47%
Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market inter- est rates, while interest rates on other types may lag behind changes in market rates. Net Portfolio Value The Company's interest rate sensitivity is monitored by management through se- lected interest rate risk measures produced internally and by the OTS. Using data from the Association's quarterly Thrift Financial Reports, the OTS mea- sures the Association's interest rate risk by modeling the change in net port- folio value ("NPV") over a variety of interest rate scenarios. NPV is the pres- ent value of expected cash flows from assets, liabilities and off-balance sheet contracts. A NPV ratio, in any interest rate scenario, is defined as the NPV in that rate scenario divided by the market value of assets in the same scenario. The interest rate risk measures used by the OTS include an interest rate risk "Exposure Measure" or "post-shock" NPV ratio and a "Sensitivity Measure." A low "post-shock" NPV ratio indicates greater exposure to interest rate risk. Greater exposure can result from a low initial NPV ratio or high sensitivity to changes in interest rates. The Sensitivity Measure is the decline in the NPV ratio, in basis points, caused by a 200 basis point increase or decrease in rates, whichever produces a larger decline. - -------------------------------------------------------------------------------- 11 FIRST BELL BANCORP, INC. 1997 ANNUAL REPORT - -------------------------------------------------------------------------------- As of December 31, 1997, the Association's NPV, as measured by the OTS, was $86.6 million or 12.5% of the market value of assets. Following a 200 basis point increase in interest rates, which provides a larger decline than a 200 point decrease, the Association's "post-shock" NPV was $48.0 million, or 7.4% of the market value of assets. The change in the NPV ratio or the Association's Sensitivity Measure was (45.0)%. Under OTS capital requirements which have not yet been fully implemented, the decline in the NPV ratio at December 31, 1997 would reflect an above average interest rate risk. If the regulations are fi- nalized as proposed, the Company would remain in compliance with the fully phased in capital requirements. Management reviews the quarterly OTS measure- ments and compares them to evaluations produced through internally generated simulation models. These measures are used in conjunction with NPV measures to identify excessive interest rate risk. Capital Resources The Company's sources of funds are deposits, borrowings and principal and in- terest payments on loans, and, to a lesser extent, mortgage-backed securities. While maturities and scheduled amortization of loans and mortgage-backed secu- rities are predictable sources of funds, deposit flows and mortgage prepayments are strongly influenced by changes in general interest rates, economic condi- tions and competition. The primary investment activity of the Company is the origination of mortgage loans. During the years ended December 31, 1997, 1996 and 1995, the origination of mortgage loans, including residential construction loans in the amounts of $129.0 million, $168.9 million and $112.3 million, respectively. No other loans were originated during those periods. However, $30.0 million of conventional mortgage loans were sold in 1997. During 1997, $92.5 million in mortgage-backed securities were bought. Of these securities purchased, $46.7 million were sub- sequently sold. The company had no mortgage-backed securities at December 31, 1996 and 1995. The lending activities are funded primarily by deposits, princi- pal repayments on loans and mortgage-backed securities and operations. Other investments primarily include securities of the United States Government ("U.S. Government securities") and securities of various federal agencies. At December 31, 1997, loan commitments were $17.9 million. The Association an- ticipates that it will have sufficient funds available to meet its current loan origination commitments. Certificates of deposit which are scheduled to mature in one year or less from December 31, 1997 totalled $275.9 million. Management believes that a significant portion of such deposits will remain with the Asso- ciation. As a member of the FHLB, the Association has the ability to borrow from the FHLB, if necessary. As of December 31, 1997, the Association had $90.0 million in outstanding borrowings and $422.1 million in additional borrowing capacity from the FHLB. Impact of Inflation and Changing Prices The Financial Statements and Notes thereto presented herein have been prepared in accordance with Generally Accepted Accounting Principles ("GAAP"), which re- quire the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company's operations. Unlike industrial companies, nearly all of the assets and liabilities are monetary in nature. As a result, interest rates have a greater impact on the Company's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services. - -------------------------------------------------------------------------------- 12 - -------------------------------------------------------------------------------- Rate/Volume Analysis The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabili- ties have affected the Company's interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate mul- tiplied by prior volume) and (iii) the changes attributable to the combined im- pact of volume and rate. The change in interest due to both rate and volume in the rate/volume analysis table have been allocated to changes due to rate and volume in proportion to the absolute amounts of the changes in each.
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, 1997 VS. 1996 1996 VS. 1995 INCREASE (DECREASE) IN INCREASE (DECREASE) IN NET INTEREST INCOME DUE TO NET INTEREST INCOME DUE TO --------------------------------- ------------------------------- TOTAL TOTAL INCREASE INCREASE VOLUME RATE (DECREASE) VOLUME RATE (DECREASE -------- --------- ------------ --------- ------- ----------- (IN THOUSANDS) Interest-earning assets: Investment securities. $ 1,669 $ 204 $ 1,873 $ (2,053) $ (29) $ (2,082) Conventional loans.... 5,511 (841) 4,670 9,807 (626) 9,181 Other loans........... (3) (1) (4) (6) (4) (10) Mortgage-backed securities........... 3,147 -- 3,148 (311) -- (311) Federal funds sold.... (1,473) 5 (1,468) 566 (168) 398 -------- --------- --------- --------- ------- --------- Total interest- earning assets..... 8,851 (633) 8,219 8,022 (826) 7,176 -------- --------- --------- --------- ------- --------- Interest-bearing liabilities: Passbook, club and other accounts....... (94) 68 (26) (92) 35 (57) Money Market and NOW accounts............. 116 (64) 52 45 (74) (29) Certificate accounts.. 3,748 1,054 4,802 3,909 (397) 3,512 Borrowings............ 3,190 2,262 5,452 191 -- 191 -------- --------- --------- --------- ------- --------- Total interest- bearing liabilities........ 6,960 3,320 10,280 3,862 (245) 3,617 -------- --------- --------- --------- ------- --------- Net change in net interest income........ $ 1,891 $ (3,953) $ (2,062) $ 4,140 $ (581) $ (3,559) ======== ========= ========= ========= ======= =========
- -------------------------------------------------------------------------------- 13 FIRST BELL BANCORP, INC. 1997 ANNUAL REPORT - -------------------------------------------------------------------------------- Average Balances, Interest and Average Yields The following table sets forth certain information relating to the Company's balance sheet at December 31, 1997, and average balance sheets and statements of income for the years ended December 31, 1997, 1996 and 1995, and reflect the average yield on assets and average cost of liabilities for the periods indi- cated. Such yields and costs are derived by dividing income or expense by the average monthly balance of assets or liabilities, respectively, for the periods shown. Average balances are derived from month-end balances. The yields and costs include fees which are considered adjustments to yields.
AT DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1997 ------------------------ ---------------------------- AVERAGE AVERAGE BALANCE YIELD/COST BALANCE INTEREST YIELD/COST ------------ ----------- -------- -------- ---------- (DOLLARS IN THOUSANDS) Interest-earning Assets: Investment securities (1).................. $ 52,966 6.41% $ 64,294 $ 4,117 6.40% Conventional loans (2)(6)............... 578,487 7.27 560,448 41,397 7.39 Other loans........... 907 6.85 910 67 7.36 Mortgage-backed securities........... 31,885 6.50 55,003 3,148 5.72 Federal funds sold.... 1,550 5.61 8,777 497 5.66 ------------ -------- ------- Total interest- earning assets..... 665,795 7.16 689,432 49,226 7.14 Non-interest earning assets............. 9,889 10,514 ------------ -------- TOTAL ASSETS...... $ 675,684 $699,946 ============ ======== Interest-bearing Liabilities: Passbook, club and other accounts (5)... $ 79,812 2.89% $ 78,400 $ 2,288 2.92% Money market and NOW accounts............. 47,264 2.47 46,798 1,092 2.33 Certificate accounts.. 380,204 5.98 388,660 23,306 6.00 Borrowings............ 90,000 5.69 103,250 5,643 5.47 ------------ -------- ------- Total interest- bearing liabilities........ 597,280 5.25 617,108 32,329 5.24 Non-interest-bearing liabilities........ 5,421 8,963 ------------ -------- TOTAL LIABILITIES. 602,701 626,071 Stockholders' equity.. 72,983 73,875 ------------ -------- Total liabilities and stockholders' equity. $ 675,684 $699,946 ============ ======== Net interest income/net interest rate spread (3).................... 1.91% $16,897 1.90% ======= Net yield on average interest-earning assets (4).................... 2.45% Ratio of average interest-earning assets to average interest- bearing liabilities.... 1.11 1.12
- ------- (1) Includes interest-bearing deposits in other financial institutions and FHLB. (2) Includes non-accrual loans, deferred net loan origination fees, undisbursed portion of loans in process, and allowance for loan losses. (3) Net interest rate spread represents the difference between the average yield on interest-earning assets, and the average cost of interest- bearing liabilities. (4) Net interest margin represents net interest income as a percentage of average interest-earning assets. (5) Includes advances by borrowers for taxes and insurance. (6) Interest on conventional loans includes loan fees of $406, $990, and $508 for the years ended December 31, 1997, 1996 and 1995, respectively. - -------------------------------------------------------------------------------- 14 - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, --------------------------------------------------------- 1996 1995 ---------------------------- ---------------------------- AVERAGE AVERAGE AVERAGE AVERAGE BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST -------- -------- ---------- -------- -------- ---------- (DOLLARS IN THOUSANDS) Interest-earning Assets: Investment securities (1).................. $ 36,869 $ 2,244 6.09% $ 70,180 $ 4,326 6.16% Conventional loans (2)(6)............... 487,322 36,727 7.54 359,376 27,546 7.66 Other loans........... 944 71 7.52 1,025 81 7.90 Mortgage-backed securities........... -- -- -- 3,713 311 8.38 Federal funds sold.... 35,075 1,965 5.60 25,769 1,567 6.08 -------- ------- -------- ------- Total interest- earning assets..... 560,210 41,007 7.32 460,063 33,831 7.35 Non-interest-earning assets............. 9,437 9,078 -------- -------- TOTAL ASSETS...... $569,647 $469,141 ======== ======== Interest-bearing Liabilities: Passbook, club and other accounts (5)... $ 81,715 $ 2,314 2.83% $ 85,020 $ 2,371 2.79% Money market and NOW accounts............. 42,088 1,040 2.47 40,388 1,069 2.65 Certificate accounts.. 323,199 18,504 5.73 256,350 14,992 5.85 Borrowings............ 5,833 191 3.27 -- -- -------- ------- -------- ------- Total interest- bearing liabilities........ 452,835 22,049 4.87 381,758 18,432 4.83 Non-interest-bearing liabilities........ 7,082 4,633 -------- -------- TOTAL LIABILITIES. 459,917 386,391 Stockholders' equity.. 109,730 82,750 -------- -------- Total liabilities and stockholders' equity. $569,647 $469,141 ======== ======== Net interest income/net interest rate spread (3).................... $18,958 2.45% $15,399 2.52% ======= ======= Net yield on average interest-earning assets (4).................... 3.38% 3.35% Ratio of average interest-earning assets to average interest- bearing liabilities.... 1.24 1.21
- -------------------------------------------------------------------------------- 15 FIRST BELL BANCORP, INC. 1997 ANNUAL REPORT - -------------------------------------------------------------------------------- Comparison of Financial Condition at December 31, 1997 and December 31, 1996 The following table sets forth information concerning the composition of the Company's assets, liabilities and stockholders' equity at December 31, 1997 and 1996.
AT DECEMBER 31, ----------------------------------- 1997 1996 ----------------- ----------------- PERCENT PERCENT AMOUNT OF TOTAL AMOUNT OF TOTAL -------- -------- -------- -------- (DOLLARS IN THOUSANDS) ASSETS Cash and cash equivalents.................. $ 24,523 3.63% $ 26,406 4.02% Mortgage-backed securities................. 31,885 4.72 -- -- Federal funds sold......................... 1,550 0.23 72,875 11.11 Investment securities...................... 31,023 4.59 14,964 2.28 Conventional loans, net.................... 578,487 85.62 529,866 80.75 Other loans................................ 907 .13 949 .14 FHLB stock................................. 5,148 .76 3,999 .61 Other assets............................... 2,161 .32 7,124 1.09 -------- ------ -------- ------ TOTAL ASSETS............................. $675,684 100.00% $656,183 100.00% ======== ====== ======== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits................................... $495,055 73.27% $483,941 73.75% Borrowings................................. 90,000 13.32 70,000 10.67 Other liabilities.......................... 17,646 2.61 15,809 2.41 Stockholders' equity....................... 72,983 10.80 86,433 13.17 -------- ------ -------- ------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................. $675,684 100.00% $656,183 100.00% ======== ====== ======== ======
Assets Total assets increased to $675.7 million at December 31, 1997, from $656.2 million at December 31, 1996. The $19.5 million or 3.0% increase was primarily the result of increases in conventional mortgage loans, mortgage-backed securi- ties and investment securities offset by a decrease in federal funds sold. Con- ventional mortgage loans increased by $48.6 million or 9.2% to $578.5 million at December 31, 1997 from $529.9 million at December 31, 1996. The increase was the result of originating $129.0 million in conventional mortgage loans offset by principle repayment of $50.2 million and the sale of $30.0 million in con- ventional mortgage loans during 1997. The balance of mortgage-backed securities at December 31, 1997 was $31.9 million. There were no mortgage-backed securi- ties at December 31, 1996. The increase was the result of the purchase of $92.5 million in mortgage-backed securities reduced by the sale of $46.7 million and the principle repayments of $14.0 million. Investment securities increased $10.9 million or 72.9% to $25.9 million at December 31, 1997 from $15.0 million at December 31, 1996. The increase was the result of the purchase of $25.9 mil- lion of Collateralized Mortgage Obligations ("CMO's") offset by one CMO of $10.0 million being called and the maturity of a $5.0 million treasury note. The increases in conventional mortgage loans, mortgage-backed securities and investment securities were funded by the reduction in federal funds sold of $71.3 million or 97.9% to $1.6 million at December 31, 1997 from $72.9 million at December 31, 1996. Funding for the increases was also received through the increases in deposits and borrowings. - -------------------------------------------------------------------------------- 16 - ------------------------------------------------------------------------------- Liabilities Total liabilities increased by $33.0 million or 5.8% to $602.7 million at De- cember 31, 1997 from $569.7 million at December 31, 1996. The increase was primarily the result of increases in borrowings, deposits and advances by bor- rowers for taxes and insurance. Borrowings increased $20.0 million or 28.6% to $90.0 million at December 31, 1997 from $70.0 million at December 31, 1996. The increase was used to fund the investment and operating activities of the Company. Deposits at December 31, 1997 were $495.0 million compared to $483.9 million at December 31, 1996. The $11.1 million or 2.3% increase was primarily the result of certificate accounts increasing by $7.4 million, or 2.0% to $380.2 million at December 31, 1997 from $372.8 million at December 31, 1996. Advances by borrowers for taxes and insurance increased by $1.4 million or 13.0% to $12.2 million at December 31, 1997 from $10.8 million at December 31, 1996. This increase was the result of the increase in the balance of conven- tional mortgage loans. Capital Total stockholders equity declined by $13.5 million, or 15.6% to $73.0 mil- lion at December 31, 1997, from $86.4 million at December 31, 1996. The de- crease was the result of the repurchase of 1.2 million shares of the Company's common stock for $20.4 million and dividends declared of $1.8 million. The av- erage price per share for the 1.2 million shares, which were placed in Trea- sury, was $16.34. Offsetting these decreases was net income of $7.6 million for the year ended December 31, 1997. Comparison of Operating Results for the Years Ended December 31, 1997 and December 31, 1996 Net income for the year ended December 31, 1997 increased by $172,000 or 2.3% to $7.6 million from $7.4 million for the year ended December 31, 1996. The increase was primarily the result of a decrease in other expenses of $3.1 mil- lion offset by a decrease in net interest income of $2.1 million and an in- crease in income taxes of $561,000. Interest Income Interest income increased by $8.2 million or 20.0% to $49.2 million for the year ended December 31, 1997 from $41.0 for the comparable 1996 period. The increase was the result of increases in interest income earned on conventional mortgage loans, mortgage-backed securities, investment securities and inter- est-bearing deposits offset by a decline on interest earned on federal funds sold. Interest earned on conventional mortgage loans increased by $4.7 mil- lion, or 12.7% to $41.4 million for the year ended December 31, 1997 from $36.7 million for the year ended December 31, 1996. The increase was the re- sult of the average balance in conventional mortgage loans increasing by $73.1 million or 15.0% to $560.4 million for 1997 from $487.3 million for 1996. Off- setting this increase was a 15 basis point decline on the average yield earned on conventional mortgage loans to 7.39% for the year ended December 31, 1997 from 7.54% for the year ended December 31, 1996. Interest earned on mortgage- backed securities for the year ended December 31, 1997 was $3.1 million. There were no mortgage-backed securities in 1996. Interest earned on investment se- curities increased $1.2 million or 99.8% to $2.4 million for the year ended December 31, 1997 from $1.2 million for the comparable 1996 period. This in- crease was the result of the average balance in investment securities increas- ing by $17.7 million, or 101.1% to $35.2 million for 1997 from $17.5 million for 1996. Interest on interest bearing deposits increased by $552,000 or 69.8% to $1.3 million for the year ended December 31, 1997 from $791,000 for the year ended December 31, 1996. This was the result of the average balance of interest bearing deposits increasing by $7.9 million or 51.1% to $23.5 million during 1997 from $15.6 million during 1996 and an 18 basis points increase in the average yield earned. Interest earned on federal funds sold declined by $1.5 million or 74.7% to $497,000 for the year ended December 31, 1997 from $2.0 million for the year ended December 31, 1996. This was the result of the average balance decreasing to $8.8 million during 1997 from $35.1 million dur- ing 1996. - ------------------------------------------------------------------------------- 17 FIRST BELL BANCORP, INC. 1997 ANNUAL REPORT - -------------------------------------------------------------------------------- Interest Expense Interest expense for the year ended December 31, 1997 increased by $10.3 mil- lion or 46.6% to $32.3 million from $22.0 million for the comparable 1996 peri- od. This increase was the result of increases in interest expense on deposits and borrowings. Interest expense on deposits increased by $4.8 million, or 22.1% to $26.7 million for the year ended December 31, 1997 from $21.9 million for the year ended December 31, 1996. The increase was the result of the aver- age balance on certificate accounts increasing by $65.5 million, or 20.3% to $388.7 million during 1997 from 5.7%. Interest expense on FHLB borrowings for the year ended December 31, 1997 was $5.6 million compared to $191,000 for the year ended December 31, 1996. The increase was the result of the Company under- taking a leverage program beginning in December 1996. Net Interest Income Net interest income decreased by $2.1 million or 10.9% to $16.9 million for the year ended December 31, 1997 compared to $19.0 million. The decrease was the result of the average interest-bearing liabilities increasing by $164.3 million or 36.3% to $617.1 million during 1997 compared to $452.8 million for 1996. Offsetting the increase in average interest-bearing liabilities was an increase in interest earning assets of $129.2 million, or 23.1% to $689.4 mil- lion during 1997 from $560.2 million during 1996. In addition, the net interest income/net interest rate spread declined by 55 basis points to 1.90% for 1997 from 2.45% for 1996 as the result of a flat yield curve. Provision for Loan Loss An additional $45,000 was recorded to the provision for loan losses in 1997 compared to $90,000 in 1996. The additional amount was recorded due to a $48.6 million increase in conventional mortgage loans. At December 31, 1997, the al- lowance for loan losses to non-performing assets was 112.8% compared to 105.7% at December 31, 1996. In determining the provision for loan losses, management assesses the risk in- herent in its loan portfolio including, but not limited to, an evaluation of the concentration of loans secured by properties located in the Pittsburgh ar- ea, the trends in national and local economies, trends in the real estate mar- ket and in the Company's loan portfolio and the level of non-performing loans and assets. The Company's history of loan losses has been minimal, which man- agement believes is a reflection of the Company's underwriting standards. There were no charge-offs for the year ended December 31, 1997. Management believes the current level of loan loss reserve is adequate to cover losses inherent in the portfolio as of such date. However, there can be no assurance that the Com- pany will not sustain losses in future periods. Other Income Other income declined by $369,000 or 30.8% to $829,000 for the year ended De- cember 31, 1997 from $1.2 million for the year ended December 31, 1996. The de- crease was the result of loan fees and service charges decreasing by $119,000 or 18.5% to $525,000 for the year ended December 31, 1997 from $644,000 for the comparable 1996 period due to a decrease in the amortization of deferred loan fees. In addition, in 1996 there was a gain of $536,000 on the sale of the building in which our Wood Street branch was located. A gain of $250,000 from the sale of loans and investments was also recorded in 1997. Other Expenses General and administrative expenses decreased to $5.1 million for the year ended December 31, 1997 from $8.2 million for the year ended December 31, 1996. The $3.1 million or 38.1% decrease was the result of federal insurance premiums declining by $3.2 million, or 92.4% to $261,000 for the year ended December 31, 1997 from $3.4 million for the comparable 1996 period. This decrease was the result of the one time assessment of $2.5 million before taxes to replenish the Savings Association Insurance Fund expensed in 1996. In addition, the premium for deposit insurance was reduced to 6.5 basis points per $100 of deposits from 23 basis points starting January 1, 1997. - -------------------------------------------------------------------------------- 18 - -------------------------------------------------------------------------------- Income Taxes Income taxes increased by $561,000 or 12.5% to $5.0 million for the year ended December 31, 1997 from $4.5 million for the year ended December 31, 1996. This was the result of net income before taxes increasing by $733,000 or 6.2% to $12.6 million for the year ended December 31, 1997 from $11.9 million for the comparable 1996 period. The annualized effective income tax rate for the peri- ods ended December 31, 1997 and 1996 were 40.0% and 38.5%, respectively. New Accounting Pronouncements For a discussion of New Accounting Prouncements and their effect on the Compa- ny, see Note 3 and Note 20 to the Consolidated Financial Statements. Comparison of Operating Results for the Years Ended December 31, 1996 and December 31, 1995 General Net income for the year ended December 31, 1996 increased by $470,000 or 6.8% to $7.4 million from $6.9 million for the year ended December 31, 1995. This increase was the result of net interest income increasing by $3.6 million, off- set by an increase in federal insurance premiums of $2.6 million and an in- crease of $553,000 in compensation, payroll taxes, and fringe benefits. Interest Income Interest income increased by $7.2 million, or 21.2% to $41.0 million for the year ended December 31, 1996 from $33.8 million for the year ended December 31, 1995. This increase was primarily due to interest on conventional mortgage loans increasing $9.2 million or 33.3% to $36.7 million for the year ended De- cember 31, 1996 from $27.5 million for the year ended December 31, 1995. The increased interest on conventional mortgage loans was the result of the average balance of conventional mortgage loans increasing by $127.9 million or 35.6% to $487.3 million for the year ended December 31, 1996 from $359.4 million for the comparable 1995 period. In addition, interest on federal funds sold increased by $398,000 or 25.4% to $2.0 million for the year ended December 31, 1996 from $1.6 million for the year ended December 31, 1995. Again this increase was pri- marily the result of the average balance of federal funds sold increasing to $35.1 million during 1996 from $25.8 million during 1995. Offsetting these in- creases was a decrease of interest in interest-bearing deposits and other in- vestment securities. Interest on interest-bearing deposits decreased by $1.4 million, or 63.3% to $791,000 for the year ended December 31, 1996 from $2.2 million for the year ended December 31, 1995. This decrease was the result of the average balance of interest-bearing deposits falling to $15.6 million for 1996 from $37.9 million during 1995. Interest earned on other investments was $1.2 million for the year ended December 31, 1996 compared to $2.0 million for the same 1995 period. The $761,000 decrease was the result of the average bal- ance in other investment securities decreasing by $11.9 million, or 40.6% to $17.5 million during 1996 from $29.4 million during 1995. Interest Expense Interest expense increased $3.6 million or 19.6% during 1996 rising to $22.0 million in 1996 from $18.4 million in 1995. This increase was primarily due to an increase in interest paid on certificate accounts of $3.5 million. This was the result of the average balance on certificate accounts increasing by $66.9 million or 26.1% to $323.2 million during 1996 from $256.3 million during 1995. Also, interest on borrowing was $191,000 in 1996. There were no borrowings in 1995. - -------------------------------------------------------------------------------- 19 FIRST BELL BANCORP, INC. 1997 ANNUAL REPORT - ------------------------------------------------------------------------------- Net Interest Income Net interest income represents the difference between income on interest bearing assets and expense on interest-bearing liabilities. Net interest in- come depends upon the volume of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them. Net interest income increased $3.6 million or 23.1% to $19.0 million for the year ended December 31, 1996 from $15.4 million for the year ended December 31, 1995. The increase in net interest income was primarily due to the average interest-earning as- sets increasing by $100.0 million or 21.8% increasing to $560.0 million during 1996 from $460.0 million in 1995. Offsetting this was the increase in average interest-bearing liabilities and a slight decrease in net interest rate spread. Average interest-bearing liabilities increase in 1996 to $452.8 mil- lion from $381.8 million in 1995. The net interest rate spread decreased by seven basis points falling to 2.45% in 1996 from 2.52% in 1995. Provision for Loan Losses An additional $90,000 was recorded to the provision for loan losses during 1996 as compared to none in 1995. This additional amount was recorded as the result of the $115.3 million increase in conventional mortgage loans. At De- cember 31, 1996 the allowance for loan losses to non-performing assets was 105.7% as compared to 112.5% at December 31, 1995. Other Income Other income for the year ended December 31, 1996 was $1.2 million compared to $824,000 for the year ended December 31, 1995. The $374,000 increase was due to a gain of $536,000 on the sale of the building in which our Wood Street office was located. The Company's downtown Pittsburgh branch was moved to a new location in the same area during 1996. Offsetting this gain was a decline in service fees and charges of $89,000 and no gain on the sale of mortgage- backed securities. There was a $68,000 gain on mortgage-backed securities in 1995. Other Expenses Total other expenses increased $3.2 million to $8.1 million for the year ended December 31, 1996 from $4.9 million for the year ended December 31, 1995. The increase was primarily due to the increases in federal insurance premiums and compensation, payroll taxes and fringe benefits. Federal insur- ance premiums increased to $3.4 million in 1996 from $848,000 in 1995. The $2.6 million increase was the result of the one time assessment of $2.5 mil- lion to replenish the Savings Association Insurance Fund. On September 30, 1996, the President signed into law the Deposit Insurance Funds Act of 1996 (the "Funds Act") which, among other things, imposed a special one-time as- sessment on SAIF member institutions, including the Association to recapital- ize the SAIF. As required by the Funds Act, the Federal Deposit Insurance Cor- poration ("FDIC") imposed a special assessment of 65.7 basis points on SAIF assessable deposits held as of March 31, 1995. Compensation, payroll taxes and fringe benefits increased by $553,000 or 24.1% to $2.8 million for the year ended December 31, 1996 compared to $2.3 million for the year ended December 31, 1995. The increase was the result of the implementation of the MRP during 1996. Income Taxes Income taxes increased by $140,000 to $4.5 million for the year ended Decem- ber 31, 1996 from $4.3 million for the year ended December 31, 1995. This was the result of income before the provision for income taxes increasing to $11.9 million for the year ended December 31, 1996 as compared to $11.3 million for the comparable 1995 period. The annualized effective income tax rate for the periods ended December 31, 1996 and 1995 were 37.7% and 38.5%, respectively. - ------------------------------------------------------------------------------- 20 Independent Auditors' Report - -------------------------------------------------------------------------------- To the Board of Directors and Stockholders of First Bell Bancorp, Inc.: We have audited the accompanying consolidated balance sheets of First Bell Bancorp, Inc. and subsidiary, as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of First Bell Bancorp's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing stan- dards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of mate- rial misstatement. An audit includes examining, on a test basis, evidence sup- porting 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 pre- sentation. We believe that our audits provide a reasonable basis for our opin- ion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of First Bell Bancorp, Inc. and sub- sidiary as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP Pittsburgh, Pennsylvania January 23, 1998 (February 24, 1998 as to Note 23) - -------------------------------------------------------------------------------- 21 FIRST BELL BANCORP, INC. 1997 ANNUAL REPORT Management's Report on the Internal Control Structure and Compliance with Laws and Regulations - ------------------------------------------------------------------------------- January 23, 1998 To the Stockholders: FINANCIAL STATEMENTS The management of First Bell Bancorp, Inc. ("the Company") is responsible for the preparation, integrity, and fair presentation of its published financial statements and all other information presented in this annual report. The fi- nancial statements have been prepared in accordance with generally accepted accounting principles and, as such, include amounts based on informed judgements and estimates made by management. INTERNAL CONTROL Management is responsible for establishing and maintaining an effective in- ternal control structure over financial reporting, including safeguarding of assets, presented in conformity with both generally accepted accounting prin- ciples and the Office of Thrift Supervision ("OTS") instructions for Thrift Financial Reports ("TFR Instructions"). The structure contains monitoring mechanisms, and actions are taken to correct deficiencies identified. There are inherent limitations in the effectiveness of any structure of in- ternal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even an effective internal control structure can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effec- tiveness of an internal control structure may vary over time. Management assessed the institution's internal control structure over finan- cial reporting, including safeguarding of assets, presented in conformity with both generally accepted accounting principles and TFR instructions as of De- cember 31, 1997. This assessment was based on criteria for effective internal control over financial reporting, including safeguarding of assets, described in Internal Control--Integrated Framework issued by the committee of Sponsor- ing Organizations of the Treadway Commission. Based on this assessment, man- agement believes that the Company maintained an effective internal control structure over financial reporting, including safeguarding of assets, pre- sented in conformity with both generally accepted accounting principles and TFR Instructions as of December 31, 1997. The Audit Committee of the Board of Directors is comprised entirely of out- side directors who are independent of the Company's management. The Audit Com- mittee is responsible for recommending to the Board of Directors, the selec- tion of independent auditors. It meets periodically with management, the independent auditors, and the internal auditors to ensure that they are carry- ing out their responsibilities. The Committee is also responsible for perform- ing an oversight rule of reviewing and monitoring the financial, accounting and auditing procedures of the Company in addition to reviewing the Company's financial reports. The independent auditors and the internal auditors have full and free access to the Audit Committee, with or without the presence of management, to discuss the adequacy of the internal control structure for fi- nancial reporting and any other matters which they believe should be brought to the attention of the Committee. - ------------------------------------------------------------------------------- 22 - -------------------------------------------------------------------------------- COMPLIANCE WITH LAWS AND REGULATIONS Management is also responsible for ensuring compliance with the federal laws and regulations concerning loans to insiders and the federal and state laws and regulations concerning dividend restrictions, both of which are designated by the FDIC as safety and soundness laws and regulations. Management assessed its compliance with the designated safety and soundness laws and regulations and has maintained records of its determinations and as- sessments as required by the OTS. Based on this assessment, Management believes that the Company has complied, in all material respects, with the designated safety and soundness laws and regulations for the year ended December 31, 1997. /s/ Albert H. Eckert, II /s/ Jeffrey M. Hinds Albert H. Eckert, II Jeffrey M. Hinds Chief Executive Officer Chief Financial Officer - -------------------------------------------------------------------------------- 23 FIRST BELL BANCORP, INC. 1997 ANNUAL REPORT Consolidated Balance Sheets (In thousands) - --------------------------------------------------------------------------------
DECEMBER 31, ------------------ 1997 1996 ASSETS -------- -------- CASH AND CASH EQUIVALENTS: Cash on hand............................................. $ 872 $ 980 Noninterest-bearing deposits............................. 1,708 1,554 Interest-bearing deposits................................ 21,943 23,872 -------- -------- Total cash and cash equivalents........................ 24,523 26,406 FEDERAL FUNDS SOLD......................................... 1,550 72,875 INVESTMENT SECURITIES HELD-TO-MATURITY--At cost (fair value of $10,553 and $15,429 at December 31, 1997 and 1996, respectively)................................... 9,973 14,964 INVESTMENT SECURITIES AVAILABLE-FOR-SALE--At fair value (cost of $15,928 at December 31, 1997).................... 15,902 -- MORTGAGE-BACKED SECURITIES AVAILABLE-FOR-SALE--At fair value (cost of $31,654 at December 31, 1997).................... 31,885 -- CONVENTIONAL LOANS--Net of allowance for loan losses of $715 and $665 at December 31, 1997 and 1996, respectively.................. 578,487 529,866 OTHER LOANS--Net........................................... 907 949 REAL ESTATE OWNED.......................................... -- 229 PREMISES AND EQUIPMENT--Net................................ 3,492 3,692 FEDERAL HOME LOAN BANK STOCK--At cost...................... 5,148 3,999 ACCRUED INTEREST RECEIVABLE................................ 3,202 2,758 OTHER ASSETS............................................... 615 445 -------- -------- Total assets........................................... $675,684 $656,183 ======== ======== 1997 1996 LIABILITIES AND STOCKHOLDERS' EQUITY -------- -------- DEPOSITS: Passbook, club and other accounts........................ $ 67,587 $ 66,486 Money market and NOW accounts............................ 47,264 44,661 Certificate accounts..................................... 380,204 372,794 -------- -------- Total deposits......................................... 495,055 483,941 BORROWINGS................................................. 90,000 70,000 ADVANCES BY BORROWERS FOR TAXES AND INSURANCE.............. 12,226 10,822 ACCRUED INTEREST ON DEPOSITS............................... 535 503 ACCRUED INTEREST ON BORROWINGS............................. 332 191 ACCRUED INCOME TAXES....................................... 229 81 DEFERRED TAX LIABILITY..................................... 1,725 1,244 DIVIDENDS PAYABLE ON COMMON STOCK.......................... 575 713 OTHER LIABILITIES.......................................... 2,024 2,255 -------- -------- Total liabilities...................................... 602,701 569,750 -------- -------- STOCKHOLDERS' EQUITY: Preferred stock ($.01 par value; 2,000,000 shares authorized; no shares issued or outstanding)............ -- -- Common stock ($.01 par value; 20,000,000 shares authorized; 8,596,250 shares issued and 6,510,625 and 7,758,150 outstanding)............................................ 86 86 Additional paid-in capital............................... 61,371 61,063 Unearned ESOP shares..................................... (4,217) (4,454) Unearned MRP shares...................................... (4,290) (4,792) Treasury stock, at cost.................................. (32,077) (11,684) Unrealized gain on securities available-for-sale, net of taxes................................................... 117 -- Retained earnings--substantially restricted.............. 51,993 46,214 -------- -------- Total stockholders' equity............................. 72,983 86,433 -------- -------- Total liabilities and stockholders' equity............. $675,684 $656,183 ======== ========
See notes to consolidated financial statements. - -------------------------------------------------------------------------------- 24 Consolidated Statements of Income (In thousands, except per share amounts) - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, ----------------------- 1997 1996 1995 ------- ------- ------- INTEREST AND DIVIDEND INCOME: Conventional loans................................... $41,397 $36,727 $27,546 Interest-bearing deposits............................ 1,343 791 2,156 Mortgage-backed securities........................... 3,148 -- 311 Federal funds sold................................... 497 1,965 1,567 Investment securities................................ 2,425 1,214 1,975 Other loans.......................................... 67 71 81 Federal Home Loan Bank stock......................... 349 239 195 ------- ------- ------- Total interest and dividend income................. 49,226 41,007 33,831 ------- ------- ------- INTEREST EXPENSE: Deposits............................................. 26,686 21,859 18,432 Borrowings........................................... 5,643 191 -- ------- ------- ------- Total interest expense............................. 32,329 22,050 18,432 ------- ------- ------- NET INTEREST INCOME.................................... 16,897 18,957 15,399 PROVISION FOR LOAN LOSSES.............................. 45 90 -- ------- ------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES.... 16,852 18,867 15,399 ------- ------- ------- OTHER INCOME: Service fees and charges............................. 525 644 733 (Loss) gain on sales of mortgage-backed securities available-for-sale.................................. (8) -- 68 Gain on sale of conventional loans................... 258 -- -- Gain on sale of premise.............................. -- 536 -- Other income......................................... 54 18 23 ------- ------- ------- Total other income................................. 829 1,198 824 ------- ------- ------- OTHER EXPENSES: Compensation, payroll taxes and fringe benefits...... 2,953 2,844 2,291 Federal insurance premiums........................... 261 3,418 848 Office occupancy expense, excluding depreciation..... 415 459 478 Depreciation......................................... 296 244 240 Computer services.................................... 218 206 212 Other expenses....................................... 917 1,006 876 ------- ------- ------- Total other expenses............................... 5,060 8,177 4,945 ------- ------- ------- INCOME BEFORE PROVISION FOR INCOME TAXES............... 12,621 11,888 11,278 ------- ------- ------- PROVISION FOR INCOME TAXES: Current: Federal............................................. 3,665 3,189 2,966 State............................................... 976 725 726 Deferred expense..................................... 405 571 653 ------- ------- ------- Total provision for income taxes................... 5,046 4,485 4,345 ------- ------- ------- NET INCOME............................................. $ 7,575 $ 7,403 $ 6,933 ======= ======= ======= BASIC EARNINGS PER SHARE (1)........................... $ 1.29 $ 1.05 $ 0.52 ======= ======= ======= DILUTED EARNINGS PER SHARE (1)......................... $ 1.23 $ 1.02 $ 0.52 ======= ======= =======
- ------- (1) Amounts for the year ending December 31, 1995 represent earnings per share for the period shares were outstanding from the date of the conversion of capital stock form of ownership (see Note 2). See notes to consolidated financial statements. - -------------------------------------------------------------------------------- 25 FIRST BELL BANCORP, INC. 1997 ANNUAL REPORT Consolidated Statements of Changes in Stockholders' Equity (In thousands) - --------------------------------------------------------------------------------
PREFERRED STOCK COMMON STOCK ADDITIONAL UNEARNED ---------------- ----------------- PAID-IN ESOP SHARES PAR VALUE SHARES PAR VALUE CAPITAL SHARES ------ --------- ------ --------- ---------- -------- BALANCE, DECEMBER 31, 1994................... -- $-- -- $-- $ -- $ -- Net proceeds from initial public offering............. -- -- 8,596 86 83,454 (6,877) Allocation of ESOP shares............... -- -- -- -- 70 241 Net income............ -- -- -- -- -- -- --- --- ------ --- -------- ------- BALANCE, DECEMBER 31, 1995................... -- -- 8,596 86 83,524 (6,636) Purchase of treasury stock................ -- -- (838) -- -- -- Purchase of MRP shares............... -- -- -- -- -- -- Allocation of ESOP shares............... -- -- -- -- 203 202 Return of capital ($2.93 per share).... -- -- -- -- (22,664) 1,980 Dividends ($.37 per share)............... -- -- -- -- -- -- Net income............ -- -- -- -- -- -- --- --- ------ --- -------- ------- BALANCE, DECEMBER 31, 1996................... -- -- 7,758 86 61,063 (4,454) Purchase of treasury stock................ -- -- (1,247) -- -- -- Allocation of MRP shares............... -- -- -- -- 8 -- Allocation of ESOP shares............... -- -- -- -- 300 237 Change in unrealized gain in securities available-for-sale, net of taxes......... -- -- -- -- -- -- Dividends ($.40 per share)............... -- -- -- -- -- -- Net income............ -- -- -- -- -- -- --- --- ------ --- -------- ------- BALANCE, DECEMBER 31, 1997................... -- $-- 6,511 $86 $ 61,371 $(4,217) === === ====== === ======== =======
UNREALIZED GAIN ON UNEARNED SECURITIES MRP TREASURY AVAILABLE-FOR-SALE, RETAINED SHARES STOCK NET OF TAXES EARNINGS TOTAL -------- -------- ------------------- -------- -------- BALANCE, DECEMBER 31, 1994................... $ -- $ -- $ -- $34,575 $ 34,575 Net proceeds from initial public offering............. -- -- -- -- 76,663 Allocation of ESOP shares............... -- -- -- -- 311 Net income............ -- -- -- 6,933 6,933 ------- -------- ---- ------- -------- BALANCE, DECEMBER 31, 1995................... -- -- -- 41,508 118,482 Purchase of treasury stock................ -- (11,684) -- -- (11,684) Purchase of MRP shares............... (4,792) -- -- -- (4,792) Allocation of ESOP shares............... -- -- -- -- 405 Return of capital ($2.93 per share).... -- -- -- -- (20,684) Dividends ($.37 per share)............... -- -- -- (2,697) (2,697) Net income............ -- -- -- 7,403 7,403 ------- -------- ---- ------- -------- BALANCE, DECEMBER 31, 1996................... (4,792) (11,684) -- 46,214 86,433 Purchase of treasury stock................ -- (20,393) -- -- (20,393) Allocation of MRP shares............... 502 -- -- -- 510 Allocation of ESOP shares............... -- -- -- -- 537 Change in unrealized gain in securities available-for-sale, net of taxes......... -- -- 117 -- 117 Dividends ($.40 per share)............... -- -- -- (1,796) (1,796) Net income............ -- -- -- 7,575 7,575 ------- -------- ---- ------- -------- BALANCE, DECEMBER 31, 1997................... $(4,290) $(32,077) $117 $51,993 $ 72,983 ======= ======== ==== ======= ========
See notes to consolidated financial statements. - -------------------------------------------------------------------------------- 26 Consolidated Statements of Cash Flows (In thousands) - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, ------------------------------ 1997 1996 1995 -------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................... $ 7,575 $ 7,403 $ 6,933 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation................................ 296 244 240 Deferred income taxes....................... 405 571 653 Amortization of premiums and accretion of discounts.................................. 195 (11) (358) Provision for loan loss..................... 45 90 -- Compensation expense--allocations of ESOP and MRP shares............................. 1,055 930 311 Gain on sale of real estate owned........... (37) -- -- Gain on sale of conventional loans.......... (258) -- -- Loss (gain) on sale of mortgage-backed securities available-for-sale.............. 8 -- (68) Gain on sale of premise..................... -- (536) -- Net proceeds from sale of conventional loans...................................... 29,662 -- -- Increase or decrease in assets and liabilities: Accrued interest receivable................ (444) (81) (615) Accrued interest on deposits............... 32 165 149 Accrued interest on borrowings............. 141 191 -- Accrued income taxes....................... 148 58 135 Other assets............................... (170) (337) 502 Other liabilities.......................... (100) 1,073 (50) Dividend payable........................... (138) (713) -- -------- --------- --------- Net cash provided by operating activities.... 38,415 9,047 7,832 -------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of investment securities available- for-sale.................................... (25,947) -- (4,878) Purchase of mortgage-backed securities available-for-sale.......................... (92,528) -- -- Net decrease (increase) in Federal Funds..... 71,325 (20,850) (52,025) Maturity of investment securities held-to- maturity.................................... 5,000 5,000 30,000 Maturity of investment securities available- for-sale.................................... 10,000 -- -- Principal paydowns on mortgage-backed securities available-for-sale............... 14,000 -- 878 Net proceeds from sale of mortgage-backed securities available-for-sale............... 46,668 -- 4,058 Net increase in conventional loans........... (78,145) (115,575) (83,615) Purchase of conventional loans............... -- -- (24,361) Net decrease in other loans.................. 42 10 106 Purchase of Federal Home Loan Bank stock..... (1,149) (990) (600) Net proceeds from sale of real estate owned.. 342 178 149 Net proceeds from sale of premises........... -- 915 -- Purchase of premises and equipment........... (96) (714) (35) -------- --------- --------- Net cash used in investing activities........ (50,488) (132,026) (130,323) -------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in demand deposits, NOW accounts and savings accounts........... $ 3,704 $ (23) $ (23,734) Net increase in certificate accounts......... 7,410 92,553 51,463 Advances by borrowers for taxes and insurance................................... 1,404 2,277 1,617 Net increase in borrowings................... 20,000 70,000 -- Dividends paid............................... (1,935) (1,984) -- Net proceeds from sale of stock.............. -- -- 76,663 Return of capital............................ -- (20,684) -- Purchase of MRP stock........................ -- (4,792) -- Purchase of treasury stock................... (20,393) (11,684) -- -------- --------- --------- Net cash provided by financing activities.... 10,190 125,663 106,009 -------- --------- --------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS................................... (1,883) 2,684 (16,482) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR... 26,406 23,722 40,204 -------- --------- --------- CASH AND CASH EQUIVALENTS, END OF YEAR......... $ 24,523 $ 26,406 $ 23,722 ======== ========= ========= SUPPLEMENTAL DISCLOSURES: Cash paid for: Interest on deposits and advances by borrowers for taxes and insurance.......... $ 26,655 $ 21,693 $ 18,283 Interest on borrowings...................... 5,502 -- -- Income taxes................................ 4,606 3,870 3,557 Noncash transactions: Transfers from conventional loans to real estate acquired through foreclosure........ 104 229 287 Increase in additional paid-in capital--ESOP and MRP allocations........................ 308 203 70 Transfers from conventional mortgage loans to conventional mortgage loans, held-for- sale....................................... 29,989 -- -- Unrealized appreciation on securities available-for-sale......................... 192 -- --
See notes to consolidated financial statements. - -------------------------------------------------------------------------------- 27 FIRST BELL BANCORP, INC. 1997 ANNUAL REPORT Notes to Consolidated Financial Statements Years Ended December 31, 1997, 1996 and 1995 - -------------------------------------------------------------------------------- 1.BASIS OF PRESENTATION The consolidated financial statements include the accounts of First Bell Bancorp, Inc. ("First Bell") and its wholly-owned subsidiary, Bell Federal Savings and Loan Association of Bellevue (the "Association" or "Bell Feder- al", collectively the "Company"). All significant intercompany transactions have been eliminated in consolidation. The investment in Bell Federal on First Bell's parent company financial statements is carried at the parent company's equity in the underlying net assets. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles and with general practices within the banking industry. In preparing such financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial state- ments and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. 2.CONVERSION TO CAPITAL STOCK FORM OF OWNERSHIP On July 18, 1994, the Board of Directors of Bell Federal Savings and Loan Association of Bellevue adopted a plan of conversion, pursuant to which the Association would convert from a federally chartered mutual savings and loan association to a federally chartered capital stock savings and loan association, with the concurrent formation of the holding company, First Bell Bancorp, Inc. On June 29, 1995, conversion from a mutual form of ownership to a stock form was finalized. First Bell was capitalized through the initial sale of 8,596,250 shares of common stock to eligible account holders, an employee benefit plan of the Association, supplemental eligible account holders, other members of the Association, and the general public. First Bell then used a portion of the proceeds from the sale to purchase all of the out- standing shares of Bell Federal. This transaction was accounted for in a manner similar to the pooling of interests method. On December 16, 1996, the Company declared a one-time cash distribution of $3.00 per share. The Company obtained a private letter ruling from the In- ternal Revenue Service which allowed them to treat $2.93 per share of this distribution as a return of capital. The return of capital was reflected as a reduction to additional paid-in-capital and unearned ESOP shares in the Company's financial statements. For the stockholders, the return of capital is treated as a reduction in the cost basis of the shares and is not sub- ject to income taxes until the shares are sold. The remaining $.07 per share was treated as an ordinary dividend. The total distribution paid was $23,274,450 on 7,758,150 shares of stock on December 31, 1996 to sharehold- ers of record as of December 20, 1996. 3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Federal Home Loan Bank System--The Association is a member of the Fed- eral Home Loan Bank ("FHLB") system. As a member, the Association is re- quired to maintain a minimum investment in capital stock of the FHLB of not less than 1% of the Association's outstanding conventional mortgage loans or 0.3% of its total assets. Deficiencies, if any, in the required investment at the end of any reporting period are purchased in the sub- sequent reporting period. The Association receives dividends on its FHLB stock. b. Cash and Cash Equivalents--For the purpose of presenting the consoli- dated statements of cash flows, cash on hand and interest and noninter- est-bearing deposits with original maturities of less than 90 days are considered cash equivalents. The Association services mortgage loans for the Federal National Mort- gage Association ("FNMA"). The Association is required to restrict cash balances equal to the corresponding escrow funds. As of December 31, 1997 and 1996, restricted cash of approximately $634,000 and $165,000, respectively, has been segregated on the books of the Association. - -------------------------------------------------------------------------------- 28 - -------------------------------------------------------------------------------- The Association's reserve requirements imposed by the Federal Reserve Bank averaged approximately $860,000 and $804,000 for the years ended December 31, 1997 and 1996, respectively. c. Investment and Mortgage-Backed Securities--First Bell follows Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Cer- tain Debt and Equity Securities," for investment and mortgage-backed se- curities. Investment and mortgage-backed securities that may be sold as part of First Bell's asset/liability or liquidity management or in re- sponse to or in anticipation of changes in interest rates and prepayment risk or other factors are classified as available-for-sale and are car- ried at fair market value. Unrealized gains and losses on such securi- ties are reported net of related taxes as a separate component of stock- holders' equity. Securities that the Company has the intent and ability to hold to maturity are classified as held-to-maturity and are carried at amortized cost. Realized gains and losses on sales of all securities are reported in earnings and are computed using the specific identifica- tion cost basis. Premiums are amortized and discounts are accreted to maturity using the level yield method. The Company does not maintain a trading account. d. Conventional Loans--Interest on loans is credited to income as earned. Interest earned that has not been collected is accrued. Interest accrued on loans delinquent more than 90 days is offset by a reserve for uncollected interest and is, therefore, not recognized as income. Origi- nation fees and costs related to activities performed for a loan origi- nation are deferred and recognized over the contractual life using the level yield method in accordance with SFAS No. 91 "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases." e. Servicing of Loans--The total amount of loans serviced for others was $31,407,000, $4,173,000 and $4,739,000 at December 31, 1997, 1996 and 1995, respectively. During 1997, $29,989,000 of conventional mortgage loans were sold to FNMA in which the servicing of such loans were main- tained by the Association and a related servicing asset of $237,000 was recorded. The servicing asset will be amortized over the expected life of the servicing agreement. f. Allowance for Loan Losses--The allowance for loan losses is determined by management, taking into consideration the past loan loss experience, known and inherent risks in the portfolio, adverse situations which may affect the borrowers' ability to repay and estimated values of under- lying collateral and current economic conditions in the Association's lending area. While management uses the best information available to estimate losses on loans, future additions to the allowance may be nec- essary for changes in economic conditions beyond the Association's con- trol. g. Real Estate Owned--Real estate owned is initially recorded at the lower of carrying value or fair value less estimated costs to sell. Subse- quently, such real estate is carried at the lower of fair value less es- timated costs to sell or its initial recorded value. Reductions in the carrying value of real estate subsequent to acquisition are recorded through a valuation allowance. Costs related to the development and im- provement of the real estate are capitalized, whereas those costs relat- ing to holding the real estate are charged to expense. Recovery of the carrying value of real estate acquired in settlement of loans is dependent to a great extent on economic, operating and other conditions that may be beyond the Company's control. h. Premises and Equipment--Premises, equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization. De- preciation and amortization are computed on a straight-line basis over the estimated useful lives (3-50 years) or leasehold period, if shorter, of the related assets. i. Deposits--Interest on deposits is accrued and charged to operating expense monthly and is paid in accordance with the terms of the respective accounts. - -------------------------------------------------------------------------------- 29 FIRST BELL BANCORP, INC. 1997 ANNUAL REPORT - -------------------------------------------------------------------------------- j. Income Taxes--The Company follows the provisions of SFAS No. 109, "Ac- counting for Income Taxes." SFAS No. 109 requires the asset and liabil- ity method of accounting for income taxes, under which deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates to differences between the fi- nancial statement carrying amounts and the tax bases of existing assets and liabilities. Under SFAS No. 109, the effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. k. Earnings Per Share--The Financial Accounting Standards Board ("FASB") recently issued SFAS No. 128, "Earnings Per Share," which became effec- tive for financial statements for periods ending after December 15, 1997. SFAS No. 128 establishes standards for computing and presenting earnings per share ("EPS"). It simplifies the standards for computing EPS and makes them comparable to international EPS. Basic EPS is computed by dividing net income available to common stock- holders by the weighted average number of common shares outstanding for the period. Diluted EPS is computed by dividing net income available to common stockholders, adjusted for dilutive securities, by the weighted average number of common shares outstanding, adjusted for dilutive secu- rities. For the years ended December 31, 1996 and 1995, EPS has been restated to conform with the provisions of SFAS No. 128. l. Treasury Stock--Treasury stock is recorded at cost. m. Interest Rate Risk--A significant portion of the Company's assets con- sist of long-term fixed-rate residential mortgage loans, while a signif- icant portion of the Company's liabilities consist of deposits with con- siderably shorter terms. As a result of these differences in the maturities of assets and liabilities, any significant increase in inter- est rates will have an adverse effect on the Company's results of opera- tions. To manage this interest rate risk, the Company maintains high levels of liquid assets to enable it to quickly respond to changes in interest rates. 4.INVESTMENT SECURITIES HELD-TO-MATURITY The following is a summary of investment securities held-to-maturity at De- cember 31 (in thousands):
1997 --------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAIN LOSS VALUE --------- ---------- ---------- ------- Treasury bills....................... $ 9,969 $516 $-- $10,485 Other investments.................... 4 64 -- 68 ------- ---- --- ------- $ 9,973 $580 $-- $10,553 ======= ==== === ======= 1996 --------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAIN LOSS VALUE --------- ---------- ---------- ------- Treasury bills....................... $14,960 $424 $-- $15,384 Other investments.................... 4 41 -- 45 ------- ---- --- ------- $14,964 $465 $-- $15,429 ======= ==== === =======
- -------------------------------------------------------------------------------- 30 - ------------------------------------------------------------------------------- The carrying value and fair value of investment securities held-to-maturity by contractual maturity as of December 31, 1997, are shown below (in thousands):
AMORTIZED FAIR COST VALUE --------- ------- Due after one year through five years..................... $4,993 $ 5,090 Due after five years through ten years.................... 4,980 5,463 ------ ------- $9,973 $10,553 ====== =======
There were no sales of investment securities held-to-maturity during the years ended December 31, 1997, 1996 and 1995. 5.INVESTMENT SECURITIES AVAILABLE-FOR-SALE These investments consist of collateralized mortgage obligations. The fol- lowing is a summary of investment securities available-for-sale at December 31, 1997 (in thousands):
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAIN LOSS VALUE --------- ---------- ---------- ------- Federal Home Loan Mortgage Corporation....................... $15,940 $-- $(38) $15,902 ------- --- ---- -------
There were no investment securities available-for-sale held by the Company at December 31, 1996 and 1995. There were no sales of investment securities available-for-sale during the year ended December 31, 1997. The contractual maturity of these securities is in excess of 25 years. The expected maturity will differ from the contractual maturity because borrow- ers may have the right to prepay obligations with or without call or pre- payment penalties. 6.MORTGAGE-BACKED SECURITIES AVAILABLE-FOR-SALE The following is a summary of mortgage-backed securities available-for-sale held at December 31, 1997 (in thousands):
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAIN LOSS VALUE --------- ---------- ---------- ------- Federal National Mortgage Association........................ $ 4,912 $ 15 $-- $ 4,927 Government National Mortgage Association........................ 26,742 216 -- 26,958 ------- ---- --- ------- $31,654 $231 $-- $31,885 ======= ==== === =======
Proceeds from sales of mortgage-backed securities available-for-sale were $46,668,000 and $4,058,000 for the years ended December 31, 1997 and 1995, respectively, resulting in gross gains of $94,000 and $68,000 for the years ended December 31, 1997 and 1995, respectively, and gross losses of $102,000 for the year ended December 31, 1997. There were no losses in- curred for the year ended December 31, 1995. There were no sales of such securities during 1996. There were no mortgage-backed securities held by the Company at December 31, 1996 and 1995. The contractual maturity of these securities is in excess of 25 years. The expected maturity will differ from the contractual maturity because borrow- ers may have the right to prepay obligations with or without call or pre- payment penalties. - ------------------------------------------------------------------------------- 31 FIRST BELL BANCORP, INC. 1997 ANNUAL REPORT - ------------------------------------------------------------------------------- 7.CONVENTIONAL LOANS The following is a summary of conventional loans as of December 31, 1997 and 1996 (in thousands):
1997 1996 -------- -------- Conventional mortgages..................................... $568,405 $524,867 Residential construction loans............................. 25,563 19,877 Multi-family loans......................................... 860 1,220 Second mortgage loans...................................... 268 297 -------- -------- 595,096 546,261 Less: Deferred net loan origination fees......................... 3,822 4,610 Undisbursed portion of construction loans in process....... 12,072 11,120 Allowance for loan losses.................................. 715 665 -------- -------- $578,487 $529,866 ======== ========
Conventional mortgages consist of one-to-four family fixed and adjustable rate loans. The Company grants loans throughout the greater Pittsburgh, Pennsylvania metropolitan area. The Company's borrowers ability to repay the loans outstanding is, therefore, dependent on the economy of that area. Nonaccrual loans totaled $634,000 and $400,000 at December 31, 1997 and 1996, respectively. The Association does not accrue interest on loans past due 90 days or more. Uncollected interest on total nonaccrual loans amounted to $29,000, $24,000 and $25,000 for the years ended December 31, 1997, 1996 and 1995, respectively. During 1997, the Company reclassed approximately $29,989,000 of conven- tional mortgages classified as held to maturity to held-for-sale, and sub- sequently sold all such conventional mortgages, resulting in a gain of ap- proximately $258,000. The Company reclassed and sold such mortgages in efforts to better manage the Company's interest rate risk. 8.ALLOWANCE FOR LOAN LOSSES The following is an analysis of the changes in the allowance for loan losses for the years ended December 31 (in thousands):
1997 1996 1995 ---- ---- ---- Balance, beginning of year.................................... $665 $575 $575 Provision for loan losses..................................... 45 90 -- Loans charged off............................................. -- -- Recovery of previous loan chargeoffs.......................... 5 -- -- ---- ---- ---- Balance, end of year.......................................... $715 $665 $575 ==== ==== ====
- ------------------------------------------------------------------------------- 32 - -------------------------------------------------------------------------------- 9.PREMISES AND EQUIPMENT The following is a summary of premises and equipment as of December 31 (in thousands):
1997 1996 ------ ------ Land and land improvements.................................... $ 351 $ 351 Office buildings and leasehold improvements................... 3,815 3,755 Furniture, fixtures and equipment............................. 1,671 1,636 ------ ------ 5,837 5,742 Less accumulated depreciation and amortization................ 2,345 2,050 ------ ------ $3,492 $3,692 ====== ======
During the quarter ended September 30, 1996, the Association's branch of- fice, which was located in the central business district in the City of Pittsburgh, was sold for $915,000 resulting in a gain of $536,000. The sale of the building was the result of a redevelopment project undertaken by the City of Pittsburgh to enhance the downtown retail business district. The branch was relocated to a new leased location in the same general area. The Company leases certain of its branch offices under various operating leases. Some of these leases contain renewal and extension clauses. The following is a summary of the future minimum lease payments under these op- erating leases (in thousands):
YEAR ENDING MINIMUM LEASE DECEMBER 31, PAYMENTS ------------ ------------- 1998 $158 1999 164 2000 170 2001 178 2002 113 2003 and thereafter 343
Rental expense under these leases was approximately $161,000, $113,000 and $96,000 for the years ended December 31, 1997, 1996 and 1995, respectively. 10.DEPOSITS The following is a summary of deposits and stated interest rates as of De- cember 31 (in thousands):
STATED RATE 1997 1996 ------------- -------- -------- Balance by interest rate: Passbook, club and other accounts......... 3.00%-- 4.45% $ 67,587 $ 66,486 -------- -------- Money market and NOW accounts............. 0.00%-- 3.21% 47,264 44,661 -------- -------- Certificate accounts...................... 3.00%-- 5.50% 74,933 113,356 5.51%-- 6.00% 156,885 121,968 6.01%-- 6.50% 115,491 98,368 6.51%-- 7.50% 26,200 30,860 7.51%-- 8.50% 2,855 3,630 8.51%-- 9.50% 3,559 4,346 9.51%--10.50% 281 266 -------- -------- 380,204 372,794 -------- -------- $495,055 $483,941 ======== ========
- -------------------------------------------------------------------------------- 33 FIRST BELL BANCORP, INC. 1997 ANNUAL REPORT - -------------------------------------------------------------------------------- Noninterest-bearing demand deposits were approximately $3,610,000 and $3,994,000 at December 31, 1997 and 1996, respectively. The Association maintains insurance on deposits through the Savings Associ- ation Insurance Fund ("SAIF"), which is under the supervision of the Fed- eral Deposit Insurance Corporation ("FDIC"). The following is a summary of certificate accounts by contractual maturity at December 31, 1997 (in thousands):
CONTRACTUAL MATURITY -------------------- 1998 $275,850 1999 42,701 2000 25,589 2001 10,544 2002 9,084 2003 1,382 2004 and thereafter 15,054 -------- $380,204 ========
The aggregate amount of certificates of deposit with a minimum denomination of $100,000 was $37,828,000 and $36,307,000 at December 31, 1997 and 1996, respectively. Deposits in excess of $100,000 are not insured by the SAIF. 11.BORROWINGS At December 31, 1997, the Company had $90,000,000 in borrowings from the FHLB. Of these borrowings, $70,000,000 currently bears interest based upon the three-month London Interbank Offered Rate ("LIBOR"), currently 5.46%, and matures on March 17, 2002. The remaining $20,000,000 matures on January 2, 1998 and bears interest at 6.50%. Such borrowings are secured by the as- sets of the Company. At December 31, 1996, the Company had $70,000,000 in borrowings from the FHLB. The borrowings bear interest based on the three- month LIBOR adjusted quarterly, and are secured by the assets of the Compa- ny. 12.REGULATORY CAPITAL REQUIREMENTS AND RESTRICTIONS The Association is subject to various regulatory capital requirements ad- ministered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory--and possibly additional dis- cretionary--actions by regulators that, if undertaken, could have a direct material effect on the Association's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective ac- tion, the Association must meet specific capital guidelines that involve quantitive measures of the Association's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practic- es. The Association's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Association to maintain minimum amounts and ratios (set forth in the table below) of Total and Tier I Capital to risk-weighted assets and of Tangible and Tier I Capital to total assets. Management believes, as of December 31, 1997, that the Association meets all capital adequacy require- ments to which it is subject. - -------------------------------------------------------------------------------- 34 - -------------------------------------------------------------------------------- The most recent notification from the Office of Thrift Supervision catego- rized the Association as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the As- sociation must maintain minimum Total Capital to risk-weighted assets, Tier I Capital to risk-weighted assets and Tier I Capital to total assets ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the institu- tion's category. The Association had the following amounts of capital and capital ratios at December 31, 1997 and 1996 (in thousands):
TO BE WELL CAPITALIZED UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS ------------- ----------------- ------------------ AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------- ----- ---------- -------- --------- -------- As of December 31, 1997: Total Capital (to risk-weighted assets).............. $72,523 23.39% $24,810 8.00% $31,012 10.00% Tier I Capital (to risk-weighted assets).............. 71,808 23.15% N/A N/A 18,607 6.00% Tier I Capital (to total assets)........ 71,808 10.59% 20,341 3.00% 33,902 5.00% Tangible Capital...... 71,808 10.59% 10,171 1.50% N/A N/A As of December 31, 1996: Total Capital (to risk-weighted assets).............. $80,102 27.51% $23,298 8.00% $29,123 10.00% Tier I Capital (to risk-weighted assets).............. 79,451 27.28% N/A N/A 17,474 6.00% Tier I Capital (to total assets)........ 79,451 12.16% 19,599 3.00% 32,816 5.00% Tangible Capital...... 79,451 12.16% 9,800 1.50% N/A N/A
Tangible Capital and Tier I Capital (to total assets) capital ratios are computed as a percentage of total assets. Total Capital and Tier I Capital (to risk-weighted assets) ratios are computed as a percentage of risk- weighted assets. Risk-weighted assets were $310,121,000 and $291,266,000 at December 31, 1997 and 1996, respectively. The Association may not declare or pay cash dividends on or repurchase any of its shares of common stock if the effect thereof would cause equity to be reduced below applicable regulatory capital maintenance requirements, or if such declaration and payment would otherwise violate regulatory require- ments. At December 31, 1997, the maximum dividend the Association may de- clare and pay to First Bell is approximately $36,011,000. 13.EARNINGS PER SHARE Both basic and diluted earnings per share are calculated as of December 31 as follows (in thousands, except per share amounts):
WEIGHTED AVERAGE PER INCOME SHARES SHARE 1997 ------ -------- ----- Income available to common stockholders................ $7,575 6,784 Unearned ESOP shares................................... -- (615) Unearned MRP shares.................................... -- (308) ------ ----- Basic earnings per share............................... 7,575 5,861 $1.29 ===== Effect of dilutive securities: MRP shares............................................ -- 129 Stock options......................................... -- 144 ------ ----- Diluted earnings per share............................. $7,575 6,134 $1.23 ====== ===== =====
- -------------------------------------------------------------------------------- 35 FIRST BELL BANCORP, INC. 1997 ANNUAL REPORT - --------------------------------------------------------------------------------
WEIGHTED AVERAGE PER INCOME SHARES SHARE 1996 ------ -------- ----- Income available to common stockholders................ $7,403 8,051 Unearned ESOP shares................................... -- (649) Unearned MRP shares.................................... -- (344) ------ ----- Basic earnings per share............................... 7,403 7,058 $1.05 ===== Effect of dilutive securities: MRP shares............................................ -- 180 Stock options......................................... -- 14 ------ ----- Diluted earnings per share............................. $7,403 7,252 $1.02 ====== ===== ===== WEIGHTED AVERAGE PER INCOME SHARES SHARE 1995 ------ -------- ----- Income available to common stockholders................ $4,119 8,596 Unearned ESOP shares................................... -- (662) ------ ----- Basic and diluted earnings per share................... $4,119 7,934 $0.52 ====== ===== =====
For 1995, earnings subsequent to the initial sale of common stock in the amount of $4,119,000 was used to compute both basic and diluted earnings per share. 14.INTEREST EXPENSE The following is a summary of interest expense on deposits for the year ended December 31 (in thousands):
1997 1996 1995 ------- ------- ------- Passbook, club and other accounts................... $ 2,288 $ 2,314 $ 2,371 Money market and NOW accounts....................... 1,092 1,040 1,069 Certificate accounts................................ 23,306 18,505 14,992 ------- ------- ------- $26,686 $21,859 $18,432 ======= ======= =======
15.INCOME TAXES Deferred income taxes reflect the net effects of temporary differences be- tween the carrying amounts of assets and liabilities for financial report- ing purposes and the bases used for income tax purposes. The tax effects of significant items comprising the net deferred tax liability at December 31 as follows (in thousands):
1997 1996 ------- ------- Deferred Tax Assets: Deferred loan origination fees............................ $ -- $ -- Other..................................................... 171 158 ------- ------- Total deferred tax assets................................ 171 158 ------- ------- Deferred Tax Liabilities: Deferred loan origination fees............................ (482) (57) Allowance for loan losses................................. (903) (915) Depreciation on premises and equipment.................... (252) (248) Other..................................................... (259) (182) ------- ------- Total deferred tax liabilities........................... (1,896) (1,402) ------- ------- Net deferred tax liability............................... $(1,725) $(1,244) ======= =======
- -------------------------------------------------------------------------------- 36 - -------------------------------------------------------------------------------- The provision for income taxes consists of the following components for the year ended December 31 (in thousands):
1997 1996 1995 ------ ------ ------ Current: Federal................................................ $3,665 $3,189 $2,966 State.................................................. 976 725 726 Deferred expense........................................ 405 571 653 ------ ------ ------ Total provision for income taxes...................... $5,046 $4,485 $4,345 ====== ====== ======
The following table presents the principal components of deferred income tax expense as of December 31 (in thousands):
1997 1996 1995 ---- ----- ---- Allowance for loan losses................................. $(13) $(123) $221 Deferred loan origination fees............................ 425 550 458 Depreciation differences.................................. 4 (6) 8 Other--net................................................ (11) 150 (34) ---- ----- ---- $405 $ 571 $653 ==== ===== ====
The reconciliation between the federal statutory tax rate and the Company's effective income tax rate for the year ended December 31 is as follows:
1997 1996 1995 ---- ---- ---- Statutory tax rate......................................... 34.0% 34.0% 34.0% State income taxes......................................... 5.2 4.0 4.3 Other--net................................................. 0.8 (0.3) 0.2 ---- ---- ---- Effective tax rate....................................... 40.0% 37.7% 38.5% ==== ==== ====
In accordance with SFAS No. 109, the Company has provided for deferred in- come taxes for the differences between the bad debt deduction for tax and financial statement purposes incurred after December 31, 1987. Deferred taxes have not been recognized with respect to pre-1988 tax basis bad debt reserves. In the event that the Company were to recapture these reserves into income, it would recognize tax expense of approximately $1.7 million. As a result of legislation enacted in 1996, however, this liability will not be recaptured if the Company were to change its depository institution charter. 16.EMPLOYEE BENEFIT PLANS Defined Benefit Pension Plan--The Company has a defined benefit pension plan for substantially all employees. The benefits of the defined benefit plan are generally based on the years of service and the employee's compen- sation during the last five years of employment. Net periodic pension cost for the defined benefit plan includes the follow- ing components for the year ended December 31 (in thousands):
1997 1996 1995 ---- ---- ---- Service cost............................................... $ 65 $ 82 $ 50 Interest cost.............................................. 75 68 60 Actual return on plan assets............................... (63) (61) (58) Net amortization and deferral.............................. (16) (9) (16) ---- ---- ---- Net periodic pension cost................................ $ 61 $ 80 $ 36 ==== ==== ====
- -------------------------------------------------------------------------------- 37 FIRST BELL BANCORP, INC. 1997 ANNUAL REPORT - -------------------------------------------------------------------------------- The following table reconciles the funded status of the plan to the amount recorded in the accompanying consolidated balance sheets as of December 31 (in thousands):
1997 1996 ------ ------ Projected benefit obligation................................ $1,182 $1,041 Plan assets at fair value, primarily insurance contracts and cash....................................................... 1,173 1,073 ------ ------ Plan assets (less than) in excess of projected benefit obligation................................................. (9) 32 Unrecognized net loss....................................... 213 165 Unrecognized prior service cost............................. (119) (127) Unrecognized net asset...................................... (53) (57) ------ ------ Net pension asset......................................... $ 32 $ 13 ====== ====== Actuarial present value of benefit obligation: Vested benefit obligation................................. $ 951 $ 814 Nonvested benefit obligation.............................. 24 41 ------ ------ Accumulated benefit obligation.............................. $ 975 $ 855 ====== ======
The following rate assumptions were used in the plan accounting as of De- cember 31:
1997 1996 1995 ---- ---- ---- Discount rate.............................................. 7.00% 7.25% 6.25% Rate of compensation increases............................. 6.00% 6.00% 6.00% Expected long-term rate of return on plan assets........... 7.00% 7.50% 7.50%
Deferred Supplemental Compensation Plan--During 1992, the Board of Direc- tors approved a supplemental deferred compensation plan for the President of the Association. The plan provides that the President will receive de- ferred compensation in an amount up to $60,000 per year based upon the re- turn on assets of the Company for the prior year. The compensation will be paid to the President upon his retirement. For the years ended December 31, 1997, 1996 and 1995, deferred compensation expenses under this plan were $60,000 each year. 401(k) Plan--The Association maintains a defined contribution 401(k) plan to provide benefits for substantially all employees. The plan provides for, but does not require, employees to make tax deferred payroll savings con- tributions. The Association is required to make a matching contribution based on the level of employee contribution. The total expense recorded un- der this plan for the years ended December 31, 1997, 1996 and 1995 was ap- proximately $9,200, $6,400 and $4,000, respectively. Employee Stock Ownership Plan--Effective January 1, 1995, the Association established the Bell Federal Savings and Loan Association of Bellevue Em- ployee Stock Ownership Plan ("ESOP") which covers substantially all employ- ees. On June 29, 1995, the ESOP purchased 687,700 shares of Company common stock as part of the initial public offering. The shares were purchased with the proceeds of a loan from the Company which will be repaid through the operations of the Association. Shares are allocated to employees, as principal and interest payments are made to the Company. - -------------------------------------------------------------------------------- 38 - -------------------------------------------------------------------------------- Compensation expense related to the ESOP for 1997, 1996 and 1995 totaled $537,000, $405,000 and $311,000, respectively, based on the average fair value of shares committed to be released. The loan and related interest ex- pense on the loan are eliminated in these consolidated financial state- ments. The fair value of unallocated ESOP shares at December 31, 1997 was approximately $11,326,000. Shares held by the ESOP were as follows as of December 31:
1997 1996 1995 ------- ------- ------- Unallocated shares, beginning of year............. 629,622 663,578 -- Shares purchased by ESOP.......................... -- -- 687,700 Shares released for allocation.................... (33,533) (33,956) (24,122) ------- ------- ------- Unallocated shares, end of year................... 596,089 629,622 663,578 ======= ======= =======
Stock Option Plan--The Company has a fixed option plan that was approved by Shareholders on April 29, 1996. Options under this plan have been granted to certain officers and directors of the Company. The plan also permits op- tions to be granted to employees at the Company's discretion. Under the plan, the total number of shares of common stock that may be granted is 859,625. The Company has adopted the disclosure-only provision of SFAS No. 123, "Accounting for Stock-Based Compensation," and accordingly, no compen- sation cost has been recognized for the stock option plan. Had compensation cost for the Company's stock option plan been determined based on the fair value at the grant date for awards in 1997 and 1996 consistent with the provisions of SFAS No. 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below as of December 31 (in thousands, except per share amounts):
BASIC DILUTED EARNINGS EARNINGS NET PER PER INCOME SHARE SHARE 1997 ------ -------- -------- As reported......................................... $7,575 $1.29 $1.23 Pro forma........................................... 6,654 1.14 1.08 BASIC DILUTED EARNINGS EARNINGS NET PER PER INCOME SHARE SHARE 1996 ------ -------- -------- As reported......................................... $7,403 $1.05 $1.02 Pro forma........................................... 7,067 1.00 0.97
Pro forma basic and diluted earnings per share for 1996 have been restated to conform with the provisions of SFAS No. 128 (see Note 3). The fair value of each option grant is estimated on the date of grant using the Black Sholes option pricing model with the following weighted average assumptions used for grants for each respective year as of December 31:
1997 1996 ------- -------- Dividend yield............................................ 2.00% 3.00% Expected volatility....................................... 29.00% 27.00% Risk-free interest rate................................... 5.60% 6.40% Expected lives............................................ 9 YEARS 10 Years
- -------------------------------------------------------------------------------- 39 FIRST BELL BANCORP, INC. 1997 ANNUAL REPORT - -------------------------------------------------------------------------------- The following summarizes the activity in the Stock Option Plan for the year ended December 31:
1997 1996 ------- -------- Options outstanding, beginning of year.................... 361,037 -- Options granted........................................... -- 361,037 Equitable right adjustment................................ 89,113 -- Options exercised......................................... -- -- Options forfeited......................................... (12,862) -- ------- -------- Options outstanding, end of year.......................... 437,288 361,037 ======= ======== Weighted average exercise price, end of year.............. $10.70 $13.38 ======= ======== Options exercisable, end of year.......................... 90,030 -- ======= ======== Options available for grant, end of year.................. 422,337 498,588 ======= ======== Weighted-average fair value of options granted during the year..................................................... $10.25 $4.70 ======= ======== Remaining contractual life................................ 9 YEARS 10 Years
The exercise price of all options was reduced from $13.375 to $10.70 during 1997 as a result of the return of capital distribution made on December 16, 1996 (see Note 2). As a result, the Company was required to issue addi- tional options to the existing participants in an amount equal to the dif- ference between the value of the options in each participant's account be- fore the reduction in the exercise price, and the value of the options in each participant's account after the reduction in the exercise price. All options granted in 1997 are as a result of this equitable right adjustment. Approximately one-fifth of the stock option shares may be exercised after the end of each year, and no option will be exercisable after ten years from the date of grant. Terminated employees forfeit any non-vested op- tions. Master Stock Compensation Plan--The Association has a Master Stock Compen- sation Plan ("MRP") that was approved by Shareholders on April 29, 1996. Awards under this plan have been granted to certain officers, directors and management personnel of the Association. Under the MRP, a committee of the Board of Directors of the Association grants shares of common stock to em- ployees and directors. The following summarizes activity in the MRP for the year ended December 31:
1997 1996 ------- ------- Awards outstanding, beginning of year...................... 180,260 -- Awards granted............................................. 1,500 183,760 Awards forfeited........................................... (16,280) (3,500) Awards vested.............................................. (36,052) -- ------- ------- Awards outstanding, end of year............................ 129,428 180,260 ======= ======= Total MRP shares, end of year.............................. 307,798 343,850 ======= =======
Shares vest under the current awards at 20% per year, commencing one year from the date of grant subject to the attainment of certain performance goals. The cost of unearned shares related to these awards, included as a separate component of shareholders' equity, aggregated $4,290,000 and $4,792,000 at December 31, 1997 and 1996, respectively. Compensation cost is recorded over the five year period as shares are earned based on the av- erage fair market value of stock during the fiscal year. The expense for the year ended December 31, 1997 and 1996 was $518,000 and $510,000, re- spectively. Terminated employees forfeit any non-vested awards. - -------------------------------------------------------------------------------- 40 - -------------------------------------------------------------------------------- 17.COMMITMENTS AND CONTINGENCIES In the normal course of business, the Association originates loan commit- ments. Loan commitments generally have fixed expiration dates or other ter- mination clauses and may require payment of a fee. The Association evalu- ates each customer's credit worthiness on a case-by-case basis. The amount of collateral deemed necessary by the Association is based on management's credit evaluation and the Association's underwriting guidelines for the particular loan. The total commitments outstanding at December 31 are sum- marized as follows (in thousands):
1997 1996 ----------------- ----------------- NOTIONAL NOTIONAL NOTIONAL NOTIONAL AMOUNT RATE AMOUNT RATE -------- -------- -------- -------- 3--5 year adjustable rate mortgages...... $ 737 6.38% $ -- --% 15 year fixed rate mortgages............. 437 7.13 825 7.25 30 year fixed rate mortgages............. 4,044 7.38 5,342 7.50 Construction mortgages................... 12,687 7.38 11,120 7.46 ------- ------- $17,905 $17,287 ======= =======
Additionally, the Company is also subject to certain asserted and unas- serted potential claims encountered in the normal course of business. In the opinion of management, neither the resolution of these claims nor the funding of credit commitments will have a material effect on the Associa- tion's financial position or results of operations. Credit related financial instruments have off-balance sheet credit risk be- cause only origination fees (if any) are recognized in the balance sheet (as "other liabilities") for these instruments until the commitments are fulfilled or expire. The credit risk amounts are equal to the notional amounts of the contracts, assuming that all counterparties fail completely to meet their obligations and the collateral or other security is of no value. - -------------------------------------------------------------------------------- 41 FIRST BELL BANCORP, INC. 1997 ANNUAL REPORT - -------------------------------------------------------------------------------- 18.FAIR VALUES OF FINANCIAL INSTRUMENTS The fair values of the Company's financial instruments as of December 31 are as follows (in thousands):
1997 1996 ----------------- ----------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- -------- -------- -------- Assets: Cash and noninterest-bearing deposits.. $ 2,580 $ 2,580 $ 2,534 $ 2,534 Interest-bearing deposits............. 21,943 21,943 23,872 23,872 Federal Funds sold.................... 1,550 1,550 72,875 72,875 Investment securities held-to- maturity............................. 9,973 10,485 14,964 15,429 Investment securities available-for- sale................................. 15,902 15,902 -- -- Mortgage-backed securities available- for-sale............................. 31,885 31,885 -- -- Conventional loans.................... 578,487 581,058 529,866 518,842 Federal Home Loan Bank stock.......... 5,148 5,148 3,999 3,999 Liabilities: Passbook, club, money market, NOW and other accounts....................... $114,851 $114,851 $111,147 $111,147 Certificate accounts.................. 380,204 382,976 372,794 377,536 Borrowings............................ 90,000 90,000 70,000 70,000
a. Cash and Noninterest-bearing Deposits, Interest-bearing Deposits and Federal Funds Sold--For cash and noninterest-bearing deposits, interest- bearing deposits and Federal funds sold, the fair value is estimated as the carrying amount. b. Investment Securities Held-to-Maturity, Investment Securities Available- for-Sale and Mortgage-backed Securities Available-for-Sale--Fair values for these securities 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. c. Conventional Loans--For conventional mortgages, fair value is estimated by discounting estimated future cash flows using the current rates at which similar loans would be made to borrowers with similar credit rat- ings and for the same remaining maturities. d. Passbook, Club, Money Market, NOW and Other Accounts--The fair value of these accounts is the amount payable on demand, or the carrying amount at the reporting date. e. Certificate Accounts--The fair value of fixed-maturity certificates of deposit is estimated by discounting future cash flows using the rates currently offered for deposits of similar remaining maturities. f. Borrowings--The fair value of borrowings that have an adjustable rate which reprices quarterly is estimated as the carrying amount. g. Off-balance Sheet Commitments to Extend Credit--The fair value of off- balance sheet commitments to extend credit is estimated to equal the outstanding commitment amount. Management does not believe it is mean- ingful to provide an estimate of fair value that differs from the out- standing commitment amount as a result of the uncertainties involved in attempting to assess the likelihood and timing of the commitment being drawn upon, coupled with the lack of an established market and a wide diversity of fee structures. - -------------------------------------------------------------------------------- 42 - -------------------------------------------------------------------------------- 19.FDIC SPECIAL ASSESSMENT On September 30, 1996, the President signed into law the Deposit Insurance Funds Act of 1996 (the "Funds Act") which, among other things, imposed a special one-time assessment on SAIF member institutions, including the As- sociation, to recapitalize the SAIF. As required by the Funds Act, the FDIC imposed a special assessment of 65.7 basis points on SAIF assessable depos- its held as of March 31, 1995, payable November 27, 1996. The Association recorded a pre-tax charge of $2.5 million as a result of the FDIC special assessment during the year ended December 31, 1996. The Funds Act also spreads the obligation for payment of the Financing Cor- poration ("FICO") bonds across all SAIF and Bank Insurance Fund ("BIF") members. Beginning on January 1, 1997, BIF deposits are assessed for FICO payments at a rate of 20% of the rate assessed on SAIF deposits. Based on current estimates by the FDIC, BIF deposits are assessed a FICO payment of 1.3 basis points, while SAIF deposits pay an estimated 6.5 basis points on the FICO bonds. Full pro rata sharing of the FICO payments between BIF and SAIF members will occur on the earlier of January 1, 2000 or the date the BIF and SAIF are merged. The Funds Act specifies that the BIF and SAIF will be merged on January 1, 1999 provided no savings associations remain as of that time. As a result of the Funds Act, the FDIC recently proposed to lower SAIF as- sessments to a range of 0 to 27 basis points effective January 1, 1997, a range comparable to that of BIF members. However, SAIF members will con- tinue to make the higher FICO payments described above. Management cannot predict the level of FDIC insurance assessments on an on-going basis, whether the savings association charter will be eliminated, or whether the BIF and SAIF will eventually be merged. 20.NEW ACCOUNTING PRONOUNCEMENT NOT YET ADOPTED Reporting Comprehensive Income--In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." This statement establishes standards for the reporting and display of comprehensive income and its components (reve- nues, expenses, gains, and losses) in a full set of general-purpose finan- cial statements. The provisions of this statement are effective for fiscal years beginning after December 15, 1997. Management is in the process of evaluating the impact of this statement on the consolidated financial statements. - -------------------------------------------------------------------------------- 43 FIRST BELL BANCORP, INC. 1997 ANNUAL REPORT - -------------------------------------------------------------------------------- 21.PARENT COMPANY The following are condensed financial statements for First Bell as of and for the year or period ended December 31, 1997, 1996 and 1995 (in thou- sands): BALANCE SHEETS
1997 1996 ASSETS -------- -------- CASH AND INTEREST-BEARING DEPOSITS...................... $ 10 $ 9 FEDERAL FUNDS SOLD...................................... 1,550 2,875 INVESTMENT IN AND ADVANCES TO BELL FEDERAL.............. 71,808 79,451 LOAN RECEIVABLE--ESOP................................... 4,493 4,569 OTHER ASSETS............................................ 195 625 -------- -------- Total assets.......................................... $ 78,056 $ 87,529 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY LOAN PAYABLE TO BELL FEDERAL............................ $ 4,323 $ -- ACCRUED INTEREST........................................ 14 -- ACCRUED INCOME TAXES.................................... 80 58 OTHER LIABILITIES....................................... 773 1,038 -------- -------- Total liabilities..................................... 5,190 1,096 STOCKHOLDERS' EQUITY: Preferred stock ($.01 par value; 2,000,000 shares authorized; no shares issued)......................... -- -- Common stock ($.01 par value; 20,000,000 shares authorized; 8,596,250 issued and 6,510,625 and 7,758,150 outstanding).............. 86 86 Additional paid-in capital............................. 61,371 61,063 Unearned ESOP shares................................... (4,217) (4,454) Unearned MRP shares.................................... (4,290) (4,792) Treasury stock, at cost................................ (32,077) (11,684) Retained earnings...................................... 51,993 46,214 -------- -------- Total stockholders' equity............................ 72,866 86,433 -------- -------- Total liabilities and stockholders' equity............ $ 78,056 $ 87,529 ======== ========
- -------------------------------------------------------------------------------- 44 - -------------------------------------------------------------------------------- STATEMENTS OF INCOME
YEAR ENDED SIX MONTHS DECEMBER 31, ENDED -------------- DECEMBER 31, 1997 1996 1995 ------ ------ ------------ INTEREST INCOME: Interest bearing deposits...................... $ 39 $ 89 $ -- Federal funds sold............................. 77 1,391 1,045 Interest on ESOP loan receivable............... 386 551 310 ------ ------ ------ Total interest income........................ 502 2,031 1,355 ------ ------ ------ INTEREST EXPENSE................................ 300 -- -- ------ ------ ------ NET INTEREST INCOME............................. 202 2,031 1,355 GENERAL AND ADMINISTRATIVE EXPENSES............. 213 231 -- ------ ------ ------ (LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES. (11) 1,800 1,355 ------ ------ ------ (BENEFIT) PROVISION FOR INCOME TAXES: Current: Federal....................................... (18) 601 425 State......................................... 41 41 104 ------ ------ ------ Total provision for income taxes............. 23 642 529 ------ ------ ------ (LOSS) INCOME BEFORE EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARY......................... (34) 1,158 826 Equity in undistributed earnings of Bell Federal...................................... 7,609 6,245 3,293 ------ ------ ------ NET INCOME...................................... $7,575 $7,403 $4,119 ====== ====== ======
- -------------------------------------------------------------------------------- 45 FIRST BELL BANCORP, INC. 1997 ANNUAL REPORT - -------------------------------------------------------------------------------- STATEMENTS OF CASH FLOWS
YEAR ENDED SIX MONTHS DECEMBER 31, ENDED ------------------ DECEMBER 31 1997 1996 1995 -------- -------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................. $ 7,575 $ 7,403 $ 4,119 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of Bell Federal................................. (7,609) (6,245) (3,293) Increase or decrease in assets and liabilities: Accrued income taxes.................... 22 (46) 104 Accrued interest........................ 14 -- -- Other assets............................ 430 (533) (22) Other liabilities....................... (127) 1,038 -- Dividends payable....................... (138) (713) -- -------- -------- -------- Net cash provided by operating activities............................ 167 904 908 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Net (increase) decrease in Federal Funds... (1,325) 33,150 (36,025) Principal paydowns on ESOP loan receivable. 76 2,067 241 ESOP loan receivable....................... -- -- (6,877) Dividend from Bell Federal................. 16,000 -- -- Investment in and advances to Bell Federal. 3,087 3,016 (34,894) -------- -------- -------- Net cash provided by (used in) investing activities.................. 17,838 38,233 (77,555) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid............................. (1,935) (1,984) -- Return of capital.......................... -- (20,684) -- Purchase of treasury stock................. (20,393) (11,684) -- Purchase of MRP shares..................... -- (4,792) -- Loan payable to Bell Federal............... 4,400 -- -- Principal payment on loan payable.......... (76) -- -- Net proceeds from sale of stock............ -- -- 76,663 -------- -------- -------- Net cash (used in) provided by financing activities.................. (18,004) (39,144) 76,773 -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................ 1 (7) 16 CASH, BEGINNING OF YEAR..................... 9 16 -- -------- -------- -------- CASH, END OF YEAR........................... $ 10 $ 9 $ 16 ======== ======== ======== SUPPLEMENTAL DISCLOSURES: Cash paid for: Income taxes.............................. $ 93 $ 688 $ 425 Interest.................................. 286 -- -- Non-cash transactions: Increase in additional paid-in capital-- ESOP and MRP share allocations........................ 308 203 70 Accumulated equity in Bell Federal at time of conversion (see Note 2)............................. -- -- 40,923
- -------------------------------------------------------------------------------- 46 - -------------------------------------------------------------------------------- 22.QUARTERLY EARNINGS SUMMARY (UNAUDITED) Quarterly earnings for the years ended December 31, 1997 and 1996 are as follows (in thousands, except per share amounts):
1997 ----------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- ------- ------------ ----------- INTEREST AND DIVIDEND INCOME...... $12,073 $12,533 $12,600 $12,020 INTEREST EXPENSE.................. 7,639 8,323 8,523 7,844 ------- ------- ------- ------- NET INTEREST INCOME.............. 4,434 4,210 4,077 4,176 PROVISION FOR (RECOVERY OF) LOAN LOSSES........................... 20 30 -- (5) ------- ------- ------- ------- NET INTEREST INCOME AFTER PROVISION FOR (RECOVERY OF) LOAN LOSSES.......................... 4,414 4,180 4,077 4,181 OTHER INCOME...................... 130 410 118 171 OTHER EXPENSES.................... 1,172 1,299 1,260 1,329 ------- ------- ------- ------- INCOME BEFORE PROVISION FOR INCOME TAXES............................ 3,372 3,291 2,935 3,023 PROVISION FOR INCOME TAXES........ 1,376 1,377 1,089 1,204 ------- ------- ------- ------- NET INCOME........................ $ 1,996 $ 1,914 $ 1,846 $ 1,819 ======= ======= ======= ======= BASIC EARNINGS PER SHARE (2)...... $ 0.30 $ 0.34 $ 0.33 $ 0.33 ======= ======= ======= ======= DILUTED EARNINGS PER SHARE........ $ 0.29 $ 0.32 $ 0.31 $ 0.31 ======= ======= ======= =======
1996 ----------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- ------- ------------ ----------- INTEREST AND DIVIDEND INCOME...... $9,598 $10,219 $10,439 $10,751 INTEREST EXPENSE.................. 4,932 5,180 5,624 6,314 ------ ------- ------- ------- NET INTEREST INCOME.............. 4,666 5,039 4,815 4,437 PROVISION FOR LOAN LOSSES......... 30 30 30 -- ------ ------- ------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES....... 4,636 5,009 4,785 4,437 OTHER INCOME...................... 204 209 652 133 OTHER EXPENSES (1)................ 1,438 1,378 3,919 1,442 ------ ------- ------- ------- INCOME BEFORE PROVISION FOR INCOME TAXES............................ 3,402 3,840 1,518 3,128 PROVISION FOR INCOME TAXES........ 1,291 1,545 419 1,230 ------ ------- ------- ------- NET INCOME........................ $2,111 $ 2,295 $ 1,099 $ 1,898 ====== ======= ======= ======= BASIC EARNINGS PER SHARE.......... $ 0.27 $ 0.32 $ 0.16 $ 0.30 ====== ======= ======= ======= DILUTED EARNINGS PER SHARE........ $ 0.27 $ 0.31 $ 0.16 $ 0.28 ====== ======= ======= =======
- ------- (1) The quarter ended September 30, 1996 includes a one-time pre-tax charge of $2.5 million for recapitalizing the SAIF. (2) Quarterly per share amounts do not add to the total for the year ended De- cember 31, 1997, due to rounding. 23.SUBSEQUENT EVENTS On February 18, 1998, $10.0 million of investment securities available for sale was called by the Federal Home Loan Mortgage Corporation. No gain or loss resulted from this transaction. On February 24, 1998, the remaining mortgage-backed securities available for sale were sold. Net proceeds of $30.5 million were received which resulted in a gain of $97,000. A portion of the proceeds from these transactions will be used to purchase approxi- mately $16.3 million in investment securities available for sale with the remaining proceeds to be used to maintain additional liquidity. * * * * * * - -------------------------------------------------------------------------------- 47 FIRST BELL BANCORP, INC. 1997 ANNUAL REPORT First Bell Bancorp, Inc. - -------------------------------------------------------------------------------- Executive Management Albert H. Eckert, II Robert C. Baierl President and Chief Executive Secretary Officer Robert Murcko Jeffrey M. Hinds Assistant Secretary Executive Vice President and Chief Financial Officer William S. McMinn Treasurer David F. Figgins Vice President Directors Albert H. Eckert, II Jeffrey M. Hinds President and Chief Executive Executive Vice President and Officer Chief Financial Officer First Bell Bancorp, Inc. and First Bell Bancorp, Inc. and Bell Federal Savings and Loan Bell Federal Savings and Loan Association of Bellevue Association of Bellevue David F. Figgins Theodore R. Dixon Retired President President Trafalgar House Construction, Dixon Agency Ltd. Jack W. Schweiger Thomas J. Jackson, Jr. President Attorney-at-Law Schweiger Homes Robert C. Baierl Peter E. Reinert President Partner Wright Office Furniture, Inc. Godbold, Downing, Sheahan & Battaglia William S. McMinn Senior Vice President Aon Risk Services, Inc. of Pennsylvania - -------------------------------------------------------------------------------- 48 EX-23 4 CONSENT OF DELOITTE & TOUCHE Exhibit 23.0 INDEPENDENT AUDITORS' CONSENT To the Board of Directors and Stockholders of First Bell Bancorp, Inc.: We consent to the incorporation by reference in Registration Statement No. 333-27443 of First Bell Bancorp, Inc. on Form S-8 of our report dated January 23, 1998 (February 24, 1998 as to Note 23), incorporated by reference in this Annual Report on Form 10-K of First Bell Bancorp, Inc. for the year ended December 31, 1997. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Pittsburgh, Pennsylvania March 30, 1998 EX-27.1 5 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS 6-MOS 9-MOS YEAR DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997 MAR-31-1997 JUN-30-1997 SEP-30-1997 DEC-31-1997 2,254 2,205 2,218 2,580 13,098 25,993 26,663 21,943 27,700 1,600 825 1,550 0 0 0 0 85,546 91,456 60,356 0 14,966 9,969 9,971 9,973 15,233 10,303 10,417 10,553 552,289 568,475 566,634 580,109 685 715 715 715 709,011 714,366 681,215 675,684 497,199 510,228 506,469 495,055 20,000 8,000 86,000 0 19,517 25,964 523,453 2,024 100,000 100,000 0 0 0 0 0 0 0 0 0 0 86 86 86 86 72,209 70,088 71,676 72,897 709,011 714,366 681,215 675,684 9,983 20,425 30,880 41,464 2,090 4,181 6,326 7,413 0 0 0 349 12,073 24,606 37,206 49,226 6,422 13,094 20,007 26,686 1,217 15,962 24,485 5,643 4,434 8,644 12,721 16,897 20 50 50 45 0 0 0 0 1,172 2,471 3,731 5,060 3,372 6,663 9,598 12,621 0 0 0 12,621 0 0 0 0 0 0 0 0 1,996 3,910 5,756 7,575 .30 .64 .97 1.29 .29 .61 .92 1.23 2.56 2.39 2.43 2.45 412 391 540 634 0 0 0 0 0 0 0 0 0 0 0 0 655 685 715 665 0 0 0 0 0 0 0 5 685 30 715 715 685 0 715 715 0 0 0 0 685 715 0 0
EX-27.2 6 FINANCIAL DATA SCHEDULE
9 This scdedule contains summary information extracted from the Form 10-Q and is qualified in its entirety by reference to such financial statements. 1,000 3-MOS 6-MOS 9-MOS YEAR DEC-31-1995 DEC-31-1995 DEC-31-1996 DEC-31-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996 MAR-31-1996 JUN-30-1996 SEP-30-1996 DEC-31-1996 2,145 3,539 2,253 2,534 22,510 4,844 5,355 23,872 46,550 30,125 24,100 72,875 0 0 0 0 0 0 0 0 19,959 19,959 14,962 14,964 20,168 20,968 15,241 15,429 440,113 500,224 518,537 531,480 605 635 665 665 542,600 570,649 576,981 656,183 409,991 433,651 454,957 483,941 0 0 0 0 18,337 20,733 15,662 2,255 0 0 0 70,000 0 0 0 0 0 0 0 0 86 86 86 86 114,186 116,179 106,276 86,347 542,600 570,649 576,981 656,183 8,245 17,410 27,119 36,798 1,305 2,295 2,960 3,970 48 111 176 239 9,598 19,916 30,255 41,007 4,932 10,112 15,736 21,859 4,932 10,112 15,736 191 4,666 9,704 14,519 22,050 30 60 90 90 0 0 0 0 1,438 2,813 6,734 8,177 3,402 7,243 8,760 11,888 3,402 7,243 8,760 11,888 0 0 0 0 0 0 0 0 2,111 4,406 5,504 7,402 .27 .59 .75 1.05 .27 .58 .74 1.02 0 0 0 3.38 441 474 582 400 0 0 0 0 0 0 0 0 0 0 0 0 575 605 635 575 0 0 0 0 0 0 0 0 605 635 665 665 605 635 665 665 0 0 0 0 0 0 0 0 This information is not disclosed in the Form 10-Q.
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