U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2 ON FORM 10-K/A
(Mark one)
X ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period from _____________ to _________________
Commission file number 0-12724
BELMONT BANCORP.
(Name of issuer in its charter)
Ohio (State of Incorporation)
I.R.S. Employer ID No. 34-1376776
325 MAIN STREET
BRIDGEPORT, OHIO 43912
(Address of principal executive offices)
Telephone (740)-695-3323
Securities registered under Section 12(b) of the Exchange Act:
NONE
Securities registered under Section 12(g) of the Exchange Act:
Title of each class: Name of each exchange on
which registered:
Common stock, $0.25 par value NASDAQ SmallCap Market
Check whether the issuer (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the
past 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Check if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-K is not contained in this
form, and no disclosure will be contained, to the best of the
Registrant's knowledge. In definitive proxy or information
statements incorporated by reference to Part III of this Form 10-
K or any amendment to this Form 10-K.X
Aggregate market value of voting stock held by nonaffiliates as
of March 5, 1999 - $95,304,000.
There were 5,222,152 shares of $0.25 par value, common stock
outstanding as of March 5, 1999.
<PAGE>
INTRODUCTORY NOTE
This Amendment No. 2 on Form 10-K/A has been prepared
and filed to incorporate comments made by the Securities and
Exchange Commission (the"Commission") in connection with a
Registration Statement on Form S-2 filed by Belmont Bancorp
(the "Company") which incorporates this 10-K/A. This
Amendment No. 2 restates all items included in the original
Annual Report on Form 10-K filed with the Commission on
March 26, 1999 and the 10-K/A filed with the Commission on
August 11, 1999. However, Items 1, 2, 3, 4, 5, 9, 10, 11,
12 and 13 are unchanged from the original 10-K and Items 6,
7A and 8 are unchanged from the initial 10-K/A. Only Items
7 and 14of this Amendment No. 2 reflect changes from the
earlier filings. The Company has not updated the disclosure
in this Amendment No. 2 to reflect events which have
occurred since the initial filing of the 10-K on March 26,
1999. Since the filing of the 10-K, the Company has filed
its Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1999, June 30, 1999 and September 30, 1999 and a
10-Q/A for the quarter ended September 30, 1999 (also to
reflect comments of the Commission) as well as Current
Reports on Form 8-K filed with the Commission on April 28,
1999, May 21, 1999, June 14, 1999, August 11, 1999, October
14, 1999, October 18, 1999 and October 20, 1999. Reference
is made to those filings for more recent information
concerning the business and affairs of the Company and its
financial results and condition.
PART I
The data presented herein should be read in
conjunction with the audited Consolidated Financial
Statements incorporated by reference.
ITEM 1-BUSINESS
BELMONT BANCORP.
Belmont Bancorp. is a bank holding company which
was organized under the laws of the State of Ohio in
1982. On April 4, 1984, Belmont Bancorp. acquired all
of the outstanding capital stock of Belmont National
Bank (formerly Belmont County National Bank), a banking
corporation organized as a national banking association.
Belmont National Bank provides a variety of financial services.
In addition to Belmont National Bank, the Corporation owns
Belmont Financial Network, Inc., a non-bank subsidiary.
BELMONT NATIONAL BANK
Belmont National Bank resulted from the merger on
January 2, 1959, of the First National Bank of St.
Clairsville, and the First National Bank of Bridgeport.
Both banks were organized as national associations
prior to the turn of the century. Belmont National
Bank operates through a network of thirteen branches
located in Belmont, Harrison and Tuscarawas Counties in
Ohio and Ohio County in West Virginia. The main office
is located in the Woodsdale section of Wheeling, West
Virginia. In addition to its main office in West
Virginia, the Bank operates a branch in the Elm Grove
section of Wheeling. Branch locations in Belmont
County, Ohio include St. Clairsville, Bridgeport,
Lansing, Shadyside, Ohio Valley Mall, Bellaire and
Plaza West, St. Clairsville. The Harrison County
branch is located in Cadiz, Ohio. Branches in
Tuscarawas County are located in New Philadelphia,
Ohio. The three New Philadelphia offices were acquired
on October 2, 1992, when Belmont National Bank acquired
the deposits and loans of these offices from Diamond
Savings and Loan.
2
<PAGE>
Belmont National Bank provides a wide range of
retail banking services to individuals and small to
medium-sized businesses. These services include
various deposit products, business and personal loans,
credit cards, residential mortgage loans, home equity
loans, and other consumer oriented financial services
including IRA and Keogh accounts, safe deposit and
night depository facilities. Belmont National Bank
also owns automatic teller machines located at branches
in Bellaire, Bridgeport, Woodsdale, Elm Grove, Cadiz,
the Ohio Valley Mall, Plaza West and New Philadelphia
providing 24 hour banking service to our customers.
Belmont National Bank belongs to MAC, a nationwide ATM
network with thousands of locations nationwide.
Belmont National Bank offers a wide variety of
fiduciary services. The trust department of the Bank
administers pension, profit-sharing, employee benefit
plans, personal trusts and estates.
BELMONT FINANCIAL NETWORK
On July 1, 1985, Belmont Bancorp. formed a
subsidiary corporation, Belmont Financial Network,
Inc.(BFN). BFN serves as a community development
corporation by investing in low income housing projects
that provide low income and historic tax credits.
BELMONT INVESTMENT AND FINANCIAL SERVICES, INC.
During 1988, Belmont National Bank began the
operations of Belmont Investment and Financial
Services, Inc., a wholly-owned subsidiary of the Bank.
Belmont Investment and Financial Services, Inc. was
organized so that the Bank's customers would have
available to them a wider array of financial products
as well as sound investment and financial planning.
Through Belmont Investment and Financial Services,
Inc., customers can purchase government or corporate
bonds, and mutual fund products. In 1990, the services
provided by the Corporation, other than advisory
services, were reorganized into a department of the
Bank.
SUPERVISION AND REGULATION
Belmont Bancorp. is supervised and examined by the
Board of Governors of the Federal Reserve system under
the Bank Holding Company Act of 1956 (BHCA). The BHCA
requires Federal Reserve approval for bank acquisitions
and regulates non-banking activities of bank holding
companies. Deposits of Belmont Bancorp. are insured by
the Federal Deposit Insurance Corporation (FDIC). As a
national bank, Belmont National Bank is supervised and
examined by the Office of the Comptroller of the
Currency (OCC).
Since September 1995, the BHCA has permitted bank
holding companies from any state to acquire banks and
bank holding companies located in any other state,
subject to certain conditions, including nationwide and
state imposed concentration limits. Banks have been
able to branch across state lines by acquisition,
merger or new bank charter, since June 1, 1997, if
state law expressly permits interstate branching.
3
<PAGE>
A fundamental principle underlying the Federal
Reserve's supervision and regulation of bank holding
companies is that bank holding companies should be a
source of managerial and financial strength to their
subsidiary banks. Subsidiary banks in turn are to be
operated in a manner that protects the overall
soundness of the institution and the safety of
deposits. Bank regulators can take various remedial
measures to deal with banks and bank holding companies
that fail to meet legal and regulatory standards.
The 1989 Financial Reform, Recovery and
Enforcement Act (FIRREA) expanded federal regulatory
enforcement powers. The Federal Deposit Insurance
Corporation Improvement Act of 1991 (FDICIA) created
five capital-based supervisory levels for banks and
requires bank holding companies to guarantee compliance
with capital restoration plans of undercapitalized
insured depository affiliates. Belmont Bancorp. was
considered "well capitalized" under regulatory
definitions in effect at December 31, 1998. This is
the highest rating presently available.
The monetary policies of regulatory authorities,
including the Federal Reserve Board, have a significant
effect on the operating results of banks and bank
holding companies. The nature and future monetary
policies and the effect of such policies on the future
business and earnings of Belmont Bancorp. and its
subsidiary bank cannot be predicted.
FOREIGN OPERATIONS
Belmont Bancorp. has no foreign operations.
EXECUTIVE OFFICERS
For information concerning executive officers of
Belmont Bancorp. and Belmont National Bank, see Item 10
of Form 10-K.
ITEM 2-PROPERTIES
DESCRIPTION ON PROPERTIES
In January 1996, the Bank relocated its corporate
headquarters to Wheeling, WV. The office is located at
980 National Road and consists of a 14,000 square foot,
combination one and two story masonry block building.
Approximately half of the space is leased to a tenant.
In addition, the Bank transacts business in the
following branch locations:
St. Clairsville Office-This office consists of a
two story brick building owned by the Bank with
attached drive-in facilities. The building
consists of 9,216 square feet which houses the
commercial bank operations and the executive and
human resources offices.
Mall Office-This office is located at the Ohio
Valley Mall, a major shopping mall located two
miles east of St. Clairsville, Ohio. The office
consists of a 1,400 square foot office located
along the perimeter of the Mall at the main
entrance. An automatic teller machine is located
at the drive-in facility.
Lansing Office-This 1,352 square foot office is
located in Lansing, Ohio, a small community
approximately six miles east of St. Clairsville on
US. Route 40. The facility is a masonry building
with adjoining drive-in facilities.
Bridgeport Office-This office is located in
Bridgeport, Ohio, a community located on the
Ohio/West Virginia border, approximately 10 miles
east of St. Clairsville. This 5,096 square foot
facility is a recently remodeled masonry building
with adjoining drive-in facilities and an ATM.
Shadyside Office-This 1,792 square foot office is
located in Shadyside, a village located on Ohio
State Route 7. The facility is a masonry building
with accompanying drive-in facilities.
Cadiz Office-This office is located in Cadiz, Ohio
in Harrison County, approximately seventeen miles
north of St. Clairsville at the intersection of
State Routes 9 and 22. The brick and tile
building contains 1,800 square feet with an
accompanying drive-in facility.
4
<PAGE>
New Philadelphia Office-This office, located at
152 North Broadway Avenue, is a 33,792 square
foot site improved with two inter-connected, two
story brick office buildings with a total building
area of 13,234 square feet. Part of the office
space is leased to other businesses. This
location also has a drive-in facility and an
automatic teller machine.
New Philadelphia Office-This office, located at
2300 East High Avenue, is comprised of a one
story, 1,605 square foot brick structure with a
783 square foot drive-thru canopy.
New Philadelphia Office-This office, located at
525 Wabash Avenue, is comprised of a 14,250 square
foot site with a 246 square foot drive-thru
banking facility.
Elm Grove Office-This office is located at 2066
National Road in Wheeling, WV, and includes a
drive-thru facility and an ATM.
Bellaire Office - This leased office, located in
the Imperial Shopping Center, is comprised of
approximately 1,750 square feet with an adjoining
drive-thru facility and ATM.
Plaza West Solution Center - This office is
located at the west end of St. Clairsville and
features a different concept in retail banking.
It includes a drive-thru facility and an ATM.
All offices are owned by the Bank except for the
Mall and Bellaire offices. All leased offices contain
renewal options. The land for the Elm Grove office is
also leased.
ITEM 3-LEGAL PROCEEDINGS
None.
ITEM 4-SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security
holders during the fourth quarter of the fiscal year
covered by this report.
ITEM 5-MARKET FOR THE REGISTRANT'S COMMON STOCK AND
RELATED SHAREHOLDERS' MATTERS
The number of shareholders of record for the
Corporation's stock as of February 26, 1999 was 619.
The closing price of Belmont Bancorp. stock on March 5,
1999 was $18.25 per share.
Belmont Bancorp.'s common stock has a par value of
$0.25 and, since October 1994, has been traded on the
Nasdaq SmallCap market.
1998
Dividend
Quarter High Low per Share
1st $26.00 $20.00 $0.085
2nd 28.44 22.25 0.100
3rd 27.25 19.75 0.100
4th 23.50 18.00 0.100
Total $0.385
1997
Dividend
Quarter High Low per Share
1st $11.20 $10.20 $0.068
2nd 12.60 10.40 0.068
3rd 15.00 12.56 0.085
4th 20.75 14.50 0.085
Total $0.306
The tables above show its high and low market
prices and dividend information for the past two years.
Market prices and cash dividends paid per share have
been restated to reflect the effect of a 5-for 4 common
stock split effected in the form of a 25% common stock
dividend paid July 1, 1997 and a 2-for-1 common stock
split effected in the form of a 100% common stock
dividend paid May 22, 1998.
Information regarding the limitations on dividends
available to be paid can be located in Footnote 16 of
the Notes to the Consolidated Financial Statements in
the Corporation's Annual Report (Item 8).
Treasury stock is accounted for using the cost
method. There were 66,174 shares and 13,330 shares
held in treasury on December 31, 1998 and 1997,
respectively.
5
<PAGE>
PART II
This report on Form 10-K/A presents the financial position of Belmont
Bancorp. (the "Corporation") as of December 31, 1998 and 1997 and for the
years ended December 31, 1998 and 1997. The Corporation has
restated its earnings to reflect certain loan losses, as more fully
described under "Results of Operations--Recent Developments", under Item 7.
ITEM 6-SELECTED FINANCIAL DATA
Consolidated Five Year Summary of Operations (as Restated)
For the Years Ending December 31, 1998, 1997, 1996, 1995,
1994 (Unaudited) ($000's except per share data)
1998 1997 1996 1995 1994
Interest income $ 30,787 $ 28,348 $ 25,501 $ 23,454 $ 19,715
Interest expense 16,480 14,004 12,127 10,927 8,807
Net interest income 14,307 14,344 13,374 12,527 10,908
Provision for loan
losses 12,882 1,055 465 1,150 805
Net interest income after
provision for loan
losses 1,425 13,289 12,909 11,377 10,103
Securities gains (losses) 1,338 799 396 102 (63)
Trading gains 62 - - - -
Gain on sale of
real estate 383 - - - -
Other operating income 2,183 2,010 1,861 1,683 1,290
Operating expenses 9,496 8,732 8,388 7,623 7,069
Income before income taxes (4,105) 7,366 6,778 5,539 4,261
Income taxes (2,186) 1,421 1,776 1,333 1,027
Net income $(1,919) $ 5,945 $ 5,002 $ 4,206 $ 3,234
Earnings per common
share (1) $ (0.37) $ 1.13 $ 0.94 $ 0.78 $ 0.60
Cash dividend declared
per share (1) $ 0.385 $ 0.306 $ 0.240 $ 0.190 $ 0.151
Book value per common
share (1) $ 4.86 $ 6.05 $ 5.17 $ 4.57 $ 3.63
Total loans $208,186 $224,900 $ 188,783 $159,957 $147,096
Total assets 438,283 388,713 333,903 317,279 312,963
Total deposits 304,351 263,908 261,539 246,850 255,923
Total shareholders'equity 25,364 31,899 27,332 25,164 20,214
(1) Restated for stock dividends paid during 1994, 1995, 1997 and 1998.
ITEM 7-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The data presented in this discussion should be read in
conjunction with the audited consolidated financial statements as
restated.
RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
The Corporation has restated its 1998 earnings as
previously reported due to loan relationships with Schwartz Homes,
Inc., a retailer of mobile homes based in New Philadelphia, Ohio and retail
customers of Schwartz Homes. Following the March 15, 1999,
resignation of William Wallace as executive vice president
and chief operating officer of the Bank, the board of
directors became aware of irregularities in the Bank's loan
portfolio relating to loans made to Schwartz Homes.
Commencing in November 1996, the Bank began lending
substantial amounts of money to Schwartz Homes, Inc. and
Steven D. Schwartz, and in February 1997 the Bank began
indirect lending to Schwartz Homes's retail customers at the
direction of Mr. Wallace. The outstanding balance of loans
made directly to Schwartz Homes and Steven D. Schwartz at
March 31, 1999 was $3,521,000. The Bank made loans to
Schwartz Home's retail customers under recourse agreements
with Schwartz Homes. Under these recourse agreements,
Schwartz Homes agreed to repay any loans not repaid by
retail customers. Schwartz Homes apparently used the funds
advanced by the Bank to fund its own operations or for other
improper purposes, without the knowledge of the Bank's
board. In many instances, Schwartz Homes failed to perform
on the retail sales contracts it entered into with its
customers even though the Bank had provided the funds to
Schwartz Homes for this purpose. In addition, Schwartz
Homes often failed to repay the floor-plan lenders on homes
purchased, which has further impacted the Bank's collateral
position with respect to the homes. As of March 1999, the
Bank had $6,672,000 in principal amount of loans outstanding
to retail customers of Schwartz Homes. On April 26, 1999,
Schwartz Homes unexpectedly ceased operations and on June 2,
1999 other creditors of Schwartz Homes placed it in
involuntary bankruptcy.
6
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Previously reported net income for the year ended
December 31, 1998 was $6,147,000; earnings for the year have
been restated to reflect a loss of $1,919,000 or a loss of
$0.37 per share. Further details on the restatement
including a summary of the effects of the restatement can be
found in Footnote 24 of the Notes to the Consolidated
Financial Statements as Restated.
With respect to the consumer loans provided to Schwartz
Home's, cancelled sales contracts that were originated prior
to 1999 are recognized as a loss during the fourth quarter
of 1998. Also, loss associated with contracts in the
progress of construction that were funded prior to 1999 have
been recognized as a loss during the fourth quarter of 1998.
Losses on contracts funded during 1999 have been recognized
during the first quarter of 1999. In addition, the estimate
of loss associated with the commercial loan relationship has
been recognized during the first quarter of 1999. The Bank
continues to assess the impact of this segment of its
consumer loan portfolio on its current and future
operations.
Charge-offs of the indirect consumer loans during the fourth
quarter of 1998 totaled $11,227,000. At December 31, 1998, the
remaining balance of indirect consumer loans was $8,007,000.
These loans are included in nonperforming assets.
During the quarter ended March 31, 1999, the Corporation
charged off $ ,000 in indirect consumer loans for loans that
were funded during 1999. The remaining balance on the indirect
consumer loans total $6,672,000 at March 31, 1999; at March 31,
1999 a reserve in the allowance for loan losses in the amount of
$2,147,000 has been allocated to these consumer loans. Charge-
offs associated with the Borrower's commercial loans totaled
$1,955,000 during the first quarter of 1999. The balance on the
commercial loan relationship with the Borrower at March 31, 1999
was $3,618,000; at March 31, 1999 a reserve in the allowance for
loan losses in the amount of $1,118,000 has been allocated to the
commercial credits.
Of the remaining $8,007,000 in indirect consumer loans
at December 31, 1998, $424,000 were funded in 1997 and the
remainder were funded in 1998. The collateral for these
loans was in various stages of completion. For example, the
consumer borrower may have received value for one or more of
the following: land, land improvements, a foundation, a
modular home. During the second and third quarter of 1999,
the Bank contacted customers to determine what value they
had received from the contract and what their obligation
was, if any, to the Bank. The Bank also obtained current
credit reports on the consumer borrowers and current
appraisals and title searches on the subject properties to
determine value.
Of the remaining $6,672,000 in indirect consumer loans
at March 31, 1999, $424,000 were funded in 1997, $5,757,000
were funded in 1998 and $491,000 were funded in 1999.
Schwartz-related commercial loans outstanding at
December 31, 1998 totaled $2,682,000--$2,585,000 were
funded in 1996 and $97,000 were funded in 1997. In 1999,
an additional $2,577,000 in commercial loans were funded.
After principal repayments and charge-offs for the
first quarter of 1999, the outstanding balance of commercial
loans related to the Schwartz Homes' relationship
at March 31, 1999 was $3,618,000 of which
$2,277,000 was funded in 1996, $97,000 was funded in
1997, and $1,244,000 was funded in 1999.
Future results of operations may continue to be affected by
this situation. The Bank is pursuing a claim with its fidelity
bond carrier seeking partial restitution, however there can be no
assurance that the claim will be paid.
7
<PAGE>
Based upon the restated financial results for the year ended
1998, net income decreased from $5,945,000 for 1997 to a loss of
$1,919,000 for the year ended 1998. The net loss per common
share for 1998 was $0.37 compared to earnings per share of $1.13
in 1997 and $0.94 in 1996. Because of the 1998 reported loss,
there was a negative return on shareholders' equity of 5.76% for
1998. Returns on average common shareholders' equity were 20.21%
for 1997 and 19.55% in 1996. The Corporation's net income to
average assets, referred to as return on assets, was a negative
0.46% for the year ended 1998 compared to 1.62% in 1997 and 1.49%
during 1996. The table below summarizes earnings performance for
the past three years.
($000s) except per share data 1998 1997 1996
Net income (1,919) 5,945 5,002
Net income (loss) per share $(0.37) $ 1.13 $ 0.94
Return on average assets -0.46% 1.62% 1.49%
Return on average common
equity -5.76% 20.21% 19.55%
NET INTEREST REVENUE
A major share of the Corporation's income results from the
spread between income on interest earning assets and interest
expense on the liabilities used to fund those assets, known as
net interest income. Net interest income is affected by changes
in interest rates and amounts and distributions of interest
earning assets and interest bearing liabilities outstanding. Net
interest margin is net interest income divided by the average
earning assets outstanding. A third frequently used measure is
net interest rate spread which is the difference between the
average rate earned on assets and the average rate incurred on
liabilities without regard to the amounts outstanding in either
category.
The Consolidated Average Balance Sheets and Analysis of Net
Interest Income Changes compare interest revenue and interest
earning assets outstanding with interest cost and liabilities
outstanding for the years ended December 31, 1998, 1997, and
1996, and computes net interest income, net interest margin and
net interest rate spread for each period. All three of these
measures are reported on a taxable equivalent basis.
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<TABLE>
Belmont Bancorp. and Subsidiaries
Consolidated Average Balance Sheets (as Restated)
For the Years Ended December 31, 1998, 1997 and 1996
(Fully Taxable Equivalent Basis) (000's)
<CAPTION>
1998 1997 1996
Average Averag Average Average Average Average
Out- Revenue/ Yield/ Out- Revenue/ Yield/ Out- Revenue/ Yield/
standing Cost Rate standing Cost Rate standing Cost Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest earning assets
Loans and leases $222,961 $21,321 9.56% $208,265 $19,632 9.43% $174,445 $16,389 9.39%
Securities:
Taxable 134,337 8,053 5.99% 110,739 7,515 6.79% 115,070 7,828 6.80%
Exempt from income tax 24,261 1,802 7.43% 24,728 1,861 7.53% 23,403 1,802 7.70%
Trading account assets 1,193 68 5.70% - - - - - -
Federal funds sold 4,194 228 5.44% 1,317 71 5.39% 3,409 181 5.31%
Total interest earning assets 386,946 31,472 8.13% 345,049 29,079 8.43% 316,327 26,200 8.28%
Cash and due from banks 10,972 10,267 9,328
Other assets 20,100 15,648 14,229
Market value depreciation
of securities
available for sale (597) (546) (767)
Allowance for possible loan loss (4,312) (3,461) (2,928)
Total Assets $413,109 $366,957 $336,189
Liabilities
Interest bearing liabilities
Interest checking $ 45,864 1,525 3.33% $ 43,476 1,444 3.32% $ 38,576 $ 1,225 3.18%
Savings 82,196 2,709 3.30% 78,636 2,474 3.15% 79,341 2,423 3.05%
Other time deposits 134,485 7,438 5.53% 115,304 6,145 5.33% 111,657 5,738 5.14%
Other borrowings 86,084 4,809 5.59% 68,095 3,941 5.79% 50,274 2,741 5.45%
Total interest bearing
liabilities 348,629 16,481 4.73% 305,511 14,004 4.58% 279,848 12,127 4.33%
Demand deposits 29,910 29,878 27,878
Other liabilities 1,256 2,146 2,199
Total liabilities 379,795 337,535 309,925
Shareholders' Equity 33,314 29,422 26,264
Total Liabilities and
Shareholders' Equity $413,109 $366,957 $336,189
Net interest income margin
on a taxable equivalent basis 14,991 3.87% 15,075 4.37% 14,073 4.45%
Net interest rate spread 3.41% 3.84% 3.95%
Interest bearing liabilities to
interest earning assets 90.10% 88.54% 88.47%
</TABLE>
Fully taxable equivalent basis computed at effective federal
tax rate of 34%.
Average loan balances include nonperforming loans.
<TABLE>
Belmont Bancorp. and Subsidiaries
Analysis of Net Interest Income Changes
For the Years Ended December 31, 1998, 1997 and 1996 (Fully
Taxable Equivalent Basis) (000's)
<CAPTION>
1998 Compared to 1997 1997 Compared to 1996
Volume Yield Mix Total Volume Yield Mix Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in
interest income:
Loans and leases $1,385 $ 284 $ 21 $1,690 $3,177 $ 55 $ 12 $3,244
Securities
Taxable 1,601 (877) (188) 536 (295) (19) - (314)
Exempt from income taxes (35) (24) - (59) 102 (41) (2) 59
Trading account assets - - 68 68 - - - -
Federal funds sold 155 1 2 158 (111) 3 (2) (110)
Total interest income change 3,106 (616) (97) 2,393 2,873 (2) 8 2,879
Increase (decrease) in interest
expense:
Interest checking 79 2 - 81 156 56 8 220
Savings 112 118 4 234 (22) 73 (1) 50
Other time deposits 1,022 232 39 1,293 187 213 7 407
Short-term borrowings 1,041 (137) (36) 868 972 169 59 1,200
Total interest expense change 2,254 215 7 2,476 1,293 511 73 1,877
Increase (decrease) in net
interest
Income on a taxable equivalent
basis $ 852 $(831) $(104) $(83) $1,580 $(513) $(65) $1,002
(Increase) decrease in taxable
equivalent adjustment 46 (32)
Net interest income change $(37) $ 970
</TABLE>
9
<PAGE>
The Corporation's net interest income declined by 0.6%, or
$84,000, on a taxable equivalent basis during 1998 compared to
the same period last year. During 1998, the Corporation's
average interest-earning assets grew by approximately $41.9
million, up 12.1% from 1997.
The yield on interest earning assets was down 30 basis
points (a basis point is equal to .01%) from 8.43% in 1997 to 8.13%
in 1998. The cost of interest bearing liabilities rose 15 basis points
from 1997 to 1998. Consequently, the net interest rate spread decreased
from 3.84% during 1997 to 3.41% during 1998. The taxable equivalent
net interest margin was 3.87% during 1998 compared to 4.37% for
1997 and 4.45% during 1996.
The Analysis of Net Interest Income Changes, separates the
dollar change in the Corporation's net interest income into
three components: changes caused by (1) an increase or decrease
in the average assets and liability balances outstanding
(volume); (2) the changes in average yields on interest earning
assets and average rates for interest bearing liabilities
(yield/rate); and (3) combined volume and yield/rate effects
(mix).
This table shows that the decrease in the Corporation's net
interest income during the year-to-date periods presented from
1997 to 1998 was generated by a decline in yields on earning
assets and higher funding costs.
OTHER OPERATING INCOME
Other operating income excluding securities gains and a gain
on sale of real estate, increased 11.7% and totaled $2,245,000 in
1998, compared to $2,010,000 in 1997 and $1,861,000 in 1996. The
table below shows the dollar amounts and growth rates of the
components of other operating income.
1998 1997 1996
($000s) Total Change Total Change Total
Trust income $ 463 -0.64% $ 466 -7.17% $ 502
Service charges on deposits 752 6.36% 707 7.12% 660
Gain on sale of loans 144 58.24% 91 26.39% 72
Trading profits (losses) 62 na - na -
Recovery on class action
lawsuit - na - -100.00% 27
Other income 824 10.46% 746 24.33% 600
Subtotal 2,245 11.69% 2,010 8.01% 1,861
Investment securities gains
(losses) - 100.00% (3) -200.00% (1)
Gains (losses) on securities
available for sale 1,338 66.83% 802 102.02% 397
Gain on sale of real estate 383 na - na -
Total $3,966 41.19% $2,809 24.46% $2,257
Gains on sale of loans contributed $144,000 to noninterest
income during 1998, up from $91,000 in 1997. The Corporation
utilizes the secondary mortgage market to divest itself of fixed
rate mortgage loans with rates below a target rate for purposes
of managing the interest rate risk associated with these loans.
Servicing rights were retained on the loans sold. The
Corporation continues to utilize the secondary market as a means
of offering competitively priced mortgage loan products without
retaining the interest rate risk associated with long term, fixed
rate product. At December 31, 1998 mortgage loans serviced for
others totaled approximately $38.2 million.
Losses on investments held in the maturity portfolio during
1997 and 1996 occurred as a result of calls on municipal bonds in
the portfolio. These losses totaled $3,000 during 1997 and $1,000
during 1996. Net gains were realized on securities available for
sale during 1998 totaling $1,338,000 compared to gains of
$802,000 during 1997 and $397,000 during 1996. The related
income taxes on securities transactions, including trading and
securities available for sale, were $337,000, $174,000, and $104,000
for the years ended 1998, 1997 and 1996, respectively.
10
<PAGE>
OPERATING EXPENSES
The table below details the percentage changes in various
categories of expense for the three years ended 1998, 1997, and
1996.
($000s) 1998 % Change 1997 % Change 1996
Salaries and wages $3,533 16.45% $3,034 14.66% $2,646
Employee benefits 1,100 20.35% 914 15.70% 790
Net occupancy expense 824 5.24% 783 14.14% 686
Equipment expense 933 -1.48% 947 15.91% 817
FDIC insurance 65 1.56% 64 -87.74% 522
Other operating
expenses 3,041 1.71% 2,990 2.15% 2,927
Total $9,496 8.75% $8,732 4.10% $8,388
Management strives to maintain the Corporation's efficiency
ratio at or below 50%. (The efficiency ratio is computed by
dividing the sum of fully taxable equivalent net interest margin
plus non-interest income by non-interest expenses.) For the year
ended 1998, the efficiency ratio was 50.1% compared to 48.8% in
1997 and 51.4% in 1996.
Salaries and wages were higher in the areas of trust and
asset management services, credit administration and data
processing due to increased strategic focus on asset management
services, loan portfolio expansion, and fulfillment of vacant
positions.
Other non-interest operating expense includes FDIC insurance
assessments. FDIC insurance expense included in other operating
expenses was $65,000, $64,000, and $522,000 in 1998, 1997 and
1996, respectively, including a one time, pre-tax assessment on
deposits insured through the Savings Association Insurance Fund
during the third quarter of 1996 totaling $397,000.
Taxes, other than payroll and real estate taxes, included in
noninterest expense totaled $493,000 during 1998, up from
$426,000 in 1997. This includes the Ohio state corporate
franchise tax based on the equity of the subsidiary bank.
Other noninterest expense also includes expense associated
with other real estate owned. During 1998 there was no expense
associated with other real estate owned. During 1997 this
expense was $20,000 compared to $143,000 in 1996. Expenses
associated with one property which was disposed of during the
fourth quarter of 1996 totaled $140,000.
The federal tax benefit resulting from the consumer loan
charge-off was $4,155,000 for the fourth quarter of 1998. This
benefit was partially offset by federal taxes on the
Corporation's taxable income exclusive of the loan charge-off
resulting in a net federal tax benefit of $2,186,000 for 1998.
In the fourth quarter of 1997, federal income taxes were
reduced by $482,000 in historic tax credits associated with a low
income housing project that the subsidiary, Belmont Financial
Network, invested in as a limited partner. The project
contributed $74,000 in low income housing credits (LIHC) during
1998 and is expected to generate approximately $1.6 million in
LIHC over the next ten years.
Operating expenses will be negatively impacted in future
periods by the work-out associated with the indirect consumer
loans as previously discussed. An estimate of associated expense
is unknown at the present time.
11
<PAGE>
FINANCIAL CONDITION
SECURITIES
The book values of investments as of December 31, 1998 and
1997 are detailed in the following tables:
<TABLE>
<CAPTION>
1998 1997
Gross Gross
Unreal- Gross Estimated Unreal- Gross Estimated
Amortized ized Unrealized Fair Amortized ized Unrealized Fair
(Expressed in thousands) Cost Gains Losses Value Cost Gains Losses Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities held to maturity:
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $ 2,255 $ - $ (26) $ 2,229 $ 2,260 $ - $ (52) $ 2,208
Obligations of states and
political subdivisions 3,823 273 (3) 4,093 4,487 222 (13) 4,696
Mortgage-backed securities 6,438 84 (30) 6,492 9,208 119 (50) 9,277
Total held to maturity $ 12,516 $ 357 $ (59) $ 12,814 $ 15,955 $ 341 $(115) $ 16,181
Securities available for sale:
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $ 10,653 $ 1 $ (97) $ 10,557 $ 14,886 $ 16 $ (10) $ 14,892
Obligations of states and
political subdivisions 29,509 63 (515) 29,057 17,832 346 - 18,178
Mortgage-backed securities 94,623 324 (1,246) 93,701 58,897 341 (286) 58,952
Corporate debt 7,530 1 (191) 7,340 - - - -
Mortgage derivative securities 38,797 124 (282) 38,639 24,537 47 (153) 24,431
Total debt securities 181,112 513 (2,331) 179,294 116,152 750 (449) 116,453
Equity securities 5,700 134 (133) 5,701 4,703 - - 4,703
Total available for sale $186,812 $ 647 $(2,464) $184,995 $120,855 $ 750 $(449) $121,156
</TABLE>
The investment portfolio consists largely of fixed and
floating rate mortgage related securities, predominantly
underwritten to the standards of and guaranteed by the government
agency GNMA and by the government-sponsored agencies of FHLMC and
FNMA. These securities differ from traditional debt securities
primarily in that they have uncertain maturity dates and are
priced based on estimated prepayment rates on the underlying
mortgages.
The maturities and yields of securities held to
maturity and available for sale (excluding equity
securities) are detailed in the following tables.
<TABLE>
<CAPTION>
Securities Held to Maturity
December 31, 1998 Over 10 Year
Maturity 1-5 Year 6-10 Year Maturity Total
< 1 year Maturity Maturity
($000s) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
agencies
and
corporations $ - $2,255 4.81% $ - $ - $ 2,255 4.81%
States and
political
subdivisions (a) 533 5.48% 1,228 8.15% 557 10.00% 1,506 9.57% 3,824 8.61%
Agency mortgage-
backed
securities (b) 87 -2.25% 5,033 6.87% 827 7.98% 490 8.33% 6,437 7.00%
Total $620 4.41% $8,516 6.51% $1,384 8.79% $1,996 9.26% $12,516 7.10%
</TABLE>
12
<PAGE>
<TABLE>
Securities Available for Sale (excluding Equity Securities)
December 31, 1998
<CAPTION> Over 10
Year
Maturity 1-5 Year 6-10 Year Maturity Total
< 1 year Maturity Maturity
($000s) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U. S. Treasury
securities $ 101 6.32% $ - $ - $ - $ 101 6.32%
U.S. Government
agencies
and
corporations (b) - - 10,455 6.43% - 10,455 6.43%
States and
political
subdivisions (a) - - 102 7.58% 28,955 7.13% 29,057 7.13%
Corporate debt - - - 7,340 6.39% 7,340 6.39%
Agency mortgage-
backed
securities (b) 1,307 3.01% 79,263 5.76% 7,654 6.98% 5,478 8.41% 93,702 5.98%
Mortgage
derivative
securities 3,198 9.07% 14,278 5.79% 910 10.10% 20,253 6.77% 38,639 6.68%
Total fair
value $4,606 7.31% $93,541 5.76% $19,121 6.82% $62,026 7.02% $179,294 6.35%
Amortized cost $4,605 $94,555 $19,206 $62,746 $181,112
</TABLE>
(a) Taxable equivalent yields
(b) Maturities of mortgage-backed securities and
agency loan pools are based on estimated average life.
At December 31, 1998, the Corporation owned an
aggregate par value of $4.5 million in privately issued
collateralized mortgage obligations issued by the
Residential Funding Mortgage Securities Corporation and
an aggregate par value of $5.4 million of privately
issued collateralized mortgage obligations issued by
Norwest Asset Securities Corporation. No other
securities of a single issuer, other than U.S. Treasury
or other U.S. government agency securities, exceeded
10% of shareholders' equity.
The state and political subdivision portfolio
includes approximately $7.0 million zero coupon revenue
bonds. These bonds are purchased at a significant
discount to par value and the income recognized on the
bonds is derived from the accretion of the discount
using a method that approximates a level yield.
13
<PAGE>
MARKETABLE EQUITY SECURITIES
The Corporation held marketable equity securities
in its investment portfolio as of December 31, 1998.
In accordance with regulatory requirements, all equity
securities were transferred to Securities Available for
Sale on January 1, 1994 because these securities do not
have a stated maturity. Current accounting principles
require that marketable equity securities be recorded
at the lower of cost or market value with a
corresponding adjustment to reduce shareholders' equity
if market value is lower than cost. At December 31,
1998 and 1997, estimated market values approximated
original cost.
Taxable
Market Equivalent
December 31, 1998 ($000s) Cost Value Yield
Federal Home Loan Bank
stock $5,001 $5,001 7.00%
Corporate Stock 512 513 0.93%
Federal Reserve Bank
Stock 187 187 6.00%
$5,700 $5,701
Taxable
Market Equivalent
December 31, 1997 ($000s) Cost Value Yield
Federal Home Loan Bank
stock $4,450 $4,450 7.19%
Corporate Stock 66 66 5.17%
Federal Reserve Bank
Stock 187 187 6.00%
$4,703 $4,703
LOANS AND LEASES
The following table shows the history of
commercial and consumer loans and leases, including
loans held for sale, by major category at December 31.
($000s) 1998 1997 1996 1995 1994
Commercial loans:
Real estate construction $ 135 $ 1,418 $ 1,327 $ 1,530 $ 1,801
Acceptances of other
banks 0 0 0 0 0
Real estate mortgage 14,719 19,984 25,954 28,744 23,701
Commercial, financial
and agricultural 119,730 109,618 80,554 50,532 38,983
Direct financing leases 0 0 0 3 5
Total commercial loans $134,584 $131,020 $107,835 $ 80,809 $ 64,490
Consumer loans:
Residential mortgage $ 58,099 $ 77,995 $ 71,715 $ 69,999 $ 76,094
Installment loans 14,483 14,435 7,626 6,959 5,116
Credit card and other
consumer 1,020 1,450 1,607 2,190 1,396
Total consumer loans $ 73,602 $ 93,880 $ 80,948 $ 79,148 $ 82,606
Total loans and leases $208,186 $224,900 $188,783 $159,957 $147,096
An analysis of maturity and interest rate sensitivity
of business loans at the end of 1998 follows:
Under 1 to 5 Over 5
($000s) 1 Year Years Years Total
Domestic loans:
Real estate construction $ 10 $ 15 $ 110 $ 135
Real estate mortgage 8,655 2,717 3,347 14,719
Commercial, financial
and agricultural 59,682 46,693 12,885 119,260
Direct financing leases 0 0 0 0
Total business loans (a) $68,347 $49,425 $16,342 $134,114
Rate sensitivity:
Predetermined rate $ 4,087 $22,547 $15,443 $ 42,077
Floating or adjustable rate 64,260 26,878 899 92,037
Total domestic business loans $68,347 $49,425 $16,342 $134,114
Foreign loans 0 0 0 0
(a) does not include nonaccrual loans
14
<PAGE>
PROVISION AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
The Corporation, as part of its philosophy of risk
management, has established various credit policies and
procedures intended to minimize the Corporation's
exposure to undue credit risk. Credit evaluations of
borrowers are performed to ensure that loans are
granted on a sound basis. In addition, care is taken
to minimize risk by diversifying specific industry.
Credit risk is continuously monitored by Management
through the periodic review of individual credits to
ensure compliance with policies and procedures.
Adequate collateralization, contractual guarantees, and
compensating balances are also utilized by Management
to mitigate risk.
Management determines the appropriate level of the
allowance for possible loan losses by continually
evaluating the quality of the loan portfolio. The
reserve is allocated to specific loans that exhibit
above average credit loss potential based upon their
payment history and the borrowers' financial
conditions. The adequacy of the allowance for possible
loan losses is evaluated based on an assessment of the
losses inherent in the loan portfolio. This assessment
results in an allowance consisting of two components,
allocated and unallocated. The allocations are made
for analytical purposes. The total allowance is
available to absorb losses from any segment of the
portfolio. Management maintains a watch list of
substandard loans for monthly review. Although these
loans may not be delinquent and may be adequately
secured, Management believes that due to location,
size, or past payment history, it is necessary to
monitor these loans monthly.
The allowance for possible loan losses totaled
$5,474,000, or 2.63% of total loans and leases at
December 31, 1998. At the end of the previous year,
the allowance for possible loan losses was $4,134,000,
or 1.84% of total loans and leases. The provision
charged to expense during 1998 was $12,882,000 compared
to $1,055,000 in the year ago period. The increase in
the provision for 1998 was related to the indirect
consumer loans discussed previously.
At December 31, 1998, the balance of indirect
consumer loans was approximately $8.0 million with a
specific allocation of the loan loss reserve of
approximately $1.9 million. The collateral for these loans
was in various stages of completion. For example, the
consumer borrower may have received value for one or more
of the following: land, land improvements, a foundation, a
modular home. Because there was value associated with
these contracts, it was not appropriate to recognize a
loss for the entire amount of the loans at December 31,
1998.
At the time the restated financial statements were
being prepared, the Bank was in the process of contacting
customers to determine what value they had received from
the contract and what their obligation was, if any, to the
Bank. The Bank was also obtaining current credit reports
on the consumer borrowers and current appraisals and title
searches on the subject properties to determine value. For
these reasons, management did not charge-off the entire
balance of the indirect consumer loans with the December
31, 1998 restatement.
15
<PAGE>
Management's allocation of the allowance for
possible loan losses for the past five years based on
estimates of potential future loan loss is set forth in
the table below:
($000s) 1998 1997 1996 1995 1994
Specific reserves:
Commercial $ 268 $ 560 $ 330 $ 310 $ 10
Mortgage 0 0 10 10 5
Consumer 60 161 176 5 7
Criticized loans without
specific allocation 616 470 296 414 315
Provision for loan
categories based on
historical loss
experience:
Commercial 1,577 1,534 1,197 799 664
Commercial real estate 324 313 269 152 103
Residential mortgage 272 358 328 325 298
Consumer 2,267 209 137 143 112
Unallocated 90 529 410 545 23
Total $5,474 $4,134 $3,153 $2,703 $1,537
Reserves as a % of total loans
($000s) 1998 1997 1996 1995 1994
Specific reserves:
Commercial 0.13% 0.25% 0.17% 0.19% 0.01%
Mortgage 0.00% 0.00% 0.01% 0.01% 0.00%
Consumer 0.03% 0.07% 0.09% 0.00% 0.00%
Criticized loans without
specific allocation 0.30% 0.21% 0.16% 0.26% 0.21%
Provision for loan
categories
based on historical
loss experience:
Commercial 0.76% 0.68% 0.63% 0.50% 0.45%
Commercial real estate 0.16% 0.14% 0.14% 0.10% 0.07%
Residential mortgage 0.13% 0.16% 0.17% 0.20% 0.20%
Consumer 1.09% 0.09% 0.07% 0.09% 0.08%
Unallocated 0.03% 0.24% 0.23% 0.34% 0.02%
Total 2.63% 1.84% 1.67% 1.69% 1.04%
Total loans and leases
outstanding $208,186 $224,899 $188,783 $159,957 $147,096
Loans by Category as a %
of Total Loans:
Commercial 64.6% 58.3% 57.1% 50.5% 43.8%
Mortgage 27.9% 34.7% 38.0% 43.8% 51.7%
Consumer 7.5% 7.0% 4.9% 5.7% 4.5%
Total Loans and Leases 100.0% 100.0% 100.0% 100.0% 100.0%
16
<PAGE>
The following table sets forth the five year
historical information on the reserve for loan losses:
($000s) 1998 1997 1996 1995 1994
Balance as of January 1 $ 4,134 $3,153 $2,703 $1,537 $1,617
Provision for loan losses 12,882 1,055 465 1,150 805
Adjustment incident to
acquisition 0 0 0 0 0
Loans charged off:
Real estate 133 24 30 25 49
Commercial 178 23 0 0 806
Consumer 11,245 43 32 26 85
Direct financing leases 0 0 0 0 0
Total loans charged-off 11,556 90 62 51 940
Recoveries of loans
previously
charged-off:
Real estate 11 2 2 3 18
Commercial 1 1 0 1 29
Consumer 3 13 45 18 7
Direct financing leases 0 0 0 45 1
Total recoveries 15 16 47 67 55
Net charge-offs
(recoveries) 11,541 74 15 (16) 885
Balance at December 31 $ 5,475 $4,134 $3,153 $2,703 $1,537
($000s) 1998 1997 1996 1995 1994
Loans and leases
outstanding
at December 31 $208,186 $224,899 $188,783 $159,957 $147,096
Allowance as a percent of
loans and leases
outstanding 2.63% 1.84% 1.67% 1.69% 1.04%
Average loans and leases $222,961 $208,265 $174,445 $152,502 $134,952
Net charge-offs as a
percent of average loans
and leases 5.18% 0.04% 0.01% -0.01% 0.66%
The following schedule shows the amount of non-
performing assets and loans 90 days or more past due
but accruing interest.
NON-PERFORMING ASSETS
($000s) 1998 1997 1996 1995 1994
Nonaccrual loans and
leases $8,576 $1,515 $143 $162 $ 478
Loans 90 days or more past
due but accruing interest 4 44 74 14 11
Other real estate owned - 20 66 579 586
Total $8,580 $1,579 $283 $755 $1,075
Restructured loans in compliance with modified terms totaled
$1,633,000 at December 31, 1998 and $905,000 at December 31, 1997.
In addition to the above schedule of non-
performing assets, Management prepares a watch list
consisting of loans which Management has determined
require closer monitoring to further protect the
Corporation against loss. The balance of loans
classified by Management as substandard due to
delinquency and a change in financial position at the
end of 1998 and not included in the table above was
$4,746,000. The indirect consumer loans and the
commercial loans of the Borrower discussed previously
may impact future operating results. The Corporation
continues to analyze its loan portfolio. As of the
date of this Form 10-K/A, the Corporation recognized a
provision for loan losses of $5,735,000 for the quarter
ended March 31, 1999 and a provision for loan losses of
$1,871,000 for the quarter ended June 30,1999.
17
<PAGE>
DEPOSITS
Primarily core deposits are used to fund interest-
earning assets. The Corporation has a lower volume of
interest-free checking accounts than its peer group
which is typical for its market area. This results in
an overall higher cost of funds than peer average. The
accompanying tables show the relative composition of
the Corporation's average deposits and the change in
average deposit sources during the last three years.
AVERAGE DEPOSITS 1998 1997 1996
($000s)
Demand $ 29,910 $ 29,878 $ 27,878
Interest bearing
checking 45,863 43,476 38,576
Savings 82,196 78,636 79,341
Other time 107,399 101,405 99,649
Certificates-$100,000
and over 27,087 13,899 12,008
Total average
deposits $292,455 $267,294 $257,452
DISTRIBUTION OF AVERAGE 1998 1997 1996
DEPOSITS
Demand 10.23% 11.18% 10.83%
Interest bearing
checking 15.68% 16.27% 14.98%
Savings 28.11% 29.42% 30.82%
Other time 36.72% 37.94% 38.71%
Certificates-$100,000
and over 9.26% 5.20% 4.66%
Total 100.00% 100.00% 100.00%
CHANGE IN AVERAGE
DEPOSIT SOURCES 1997 to 1998 1996 to 1997
($000s)
Demand $ 32 $2,000
Interest bearing
checking 2,387 4,900
Savings 3,560 (705)
Other time 5,994 1,756
Certificates-$100,000
and over 13,188 1,891
Total $25,161 $9,842
BORROWINGS
Other sources of funds for the Corporation include
short-term repurchase agreements and Federal Home Loan
Bank borrowings. Borrowings at the Federal Home Loan
Bank are utilized to match the maturities of selected
loans and to leverage the capital of the Corporation to
enhance profitability for shareholders.
CAPITAL RESOURCES
At December 31, 1998, shareholders' equity was
$25,364,000 compared to $31,899,000 at December 31,
1997, a decrease of $6,535,000 or 20.5%. The decrease
in capital during 1998 was due to the losses associated
with the consumer loan portfolio as previously
discussed. In addition, the Corporation paid cash
dividends to shareholders totalling $2,022,000 during
1998.
The Federal Reserve Board has adopted risk-
based capital guidelines that assign risk weightings
to assets and off-balance sheet items. The
guidelines also define and set minimum capital
requirements (risk-based capital ratios). Bank
holding companies are required to have core capital
(Tier 1) of at least 4.0% of risk-weighted assets
and total capital of 8.0% of risk-weighted assets.
Tier 1 capital consists principally of shareholders'
equity less goodwill, while total capital consists
of core capital, certain debt instruments and a
portion of the reserve for loan losses. At December
31, 1998, the Corporation had a Tier 1 capital ratio
of 9.08% and a total capital ratio of 10.33%.
18
<PAGE>
The following table shows several capital and
liquidity ratios for the Corporation for the last
three years:
December 31 1998 1997
Average shareholders' equity
to :
Average assets 8.06% 8.02%
Average deposits 11.39% 11.01%
Average loans and leases 14.94% 14.13%
Primary capital 8.50% 9.10%
Risk-based capital ratio:
Tier 1 9.08% 11.81%
Total 10.33% 13.06%
Leverage ratio 5.94% 8.00%
National banks must maintain a total assets
leverage ratio of at least 3.0%. The total assets
leverage ratio is calculated by dividing capital
less intangibles into assets, net of intangibles.
In many cases, regulators require an additional
cushion of at least 1.0% to 2.0%. At December 31,
1998, the Corporation's Tier One leverage ratio was
5.94%.
The following table presents dividend payout
ratios for the past three years.
1998 1997 1996
Total dividends declared
as a percentage of net income N/A 27.17% 26.59%
Common dividends declared
as a percentage of earnings
per common share N/A 27.20% 25.64%
Cash dividends were declared and paid during 1998
prior to the Corporation's determination that it
would not realize positive earnings for the year.
Dividends of $0.385 per share were paid.
DIVIDENDS
The subsidiary Bank is the primary source of funds
to pay dividends to the shareholders of Belmont
Bancorp. The approval of the Comptroller of the
Currency will be required for future dividends from the
Bank to Belmont Bancorp. because previously paid
dividends have exceeded the total of the Bank's
retained net profits for the preceding two years. The
Board of Governors of the Federal Reserve Bank has
issued a policy statement stating that a bank holding
company generally should not maintain its existing rate
of cash dividends on common stock unless (1) the
organization's net income available to common
shareholders over the past year has been sufficient to
fully fund the dividends and (2) the prospective rate
of earnings retention appears consistent with the
organization's capital needs, asset quality, and
overall financial condition. The Corporation has
ceased payment of a cash dividend until the Corporation
achieves a certain level of profitability and capital.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation meets its liability based needs
through the operation of Belmont National Bank's branch
banking network that gathers demand and retail time
deposits. The Bank also acquires funds through
repurchase agreements and overnight federal funds that
provide additional sources of liquidity. Total
deposits increased by $40.4 million, or 15.3%, from the
end of 1997 to 1998. Average deposits increased $25.2
million, or 9.4%, during 1998 compared to 1997.
The Bank has utilized alternative funding sources
to leverage shareholders' equity and improve overall
profitability. Sources include the Federal Home Loan
Bank of Cincinnati and various correspondent bank
relationships.
19
<PAGE>
The Bank also has lines of credit with various
correspondent banks totaling $6,500,000 which may be
used as an alternative funding source; the unused
portion of these lines at December 31, 1998 was
$4,550,000. During June 1999, one correspondent
temporarily suspended their line of credit in the
amount of $4.5 million until the Bank collateralized
the line with securities. In addition, the Bank has a
line of credit with the Federal Home Loan Bank of
Cincinnati for $30 million; at December 31, 1998, the
line was not drawn upon. All borrowings at the Federal
Home Loan Bank are subject to eligible collateral
requirements.
Future liquidity may be impacted by the items
discussed under the Item 7--Results of Operations.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board
issued SFAS No. 133. "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 133 provides accounting
and reporting standards for derivatives instruments,
including certain derivative instruments embedded in other
contracts, by requiring the recognition of those items as
assets or liabilities in the statement of financial
position, recorded at fair value. SFAS No. 133 precludes a
held-to-maturity securitiy from being designated as a hedge
item. However, at the date of initial application of SFAS
No. 133, an entity is permitted to transfer any held-to-
maturity security into the available-for-sale or trading
categories. The unrealized holding gain or loss on such
transferred securities shall be reported consistent with the
requirements of SFAS No. 115, "Accounting for Certain
Investment in Debt and Equity Securities." Such transfers
do not raise an issue regarding an entity's intent to hold
other debt securities to maturity in the future. SFAS No.
133 applies prespectively for all fiscal quarters of all
years beginning after June 15, 1999. Earlier adoption is
permitted for any fiscal quarter that begins after the issue
date of SFAS No. 133. Management does not believe the
adoption of SFAS No. 133 will have a material impact on the
Company.
Year 2000
The Corporation is aware of the overall potential
impact the 1999 to 2000 calendar changes could present.
The loss of hardware and/or software systems as well as
the loss of electricity and/or telecommunications are
areas of concern throughout the entire industry. A
smooth transition to the Year 2000 is planned with
little or no impact to our customer base.
The Corporation began gathering Year 2000 data in
August 1997. A written project plan was researched and
delivered during the fourth quarter of 1997. The Year
2000 project plan was presented to the Board of
Directors in February 1998 and was approved at the
February board meeting. The Year 2000 Project Team was
assigned in December 1997 and is comprised of
representatives from all affected departments. Monthly
meetings are held to review the current project status
and to assign various tasks to departments.
As a financial institution, the Corporation
follows Year 2000 guidelines written by the Federal
Financial Institutions Examination Council as well as
OCC Advisory Letters. The Office of the Comptroller of
the Currency has completed three extensive examinations
of Belmont National Bank and the Year 2000 plan. The
assigned examiner reviews all plans, research, and
results on a continual basis.
The Belmont National Bank Year 2000 plan is
comprised of the five Y2K phases: Awareness,
Assessment, Renovation, Validation and Implementation.
The Awareness phase consists of the institution being
aware of the potential problem(s) that could result
from the Year 2000. This phase was completed in
December 1997. The Assessment phase was completed in
January 1998 and included inventories of all equipment
including hardware, software, environmental controls,
fax machines, copiers, vault timers, security systems,
network systems etc. The Renovation phase, January
1998 through October 1998, consisted of known
renovations such as upgrading network routers, servers,
and software, and the installation of a new mainframe
system. June 1998 through December 1998 was the time
frame designated for the Validation phase. This phase
consisted of testing the software and hardware at
Belmont National Bank. During this phase all "mission
critical" systems were tested by changing the date and
completing transactions with calculation results
validated. From March 1998 through the remainder of
1999 Belmont National Bank will implement new software,
hardware and/or any equipment that did not pass all Y2K
tests.
20
<PAGE>
As of January 1999, all "mission critical" systems
have been tested. All mission critical systems passed
Year 2000 testing. Other less critical systems that
did not pass were replaced by June 1999. The
regulatory agency examiner has reviewed all test
results.
Belmont National Bank has included a customer
awareness policy dedicated to maintaining updated
communication with its customer base. The Bank
provided a project update in June 1998 and issued a new
update in February 1999. Both Y2K status reports were
available through the Bank's WEB site on the internet
as well as to customers and employees at all branch
locations.
At its June 1998 meeting, the Loan Committee
established a Year 2000 evaluation form, which was
included in the lending policy for all new commercial
loan applicants. The lending department prepared and
distributed Y2K readiness surveys to existing loan
customers with aggregate balances greater than
$150,000. All returned survey responses were
evaluated and a rating was assigned to each commercial
customer. The customer's Y2K readiness status was
reviewed quarterly.
Year 2000 surveys were also sent to commercial
deposit account holders with balances greater than
$250,000. Senior Management reviewed these surveys
and took appropriate action based on a low to high risk
rating system.
Regular update reports have been presented to the
Board of Directors of the Corporation.
ITEM 7A-QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
INTEREST RATE SENSITIVITY
The Corporation's net interest revenue can be
vulnerable to wide fluctuations arising from a change
in the general level of interest rates to the degree
that the average yield on assets responds differently
to such a change than does the average cost of funds.
To maintain a consistent earnings performance, the
Corporation actively manages the repricing
characteristics of its assets and liabilities to
control net interest income rate sensitivity.
The mismatching of asset and liability repricing
characteristics in specific time frames is referred to
as interest rate sensitivity gaps. Mismatching or
"gapping" can be profitable when the term structure of
interest rates (the yield curve) is positive, i.e.
short term yields are lower than long term yields, but
gapping entails an element of risk, particularly in
volatile markets. An institution is said to have a
negative gap when its liabilities reprice in a shorter
time period than its assets. A positive gap exists
when assets reprice more quickly than liabilities. A
negative gap in a period when the general level of
interest rates is declining will produce a larger net
interest income spread than would be the case if all
assets and liabilities were perfectly matched.
Conversely, net interest income will be adversely
affected by a negative gap position in a period when
the general level of interest rates is rising. Gaps,
therefore, must be prudently managed.
The Corporation examines its interest rate
sensitivity position by categorizing the balance sheet
into respective repricing time periods similar to those
shown on the accompanying table. Repricing of certain
assets, such as installment loans, mortgage loans and
leases, is based upon contractual amortization or
repricing, although experience indicates that they
reprice more quickly due to early payoffs. Mortgage-
backed securities are included in maturity/repricing
categories based upon historical prepayment speeds.
Based upon historical deposit rate relationships,
savings and interest bearing checking are partially
included in the non-rate sensitive category since rate
changes on these products are not completely sensitive
to fluctuations in the interest rate environment.
21
<PAGE>
Asset/liability management encompasses both
interest rate risk and liquidity management. The
resulting net cumulative gap positions reflect the
Corporation's sensitivity to interest rate changes over
time. The calculation is a static indicator and is not
a net interest income predictor of a dynamic business
in a volatile environment. As a static indicator, the
gap methodology does capture major trends.
<TABLE>
Rate Sensitivity Analysis
December 31, 1998
<CAPTION>
Maturing or repricing
Non-rate
Total Sensitive
1-30 31-90 91-180 181-356 1 Year 1-5 & Over
days days days days & Over Years 5 years Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning
assets:
Loans and leases $58,406 $14,171 $ 7,968 $10,599 $ 91,144 $60,114 $ 56,928 $208,186
Trading securities 955 955 967 359 2,281
Investment securities 2,491 648 576 3,715 5,531 3,270 12,516
Securities available
for sale 14,937 6,816 5,655 28,377 55,785 68,690 60,520 184,995
Total interest
earning assets 74,298 23,478 14,271 39,552 151,599 135,302 121,077 407,978
Interest bearing
liabilities:
Interest checking 5,580 5,580 36,857 42,437
Savings 17,077 17,077 71,188 88,265
Certificates-$100,000
and over 1,190 2,497 5,482 10,392 19,561 3,987 3,697 27,245
Other time 7,845 14,991 23,398 23,887 70,121 31,405 14,659 116,185
Repurchase agreements 6,239 6,239 6,239
Short term borrowings 3,950 3,950 3,950
Long term debt 5,000 5,000 11,401 75,000 91,401
Total interest
bearing liabilities 35,642 17,488 28,880 45,518 127,528 46,793 201,401 375,722
Rate sensitivity gap 38,656 5,990 (14,609) (5,966) 24,071 88,509 (80,324) 32,256
Cumulative gap $38,656 $44,646 $30,037 $24,071 $112,580 $ 32,256
Cumulative gap as a
percentage of
interest earning
assets 9.48% 10.94% 7.36% 5.90% 27.59% 7.91%
</TABLE>
Interest bearing checking and savings deposits
that have no contractual maturity are scheduled in the
table above according to Management's best estimate of
their repricing sensitivity to changes in market rates.
The Bank seeks to manage interest rate risk
utilizing various modeling techniques and through
monitoring short and long term interest rates and
adjusting its product line and pricing accordingly.
Forward-looking Statements
This report includes forward-looking statements
within the meaning of Section 27A of the Securities Act
of 1933, as amended, that involve inherent risks and
uncertainties. A number of important factors could
cause actual results to differ materially from those in
the forward-looking statements. These factors include
the economic environment, competition, products and
pricing in geographic and business areas in which the
Corporation operates, prevailing interest rates,
changes in government regulations and policies
affecting financial services companies, credit quality
and credit risk management, changes in the banking
industry including the effects of consolidation
resulting from possible mergers of financial
institutions, acquisitions and integration of acquired
businesses. The Corporation undertakes no obligation
to release revisions to these forward-looking
statements or reflect events or circumstances after the
date of this report.
22
<PAGE>
ITEM 8 - FINANCIAL STATEMENTS & SUPPLEMENTARY DATA
The financial statements and schedules are set
forth beginning on page F-1.
ITEM 9 - DISAGREEMENT OF ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information appearing in Belmont Bancorp.'s
definitive proxy statement dated March 19, 1999
(Exhibit C) is incorporated by reference in response to
this item.
EXECUTIVE OFFICERS OF THE REGISTRANT AS OF JANUARY 1, 1999:
Name Age Position
J. Vincent Ciroli, Jr. 53 President and
Chief Executive Officer,
Belmont Bancorp. &
Belmont National Bank
William Wallace 43 Vice President, Belmont Bancorp.;
Executive Vice President & Chief
Operating Officer, Belmont
National Bank
Jane R. Marsh 37 Secretary, Belmont Bancorp.;
Senior Vice President, Controller &
Cashier, Belmont National Bank
Each of the officers listed above has been an
executive officer of the Corporation or one of its
subsidiaries during the past five years.
ITEM 11 - EXECUTIVE COMPENSATION
The information appearing in Belmont Bancorp.'s
definitive proxy statement dated March 19, 1999
(Exhibit C) is incorporated by reference in response to
this item.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing in Belmont Bancorp.'s
definitive proxy statement dated March 19, 1999
(Exhibit C) is incorporated by reference in response to
this item.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing in Belmont Bancorp.'s
definitive proxy statement dated March 19, 1999
(Exhibit C) is incorporated by reference in response to
this item.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
The following exhibit is filed as part of this
report:
Exhibit 27 -- Financial data schedule
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on
January 24, 2000.
BELMONT BANCORP
/s/ Wilbur R. Roat
--------------------
By: Wilbur R. Roat
Title: President and Chief Executive Officer
Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ W. Quay Mull II
- ------------------------------
W. Quay Mull II Chairman of the Board, January 24, 2000
and Director
/s/ Wilbur R. Roat
- ------------------------------
Wilbur R. Roat President and Chief January 24, 2000
Executive Officer
(principal executive officer)
/s/ Jane R. Marsh
- ------------------------------
Jane R. Marsh Secretary January 24, 2000
(principal financial
and accounting officer)
/s/ Mary L. Holloway Haning
- ------------------------------
Mary L. Holloway Haning Director January 24, 2000
/s/ Charles J. Kaiser, Jr.
- ------------------------------
Charles J. Kaiser, Jr. Director January 24, 2000
/s/ John H. Goodman II
- ------------------------------
John H. Goodman II Director January 24, 2000
/s/ James R. Miller
- ------------------------------
James R. Miller Director January 24, 2000
/s/ Terrence A. Lee
- ------------------------------
Terrence A. Lee Director January 24, 2000
/s/ Thomas P. Olszowy
- ------------------------------
Thomas P. Olszowy Director January 24, 2000
/s/ Keith A. Sommer
- ------------------------------
Keith A. Sommer Director January 24, 2000
/s/ Charles A. Wilson, Jr.
- ------------------------------
Charles A. Wilson, Jr. Director January 24, 2000
</TABLE>
24
<PAGE>
Index to Financial Statements
Consolidated Balance Sheets at December 31, 1998 and 1997 F-1
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996 F-2
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1998, 1997 and 1996 F-3
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 F-4
Notes to Financial Statements F-5
Report of Independent Accountants F-20
25
<PAGE>
PAGE F-1
Belmont Bancorp. and Subsidiaries
Consolidated Balance Sheets
($000's)
December 31,
1998 1997
Assets as Restated
Cash and due from banks $ 9,439 $ 10,265
Loans held for sale 1,734 884
Trading securities 2,281 -
Securities available for sale (at fair value) 184,995 121,156
Securities held to maturity (fair value of
$12,814 - 1998; and $16,181 - 1997) 12,516 15,955
Loans 206,452 224,016
Less allowance for possible loan losses (5,475) (4,134)
Net loans 200,977 219,882
Premises and equipment, net 7,377 7,401
Other real estate owned - 20
Accrued income receivable 2,731 2,586
Other assets 16,233 10,564
Total Assets $438,283 $388,713
Liabilities and Shareholders' Equity
Liabilities
Noninterest bearing deposits:
Demand $ 30,219 $ 29,987
Interest bearing deposits:
Demand 42,437 33,463
Savings 88,265 79,829
Time 143,430 120,629
Total deposits 304,351 263,908
Securities sold under repurchase agreements 6,239 5,256
Federal funds purchased and other short
term borrowings 3,950 14,635
Long-term debt 91,401 69,635
Accrued interest on deposits and other
borrowings 896 731
Other liabilities 6,082 2,649
Total liabilities 412,919 356,814
Shareholders' Equity
Preferred stock - authorized 90,000 shares
with no par value; issued and outstanding,
none - -
Common stock - $0.25 par value, 17,800,000
shares authorized,
5,288,326 issued in 1998 and 1997 1,321 1,321
Surplus 7,854 7,781
Treasury stock (66,174 shares in 1998;
13,330 shares in 1997) (1,400) (131)
Retained earnings:
Unappropriated 17,938 21,879
Appropriated for contingencies 850 850
Accumulated other comprehensive
income (loss) (1,199) 199
Total shareholders' equity 25,364 31,899
Total liabilities and shareholders'
equity $438,283 $388,713
The accompanying notes are an integral part of the financial statements.
F-1
<PAGE>
Belmont Bancorp. and Subsidiaries
Consolidated Statements of Income
For the Years Ended December 31, 1998, 1997 and 1996
($000's)
Interest Income 1998 1997 1996
as Restated
Loans and lease financing:
Taxable $ 20,923 $ 19,141 $ 15,905
Tax-exempt 271 334 329
Investment securities:
Taxable 7,720 7,238 7,660
Tax-exempt 1,241 1,284 1,251
Dividends 336 280 175
Interest on trading securities 68 - -
Interest on federal funds sold 228 71 181
Total interest income 30,787 28,348 25,501
Interest Expense
Deposits 11,671 10,063 9,386
Other borrowings 4,809 3,941 2,741
Total interest expense 16,480 14,004 12,127
Net interest income 14,307 14,344 13,374
Provision for Possible Loan Losses 12,882 1,055 465
Net interest income after provision
for possible loan losses 1,425 13,289 12,909
Noninterest Income
Trust fees 463 466 502
Service charges on deposits 752 707 660
Other operating income 968 837 699
Gain on sale of real estate 383 - -
Trading gains 62 - -
Investment securities gains 1,338 799 396
Total noninterest income 3,966 2,809 2,257
Noninterest Expense
Salary and employee benefits 4,633 3,948 3,436
Net occupancy expense of premises 824 783 686
Equipment expenses 933 947 817
Other operating expenses 3,106 3,054 3,449
Total noninterest expense 9,496 8,732 8,388
Income (loss) before income
taxes (4,105) 7,366 6,778
Income Taxes (Benefit) (2,186) 1,421 1,776
Net income (loss) $ (1,919) $ 5,945 $ 5,002
Weighted Average Number of
Shares Outstanding 5,252,161 5,278,152 5,286,610
Earnings (loss) Per
Common Share $(0.37) $ 1.13 $ 0.95
The accompanying notes are an integral part of the financial statements.
F-2
<PAGE>
<TABLE>
Belmont Bancorp. and Subsidiaries
Consolidated Statements of Shareholders' Equity
For the Years Ended December 31, 1998, 1997 and 1996
($000's)
<CAPTION> Accumulated
Other
Retained Earnings Compre- Compre-
Preferred Common Unappro- Appro- Treasury hensive hensive
Stock Stock Surplus priated priated Stock Income Income
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 1,000 $1,057 $7,781 $14,148 $850 $ (8) $ 336
Comprehensive income
Net Income - - - 5,002 - - - $5,002
Other comprehensive income,
net of tax
Unrealized loss on securities (504) (504)
Comprehensive income $4,498
Cash dividends declared:
Preferred stock - - - (61) - - -
Common stock(per share $.240) - - - (1,269) - - -
Redemption of preferred stock (1,000) - - - - - -
Balance, December 31, 1996 $ - $1,057 $7,781 $17,820 $850 $ (8) $(168)
Comprehensive income
Net income - - - 5,945 - - - $5,945
Other comprehensive income,
net of tax
Unrealized gains on securities 367 367
Comprehensive income $6,312
Cash dividends declared:
Common stock (per share $.306) - - - (1,615) - - -
Five-for-four stock split effected
in the form of a stock dividend - 264 - (264) - - -
Cash paid in lieu of fractional
shares on stock dividend - - - (7) - - -
Purchase of treasury stock - - - - - (123) -
Balance, December 31, 1997 $ - $1,321 $7,781 $21,879 $850 $(131) $ 199
Comprehensive income
Net loss (as restated) - - - (1,919) - - - $(1,919)
Other comprehensive income,
net of tax
Unrealized loss on securities
net of reclassification
adjustment (see disclosure) (1,398) (1,398)
Comprehensive income $(3,317)
Cash dividends declared:
Common stock (per share $.385) - - - (2,022) - - -
Purchase of treasury stock - - - - - (1,308) -
Issuance of treasury stock - - 73 - - 39 -
Balance, December 31, 1998 $ - $1,321 $7,854 $17,938 $850 $(1,400) $(1,199)
(As Restated)
The accompanying notes are an integral part of the financial statements.
</TABLE>
F-3
<PAGE>
Belmont Bancorp. and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1998, 1997 and 1996
($000's)
1998 1997 1996
as Restated
Operating Activities:
Net income (loss) $ (1,919) $ 5,945 $ 5,002
Adjustments to reconcile net income to
net cash flows provided by (used in)
operating activities:
Provision for loan losses 12,882 1,055 465
Depreciation and amortization expense 743 818 674
Amortization of investment security premiums 2,403 1,278 1,469
Accretion of investment security discounts and
interest recorded on zero-coupon securities (302) (230) (358)
Investment securities losses - 3 1
Trading (gains) losses (63) - -
Gains on securities available for sale (1,338) (802) (397)
Proceeds from sales of securities held in
trading account 12,893 - -
Purchase of securities for trading account (14,865) - -
Loss (gain) on sale of fixed assets (384) (1) 6
Gain on sale of loans (144) (91) (72)
Loss (gain) on sale of other real estate owned - (7) 65
(Increase) decrease in interest receivable (144) (665) 229
Increase in interest payable 165 67 3
Net increase in loans held for sale (850) (642) (242)
Others, net (1,103) (6,546) 6,130
Net cash provided by operating activities 7,974 182 12,975
Investing Activities:
Net decrease (increase) in federal funds sold - 24,450 (24,450)
Proceeds from maturities and calls of
investment securities 4,370 3,575 1,859
Purchase of securities available for sale (193,441) (164,305) ( 99,267)
Purchase of investment securities - - -
Proceeds from sale of securities available for
sale 87,580 105,407 110,808
Principal collected on mortgage-backed
securities 37,964 16,545 22,930
Net increase in loans and leases, net of
charge-offs (14,013) (39,771) (38,514)
Proceeds from sale of loans 20,144 13,361 9,874
Loans purchased - (9,124) -
Recoveries on loans previously charged-off 15 16 47
Proceeds from sale of other real estate owned 39 111 514
Purchase of life insurance contracts (413) (2,365) -
Purchase of premises and equipment (947) (979) (2,859)
Proceeds from sale of fixed assets 612 20 8
Net cash used in investing activities (58,090) (53,059) (19,050)
Financing Activities:
Net increase in deposits 40,443 2,369 14,689
Net increase (decrease) in repurchase
agreements 983 (3,024) (6,259)
Net increase (decrease) in short-term
borrowings (10,685) 4,635 (14,126)
Proceeds from the issuance of long-term debt 35,000 52,950 15,125
Payments on long-term debt (13,233) (2,991) (251)
Dividends paid on common and preferred stock (2,022) (1,622) (1,330)
Redemption of preferred stock - - (1,000)
Issuance of treasury stock 112 - -
Purchase of treasury stock (1,308) (123) -
Net cash provided by financing activities 49,290 52,194 6,848
Increase (Decrease) in Cash and Cash
Equivalents (826) (683) 773
Cash and Cash Equivalents, Beginning of Year 10,265 10,948 10,175
Cash and Cash Equivalents, End of Year $ 9,439 $ 10,265 $ 10,948
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
Belmont Bancorp. and Subsidiaries
Notes to the Consolidated Financial Statements (as Restated)
For the Years Ended December 31, 1998, 1997 and 1996
1. Summary of Significant Accounting Policies
The accounting and reporting policies and practices of
Belmont Bancorp. (the "Corporation") and its subsidiaries
are in accordance with generally accepted accounting
principles and conform to general practices within the
banking industry. The more significant of these policies
and practices are summarized below.
Nature of Operations: Belmont Bancorp. provides a variety
of banking services to individuals and businesses through
the branch network of its wholly-owned subsidiary, Belmont
National Bank (BNB). BNB operates twelve full-service
banking facilities located in Belmont, Harrison, and
Tuscarawas Counties in Ohio, and Wheeling, West Virginia.
Principles of Consolidation: The consolidated financial
statements include the accounts of Belmont Bancorp. and its
wholly-owned subsidiaries, Belmont National Bank and Belmont
Financial Network, Inc. Material intercompany accounts and
transactions have been eliminated.
Use of Estimates: The preparation of financial statements
in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date
of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Held to Maturity Securities: These securities are purchased
with the original intent to hold to maturity and events
which may be reasonably anticipated are considered when
determining the Corporation's intent and ability to hold to
maturity. Securities meeting such criteria at date of
purchase and as of the balance sheet date are carried at
cost, adjusted for amortization of premiums and accretion of
discounts.
Available for Sale Securities: Debt and equity securities
to be held for indefinite periods of time and not intended
to be held to maturity are classified as available for sale
and carried at fair value with net unrealized gains and
losses, net of tax, reflected as a component of
shareholders' equity until realized. Securities held for
indefinite periods of time include securities that may be
sold to meet liquidity needs or in response to significant
changes in interest rates or prepayment risks as part of the
Corporation's overall asset/liability management strategy.
Trading Securities: Trading securities are held for resale
within a short period of time and are stated at fair value.
Trading gains and losses include the net realized gain or
loss and market value adjustments of the trading account
portfolio.
Loans Held for Sale: Residential mortgage loans which
management does not intend to hold to maturity or for which
sales are pending are reported as loans held for sale. Such
loans are carried at the lower of aggregate cost or market.
F-5
<PAGE>
Income Recognition: Income earned by the Corporation and
its subsidiaries is recognized principally on the accrual
basis of accounting. Certain fees, principally service, are
recognized as income when billed. The subsidiary bank
suspends the accrual of interest when, in management's
opinion, the collection of all or a portion of interest has
become doubtful. Generally, when a loan is placed on
nonaccrual, the bank charges all previously accrued and
unpaid interest against income. In future periods, interest
will be included in income to the extent received only if
complete principal recovery is reasonably assured.
The Corporation adopted the provisions of Statement of
Financial Accounting Standards No. 114 and No. 118,
"Accounting for Creditors for Impairment of a Loan." It is
the Corporation's policy not to recognize interest income on
specific impaired loans unless the likelihood of future loss
is remote. Interest payments received on such loans are
applied as a reduction of the loan principal balance. Since
the adoption of SFAS Nos. 114 and 118, the Corporation had
no loans which management has determined to be impaired.
The Corporation defers and amortizes loan fees and related
origination costs. These fees and costs are amortized into
interest or other income over the estimated life of the loan
using a method which approximates the interest method.
Allowance For Loan Losses: The allowance for loan losses is
maintained at a level which, in management's judgment, is
adequate to absorb credit losses inherent in the loan
portfolio. The amount of the allowance is based on
management's evaluation of the collectibility of the loan
portfolio, including the nature of the portfolio, credit
concentrations, trends in historical loss experience,
specific impaired loans, and economic conditions.
Allowances for impaired loans are generally determined based
on collateral values or the present value of estimated cash
flows. The allowance is increased by a provision for loan
losses, which is charged to expense and reduced by charge-
offs, net of recoveries. Changes in the allowance relating
to impaired loans are charged or credited to the provision
for loan losses. Because of uncertainties inherent in the
estimation process, management's estimate of credit losses
inherent in the loan portfolio and the related allowance may
change in the near term.
Premises and Equipment: Premises and equipment are stated
at cost, less accumulated depreciation and amortization.
Provisions for depreciation and amortization are computed
generally using the straight line method over the estimated
useful lives of the assets. Leasehold improvements are
amortized on the straight line basis over the lease period.
When units of property are disposed of, the premises and
equipment accounts are relieved of the cost and the
accumulated depreciation related to such units. Any
resulting gains or losses are credited to or charged against
income. Costs of repairs and maintenance are charged to
expense as incurred. Major renewals and betterments are
capitalized at cost.
Other Real Estate: Real estate acquired in satisfaction of
indebtedness is recorded at the lesser of the loan balance
prior to foreclosure, plus certain costs incurred for
improvements to the property, or fair value less estimated
selling costs of the property.
Earnings Per Common Share: Earnings per common share are
calculated based on net income after preferred dividend
requirements and the weighted average number of shares of
common stock outstanding during the year. The Corporation
has no securities which would be considered potential common
stock. The following is a reconciliation of net income to
income available to common shareholders in computing basic
earnings per share:
(Expressed in Thousands) 1998 1997 1996
Net income (loss) $(1,919) $5,945 $5,002
Preferred stock dividends - - (61)
Income available to
common shareholders $(1,919) $5,945 $4,941
F-6
<PAGE>
Excess of Cost Over Net Assets Acquired: The excess of cost
over net assets of branches purchased in 1991 is being
amortized on the straight line method over ten years. The
excess of cost over net assets of branches purchased in 1992
is being amortized on the straight line method over a five
to eight year period for the portion allocated to the core
deposit base and ten years for the remaining excess. The
unamortized balances at December 31, 1998 and 1997, were
$481,000 and $677,000, respectively. Amortization charged
to expense was $196,000 in the period ended December 31,
1998, and $415,000 for the periods ended December 31, 1997
and 1996.
Reclassifications: Certain prior year amounts have been
reclassified to conform with current year presentation.
2. Shareholders' Equity
On December 31, 1996, the Corporation redeemed and retired
all of the remaining outstanding shares of its $100 par
value, non-voting, senior cumulative preferred stock.
On June 16, 1997, the Corporation declared a five-for-four
stock split, which was effected in the form of a 25% stock
dividend to shareholders of record on June 16, 1997, and
paid on July 1, 1997.
On February 27, 1998, the Corporation declared a two-for-one
stock split to shareholders of record on March 16, 1998. As
a result of the split, the par value of each share was
reduced to $0.25.
All references in the accompanying financial statements to
the number of common shares and per-share amounts in prior
years, have been restated to reflect the stock splits.
At various times during 1998 and 1997, the Corporation
repurchased shares of its common stock in open market
transactions. The following table represents the change in
the Corporation's outstanding shares:
Preferred Common
Stock Stock
Shares outstanding, December 31, 1995 10,000 2,114,644
Preferred stock redemption (10,000) -
Shares outstanding, December 31, 1996 - 2,114,644
25% stock dividend - 527,354
Shares repurchased - (4,500)
Shares outstanding, December 31, 1997 - 2,637,498
Two-for-one stock split - 2,644,163
Treasury shares reissued - 5,000
Shares repurchased - (64,509)
Shares outstanding, December 31, 1998 - 5,222,152
3. Investment Securities
The estimated fair value of investment securities are as
follows at December 31:
<TABLE>
<CAPTION>
1998 1997
Gross Gross
Unreal- Gross Estimated Unreal- Gross Estimated
Amortized ized Unrealized Fair Amortized ized Unrealized Fair
(Expressed in thousands) Cost Gains Losses Value Cost Gains Losses Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities held to maturity:
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $ 2,255 $ - $ (26) $ 2,229 $ 2,260 $ - $ (52) $ 2,208
Obligations of states and
political subdivisions 3,823 273 (3) 4,093 4,487 222 (13) 4,696
Mortgage-backed securities 6,438 84 (30) 6,492 9,208 119 (50) 9,277
Total held to maturity $ 12,516 $ 357 $ (59) $ 12,814 $ 15,955 $ 341 $(115) $ 16,181
Securities available for sale:
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $ 10,653 $ 1 $ (97) $ 10,557 $ 14,886 $ 16 $ (10) $ 14,892
Obligations of states and
political subdivisions 29,509 63 (515) 29,057 17,832 346 - 18,178
Mortgage-backed securities 94,623 324 (1,246) 93,701 58,897 341 (286) 58,952
Corporate debt 7,530 1 (191) 7,340 - - - -
Mortgage derivative securities 38,797 124 (282) 38,639 24,537 47 (153) 24,431
Total debt securities 181,112 513 (2,331) 179,294 116,152 750 (449) 116,453
Equity securities 5,700 134 (133) 5,701 4,703 - - 4,703
Total available for sale $186,812 $ 647 $(2,464) $184,995 $120,855 $ 750 $(449) $121,156
</TABLE>
F-7
<PAGE>
The amortized cost and estimated fair value of investment
securities at December 31, 1998, by contractual maturity,
follow. Expected maturities will differ from contractual
maturities because issuers may have the right to call or
prepay obligations with or without call or prepayment
penalties.
Securities Securities
Held to Maturity Available for Sale
Estimated Estimated
Amortized Fair Amortized Fair
(Expressed in thousands) Cost Value Cost Value
Due in one year or less $ 533 $ 540 $ 100 $ 101
Due after one year
through five years 3,483 3,520 - -
Due after five years
through ten years 557 621 2,026 2,010
Due after ten years 1,506 1,642 45,566 44,842
Mortgage-backed securities 6,437 6,491 94,623 93,702
Mortgage derivative securities - - 38,797 38,639
Equity securities - - 5,700 5,701
Total $12,516 $12,814 $186,812 $184,995
Sales and write-downs of investment securities resulted in
the following:
(Expressed in thousands) 1998 1997 1996
Proceeds from sales $87,580 $105,407 $110,808
Gross gains 1,355 869 745
Gross losses (18) (67) (346)
Losses on securities called (1) (3) (3)
Gains on securities called 1 - -
Gross trading gains 101 - -
Gross trading losses (39) - -
All securities sold were classified as available for sale at
the time of sale. There were no transfers of securities
between classifications in 1998, 1997, or 1996.
Assets carried at $34,847,000 and $29,526,000 at December
31, 1998 and 1997, respectively, were pledged to secure
United States Government and other public funds, and for
other purposes as required or permitted by law.
4. Loans and Allowance for Possible Loan Losses
Loans outstanding at December 31 are as follows:
(Expressed in thousands) 1998 1997
Real estate-construction $ 135 $ 1,418
Real estate-mortgage 56,364 77,111
Real estate-secured by nonfarm,
nonresidential property 14,719 19,983
Commercial, financial and agricultural 116,539 106,443
Obligations of political subdivisions
in the U.S 3,191 3,175
Installment and credit card loans to
individuals 15,504 15,886
Loans receivable $206,452 $224,016
Mortgage loans serviced for others approximated $38,230,000,
$31,301,000, and $21,047,000 at December 31, 1998, 1997,
and 1996, respectively.
The bank discontinues accruing interest income on loans and
leases when, in the opinion of management, the
collectibility of such interest appears doubtful. Non-
accruing loans and leases amounted to $8,573,000 and
$1,515,000 at December 31, 1998 and 1997, respectively. The
after-tax effect of the interest that would have been
accrued on these loans was $67,000 in 1998 and $46,000 in
1997.
F-8
<PAGE>
The following is an analysis of loan activity to directors,
executive officers, and their associates (see Note 13):
(Expressed in thousands) 1998 1997
Balance previously reported $ 6,906 $ 7,812
New loans during the year 474 2,003
Total 7,380 9,815
Less repayments during the year 1,145 2,909
Balance, December 31 $ 6,235 $ 6,906
Activity in the allowance for loan losses is summarized as
follows:
December 31
(Expressed in thousands) 1998 1997 1996
Balance at beginning of year $ 4,134 $3,153 $2,703
Additions charged to operating expense 12,882 1,055 465
Recoveries on loans previously
charged off 15 17 47
Total 17,031 4,225 3,215
Loans Charged off 11,556 91 62
Balance at end of year $ 5,475 4,134 3,153
The entire allowance represents a valuation reserve which is
available for future charge-offs.
5. Premises and Equipment
Premises and equipment are stated at cost, less accumulated
depreciation and amortization, as follows:
Original
December 31 Useful Life
(Expressed in thousands) 1998 1997 Years
Land and land improvements $ 1,186 $ 1,225
Buildings 5,843 5,874 30 - 50
Furniture, fixtures and equipment 5,972 5,456 5 - 12
Leasehold improvements 492 377 5 - 20
Total 13,493 12,932
Less accumulated depreciation
and amortization 6,116 5,531
Premises and equipment, net $ 7,377 $ 7,401
Charges to operations for depreciation and amortization
approximate $743,000, $818,000, and $674,000 for 1998, 1997,
and 1996, respectively.
6. Deposits
The distribution of the bank's deposits at December 31, 1998
and 1997, are as follows:
<TABLE>
<CAPTION>
1998 1997
Non- Non-
interest interest
Bearing Interest Bearing Bearing Interest Bearing
(Expressed in thousands) Demand Demand Savings Time Demand Demand Savings Time
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Individuals, partnerships
and Corporations $13,893 $42,437 $88,265 $130,378 $20,818 $33,463 $79,829 $112,190
U.S. Government 41 - - - 44 - - -
States and political
subdivisions - - - 13,052 7,016 - - 8,439
Other depository
institutions in the U.S. 14,564 - - - - - - -
Certified, officers' checks,
travelers cheques, etc. 1,721 - - - 2,109 - - -
Total $30,219 $42,437 $88,265 $143,430 $29,987 $33,463 $79,829 $120,629
</TABLE>
Time deposits include certificates of deposit issued in
denominations of $100,000 or more which amounted to
$27,245,000 at December 31, 1998, and $17,716,000 at
December 31, 1997. A maturity distribution of time
certificates of deposit of $100,000 or more follows:
(Expressed in thousands) 1998 1997
Due in three months or less $ 3,687 $ 5,966
Due after three months through six months 5,482 4,093
Due after six months through twelve months 10,392 4,526
Due after one year through five years 3,987 1,996
Due after five years 3,697 1,135
Total $27,245 $17,716
F-9
<PAGE>
7. Securities Sold Under Repurchase Agreements
Securities sold under agreements to repurchase represent
primarily overnight borrowings. However, as of December 31,
1998 and 1997, Belmont National Bank had repurchase
agreements outstanding with maturities of three months. For
all repurchase agreements, the securities underlying the
agreements were under the subsidiary bank's control.
Information related to these borrowings is summarized below:
(Expressed in thousands) 1998 1997 1996
Balance at year-end $6,239 $5,256 $ 8,280
Average during the year 6,733 7,116 11,529
Maximum month-end balance 7,807 8,847 21,362
Weighted average rate during the year 5.65% 5.66% 4.86%
Weighted average rate at December 31 5.36% 6.39% 5.55%
8. Short-Term Borrowings
Short-term borrowings consist of advances from the Federal
Home Loan Bank of Cincinnati (FHLB) and federal funds
purchased. These represent primarily overnight borrowings.
FHLB advances are made under agreements which allow for
maximum borrowings of $30 million. Advances can be made at
fixed or variable rates of interest. Collateral for the
advances consists of residential mortgage loans and shares
of stock of the Federal Home Loan Bank of Cincinnati.
Information related to these borrowings at December 31, 1998
and 1997, is summarized below:
(Expressed in thousands)
FHLB Advances 1998 1997
Balance at year-end $ - $ 8,829
Average balance during the year $ 2,709 $17,648
Maximum month-end balance $22,047 $49,209
Weighted average rate during the year 5.63% 5.66%
Interest rate at December 31 - 6.90%
Collateral:
Residential mortgage loans $ - $13,244
Federal Home Loan Bank stock $ - $ 4,450
Federal Funds Purchased 1998 1997
Balance at year-end $ 3,950 $ 5,806
Average during the year $ 843 $ 953
Maximum month-end balance $11,000 $ 7,000
Weighted average rate during the year 5.35% 5.93%
Weighted average rate at December 31 5.25% 6.76%
9. Long-Term Debt
Long-term debt consists of advances from the Federal Home
Loan Bank of Cincinnati. Fixed-rate, single payment loans
totaling $85,000,000 and $62,000,000 at December 31, 1998
and 1997, respectively, mature in 1999 through 2008 with
interest rates ranging from 4.53% to 6.56%. Fixed-rate,
amortizing loans totaling $6,401,000 and $7,635,000 at
December 31, 1998 and 1997, respectively, reach final
maturity in years 2001 through 2017, with interest rates
ranging from 5.50% to 6.95%. The loans are secured by
residential mortgage loans with a carrying value of
$44,356,000 and $63,151,000 at December 31, 1998 and 1997,
respectively, Federal Home Loan Bank Stock, and investment
securities with a carrying value of $84,427,000 and
$39,877,000 at December 31, 1998 and 1997, respectively.
Scheduled principal payments on long-term debt in each of
the five years subsequent to December 31, 1998, are as
follows:
(Expressed in thousands)
1999 $ 6,055
2000 5,997
2001 967
2002 379
2003 343
Thereafter 77,660
F-10
<PAGE>
10. Income Tax
The components of applicable income taxes are as follows:
(Expressed in thousands) 1998 1997 1996
Currently payable
(refundable) $(2,269) $1,710 $1,910
Deferred 83 (289) (134)
Income tax
(benefit) $(2,186) $1,421 $1,776
The following temporary differences gave rise to the
deferred tax asset at December 31, 1998 and 1997:
(Expressed in thousands) 1998 1997
Allowance for loan losses $1,020 $1,256
Interest on non-accrual loans 18 24
Unrealized (gains) losses on investments 624 (94)
Deferred loan origination fees 10 11
Deferred compensation and liability
for future employees' benefits 295 228
Intangible assets 342 301
Premises and equipment due to
differences in depreciation (137) (156)
Direct finance leases (86) (86)
Federal Home Loan Bank
stock dividends (347) (235)
Alternative minimum tax credit
carryforward 148 -
Total deferred tax assets $1,887 $1,249
A reconciliation between the amount of reported income tax
expense and the amount computed by applying the statutory
federal income tax rate to income before income taxes is as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
(Expressed in thousands) Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory rate $(1,396) (34.0) $2,504 34.0 $2,305 34.0
Reductions in taxes
resulting from:
Tax exempt interest
on investments and loans (514) (12.5) (550) (7.5) (537) (7.9)
Tax credits (74) (1.8) (482) (6.5) - -
Excess of tax loss over
book gains on
investment securities (31) (0.7) (33) (0.4) (37) (0.6)
Earnings on life
insurance policies (93) (2.3) (43) (0.6) (39) (0.6)
Non-deductible
interest expense 64 1.6 68 0.9 78 1.2
Use of capital loss
carryforward (147) (3.6) (44) (0.6) - -
Others - net 5 0.1 1 - 6 0.1
Actual tax expense
(benefit) $(2,186) (53.2) $1,421 19.3 $1,776 26.2
</TABLE>
F-11
<PAGE>
11. Employee Benefit Plans
The Corporation has a profit-sharing retirement plan which
includes all full-time employees who have reached the age of
twenty-one and have completed at least one year of service.
Each participant can elect to contribute to the plan an
amount not to exceed 10% of their salary. The plan provides
for an employer matching contribution on the first 4% of the
participant's elective contribution. In addition to the
matching contribution, the plan provides for a discretionary
contribution to be determined by the bank's Board of
Directors.
Total pension expense for 1998, 1997, and 1996 was $295,000,
$277,000, and $234,000, respectively.
In addition to providing the profit-sharing plan, Belmont
Bancorp. sponsors two defined benefit post-retirement plans
that cover both salaried and nonsalaried employees.
Employees must be fifty-five years old and have ten years of
service to qualify for both plans. One plan provides
medical and dental benefits, and the other provides life
insurance benefits. The post-retirement health care plan is
contributory, with retiree contributions adjusted annually;
the life insurance plan is noncontributory. On January 1,
1993, Belmont Bancorp. adopted Statement of Financial
Accounting Standards ("SFAS") No. 106, "Employer's
Accounting for Post-retirement Benefits Other than
Pensions." The statement requires the accrual of the
expected cost of providing post-retirement benefits to
employees and certain dependents during the years that an
employee renders service.
The following table sets forth the plan's combined funded
status reconciled with the amount shown in the Corporation's
balance sheet at December 31:
(Expressed in thousands) 1998 1997
Accumulated post-retirement benefit obligation:
Retirees $ 50 $ 39
Active plan participants 42 49
92 88
Plan assets at fair value - -
Accumulated post-retirement benefit
obligation in excess of plan assets 92 88
Unrecognized net gain (loss) from past
experience different from that assumed
and from changes in assumptions 49 56
Prior service cost not yet recognized
in expense (10) 2
Accrued post-retirement benefit cost
in the balance sheet $131 $146
The Corporation's post-retirement health care plan is under
funded. The accumulated post-retirement benefit obligation
and plan assets for that plan are $92,000 and $-0-,
respectively, at December 31, 1998, and $88,000 and $-0-,
respectively, at December 31, 1997.
Post-retirement expense includes the following components:
(Expressed in thousands) 1998 1997 1996
Service cost $ 2 $ 5 $ 6
Interest cost on accumulated
post-retirement benefit obligation 7 9 10
Net amortization and deferral (20) (12) (10)
Post-retirement expense $(11) $ 2 $ 6
The annual assumed rate of increase in the per capita cost
of covered benefits for 1998 and 1997 is 11.0% for medical
benefits and 8.5% for dental benefits. The rates are
assumed to decrease gradually to 5.5% (for medical in 2006
and for dental in 2004), and remain at that level
thereafter. Increasing the assumed health care trend rates
by one percentage point in each year would have an
immaterial effect on the accumulated post-retirement benefit
obligation and the aggregate of the service and interest
cost components of the net periodic post-retirement benefit
cost. The weighted-average discount rate used in
determining the accumulated post-retirement benefit
obligation was 7%. The long-term inflation rate assumed was
4%.
F-12
<PAGE>
12. Leases
The subsidiary bank utilized certain bank premises and
equipment under long-term leases expiring at various dates.
In certain cases, these leases contain renewal options and
generally provide that the Corporation will pay for
insurance, taxes and maintenance.
As of December 31, 1998, the future minimum rental payments
required under noncancelable operating leases with initial
terms in excess of one year are as follows:
(Expressed in thousands)
Operating Leases
Year ending December 31,
1999 $119
2000 119
2001 120
2002 122
2003 121
Thereafter 203
Total minimum lease payments $804
Rental expense under operating leases approximated $139,000
in 1998, $132,000 in 1997, and $129,000 in 1996.
13. Related Party Transactions
Certain directors and executive officers and their
associates were customers of, and had other transactions
with, the subsidiary bank in the ordinary course of business
in 1998 and 1997. The outstanding balance of all loans to
the related parties was $6,235,000 and $6,906,000 at
December 31, 1998 and 1997, respectively. All loans and
commitments included in such transactions were made on
substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable
transactions with others and did not involve more than the
normal risk of collectibility or present other unfavorable
features.
14. Commitments and Contingencies
The subsidiary bank is a party to financial instruments with
off-balance-sheet risk in the normal course of business to
meet the financing needs of its customers. These financial
instruments include commitments to extend credit and
standby letters of credit. These instruments involve, to
varying degrees, elements of credit risk in excess of the
amount recognized in the balance sheet. The contract
amounts of those instruments reflect the extent of
involvement the Corporation has in particular classes of
financial instruments.
The Corporation's exposure to credit loss in the event of
nonperformance by the other party to the financial
instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amount
of those instruments. The Corporation uses the same credit
policies in making commitments and conditional obligations
as it does for on-balance-sheet instruments.
The following represents financial instruments whose
contract amounts represent credit risk at December 31:
Contract Amount
(Expressed in thousands) 1998 1997
Commitments to extend credit $30,297 $27,081
Standby letters of credit 2,414 1,449
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition
established in the contract. Commitments generally have
fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. The Corporation evaluates each customer's
creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Corporation
upon extension of credit, is based on management's credit
evaluation of the counter party. Collateral held varies,
but may include accounts receivable, inventory, property,
plant, and equipment, and income-producing properties.
Standby letters of credit are conditional commitments issued
by the Corporation to guarantee the performance of a
customer to a third party. Those guarantees are primarily
issued to support public and private borrowing arrangements.
Of the standby letters of credit, $2,121,000 expire in 1999,
while the remaining $293,000 expire in various years through
2027. The credit risk involved in issuing letters of credit
is essentially the same as that involved in extending loan
facilities to customers.
In the ordinary course of business, the Corporation and its
subsidiaries have been named as defendants in legal actions.
Management believes, based on the advice of counsel, that
liabilities, if any, arising from these actions will not be
material to the Corporation's financial position or results
of operations.
F-13
<PAGE>
15. Concentrations of Credit Risk
The subsidiary bank extends commercial, consumer, and real
estate loans to customers primarily located in Belmont,
Harrison, and Tuscarawas Counties in Ohio and Ohio County,
West Virginia. While the loan portfolios are diversified,
the ability of the borrowers to meet their contractual
obligations partially depends upon the general economic
condition of Southeastern Ohio and the Northern Panhandle of
West Virginia.
At December 31, 1998, there were approximately $21,669,000
in loans to businesses that operated in the outdoor
amusement industry or manufactured equipment for use in this
industry. These loans represent 9.95% of total loans.
Approximately one-half of these loans are to borrowers
located in the State of Ohio. The remaining businesses
operate throughout the continental United States. There
were no other significant concentrations.
16. Limitations on Dividends
The approval of the Comptroller of the Currency is required
to pay dividends if the total of all dividends declared by a
national bank in any calendar year exceeds the total of its
retained net profits of the preceding two years. Under this
formula, the bank cannot declare dividends in 1999 without
approval of the Comptroller of the Currency. The subsidiary
bank is the primary source of funds to pay dividends to the
shareholders of Belmont Bancorp.
17. Other Operating Expenses
Other operating expenses include the following:
(Expressed in thousands) 1998 1997 1996
Taxes other than payroll
and real estate $ 507 $ 426 $ 395
Supplies and printing 299 280 301
Insurance, including
Federal Deposit Insurance 127 125 567
Amortization of intangibles 196 415 415
Other (individually less than
1% of total interest income) 1,977 1,808 1,771
Total $3,106 $3,054 $3,449
18.Restrictions on Cash
The subsidiary bank is required to maintain an average
reserve balance with the Federal Reserve Bank. The average
amounts of the reserve balance for the years ended
December 31, 1998 and 1997, were $4,337,000 and $3,987,000,
respectively.
19. Cash Flows Information
The Corporation's policy is to include cash on hand and
amounts due from banks in the definition of cash and cash
equivalents.
Cash payments for interest in 1998, 1997, and 1996 were
$16,316,000, $13,937,000, and $12,124,000, respectively.
Cash payments for income taxes for 1998, 1997, and 1996,
were $2,168,000, $2,074,000, and $1,733,000, respectively.
20. Regulatory Matters
The subsidiary bank is subject to various regulatory capital
requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate
certain mandatory, and possibly additional discretionary,
actions by regulators that, if undertaken, could have a
direct material effect on the bank's financial statements.
Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the bank must meet
specific capital guidelines that involve quantitative
measures of the bank's assets, liabilities, and certain off-
balance-sheet items as calculated under regulatory
accounting practices. The bank's capital amounts and
classifications are also subject to qualitative judgments by
the regulators about components, risk, weighting, and other
factors.
Quantitative measures established by regulation to ensure
capital adequacy require the bank to maintain minimum
amounts and ratios (set forth in the table below) of total
and Tier I capital (as defined in the regulations) to risk-
weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management
believes, as of December 31, 1998, that the bank meets all
capital adequacy requirements to which they are subject.
As of December 31, 1998, the most recent notifications from
the Office of the Comptroller of the Currency categorized
the bank as adequately capitalized under the regulatory
framework for prompt corrective action. To remain
adequately capitalized, the bank must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as
set forth in the table.
F-14
<PAGE>
Based on the effects of the events described in Note 24,
management believes that the institution will be considered
adequately capitalized as of March 31, 1999, under the
regulatory framework for prompt corrective action.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
(expressed in thousands) Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1998:
Total Capital $27,365 9.6% $22,752 8.0% $28,440 10.0%
(to Risk Weighted Assets)
Tier I Capital 23,810 8.4% 11,376 4.0% 17,064 6.0%
(to Risk Weighted Assets)
Tier I Capital 23,810 5.8% 16,429 4.0% 20,537 5.0%
(to Average Assets)
As of December 31, 1997:
Total Capital 33,614 12.9% 20,912 8.0% 26,141 10.0%
(to Risk Weighted Assets)
Tier I Capital 30,336 11.6% 10,456 4.0% 15,684 6.0%
(to Risk Weighted Assets)
Tier I Capital 30,336 8.1% 14,962 4.0% 18,702 5.0%
(to Average Assets)
21. Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments",
requires disclosure of fair value information about
financial instruments, whether or not recognized in the
balance sheet. In cases where quoted market prices are not
available, fair values are based on estimates using present
value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In
that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlements
of the instruments. Statement 107 excludes certain
financial instruments and all nonfinancial instruments from
its disclosure requirements. In addition, the value of long-
term relationships with depositors and other customers is
not reflected. The value of these items is significant.
Accordingly, the aggregate fair value amounts presented do
not represent the underlying value of the Corporation.
The following methods and assumptions were used in
estimating fair values of financial instruments as disclosed
herein:
Cash and Cash Equivalents: For those short-term
instruments, the carrying amount is a reasonable estimate of
fair value.
Investment Securities and Securities Available for Sale:
For debt securities, derivative instruments and marketable
equity securities held for investment purposes and for sale,
fair values are based on quoted market prices or dealer
quotes. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar
securities.
Loans: For certain homogeneous categories of loans, such as
some residential mortgages, fair value is estimated using
the quoted market prices for securities backed by similar
loans. The fair value of other types of loans is estimated
by discounting the future cash flows using the current rates
at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining
maturities.
Deposit Liabilities: The fair value of demand deposits,
savings accounts, and certain money market deposits is the
amount payable on demand at the reporting date. The fair
value of fixed-maturity certificates of deposit is estimated
using the rates currently offered for deposits of similar
remaining maturities.
Short-Term Borrowings: These liabilities represent
primarily overnight borrowings and debt maturing within
ninety days of issuance with interest rates adjusted weekly.
Accordingly, the carrying amount is a reasonable estimate of
fair value.
Long-Term Debt: The fair values of long-term debt are
estimated using discounted cash flow analyses based on the
Corporation's current incremental borrowing rates for
similar types of borrowing arrangements.
F-15
<PAGE>
The estimated fair values of the Corporation's financial
instruments are as follows:
1998 1997
Carrying Estimated Carrying Estimated
(Expressed in thousands) Amount Fair Value Amount Fair Value
Financial assets:
Cash and federal funds sold $ 9,439 $ 9,439 $ 10,265 $ 10,265
Trading securities 2,281 2,281 - -
Securities available for sale 184,995 184,995 121,156 121,156
Securities held to maturity 12,516 12,814 15,955 16,181
Loans, net 202,711 215,559 220,766 225,678
Financial liabilities:
Deposits 304,351 307,079 263,908 264,413
Repurchase agreements 6,239 6,239 5,256 5,256
Short-term borrowings 3,950 3,950 14,635 14,635
Long-term debt 91,401 93,975 69,635 60,857
22. Condensed Parent Company Financial Statements
Presented below are the condensed balance sheets, statements
of income, and statements of cash flows for Belmont Bancorp.
Balance Sheets (Expressed in thousands)
December 31,
Assets 1998 1997
Cash $ 307 $ 227
Investment in subsidiaries
(at equity in net assets) 23,366 30,611
Equity securities 513 66
Advances to subsidiaries 1,006 1,068
Prepaid expenses 155 247
Other assets 660 565
Total assets $26,007 $32,784
Liabilities
Payable to subsidiary $ 149 $ 485
Deferred compensation 494 400
Total liabilities 643 885
Shareholders' Equity
Preferred stock - -
Common stock 1,321 1,321
Capital surplus 7,854 7,781
Treasury stock-
66,174 and 13,330 shares, respectively (1,400) (131)
Retained earnings-appropriated 850 850
Retained earnings-unappropriated 17,938 21,879
Net unrealized gain (loss) on
securities available for sale (1,199) 199
Total shareholders' equity 25,364 31,899
Total liabilities and shareholders' equity $26,007 $32,784
Statements of Income
1998 1997 1996
Operating income
Dividends from subsidiaries $ 3,921 $2,207 $2,479
Gain on sale of securities - 126 -
Other income 108 27 19
Total income 4,029 2,360 2,498
Operating expenses 143 113 67
Income before income tax
and equity in undistributed
income of subsidiaries 3,886 2,247 2,431
Income tax (credit) (41) 12 (18)
Equity in undistributed income
(loss) of subsidiaries (5,846) 3,710 2,553
Net income (loss) $(1,919) $5,945 $5,002
Statements of Cash Flows
1998 1997 1996
Operating activities
Net income (loss) $(1,919) $ 5,945 $ 5,002
Adjustments to reconcile net income
to net cash provided by operating
activities:
Gain on sale of securities - (126) -
Undistributed earnings of
affiliates 5,846 (3,710) (2,553)
Changes in operating assets and
liabilities:
Prepaid expenses 92 (242) 153
Accrued expenses and dividends 94 121 259
Other assets (95) (143) (422)
Net cash provided by
operating activities 4,018 1,845 2,439
Investing activities
Proceeds from sale of securities - 180 -
Payments to subsidiaries (274) (154) (31)
Investment purchases (446) - -
Net cash provided by (used in)
investing activities (720) 26 (31)
Financing activities
Cash paid for fractional shares - (7) -
Purchase of treasury stock (1,308) (123) -
Redemption of preferred stock 112 - (1,000)
Dividends (2,022) (1,615) (1,330)
Net cash used in financing
activities (3,218) (1,745) (2,330)
Increase (decrease) in cash & cash
equivalents 80 126 78
Cash and cash equivalents at
beginning of year 227 101 23
Cash and cash equivalents at
end of year $ 307 $ 227 $ 101
F-16
<PAGE>
Supplemental disclosures:
The Corporation made income tax payments of $2,168,000,
$2,074,000, and $1,733,000 in 1998, 1997, and 1996,
respectively. These payments represented income tax
payments for the Corporation and its consolidated
subsidiaries.
The parent company incurred no interest expense in 1998,
1997, or 1996.
23. Comprehensive Income
In June, 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income." This statement
establishes standards for reporting and display of
comprehensive income in a full set of financial statements.
The Corporation adopted this statement on January 1, 1998,
and has reclassified information in the 1997 and 1996
financial statements to reflect application of the
provisions of this statement. Unrealized gains and losses
on securities available for sale are the only components of
other comprehensive income that apply to the Corporation.
(Expressed in thousands) 1998 1997 1996
Before-tax amount $(2,118) $ 556 $ (764)
Tax expense (benefit) (720) 189 (260)
Net-of-tax amount $(1,398) $ 367 $ (504)
Disclosure of reclassification amount for
1998:
Unrealized holding loss
arising during the period $ (959)
Less: reclassification adjustment
for gains included in net income (439)
Net unrealized loss on securities $(1,398)
The income tax benefit related to the reclassification
adjustment for 1998 was $226.
24. Restatement and Subsequent Events
As publicly announced on April 28, 1999, a large commercial
borrower of BNB voluntarily and unexpectedly ceased
operations on April 26, 1999. In the course of assessing
the impact of this event on BNB, management discovered
certain irregularities related to indirect consumer loans
which had been obtained by BNB through the borrower's
finance department. With respect to the consumer loans BNB
provided to the borrower's customers, BNB advanced the
proceeds of the loans directly to the borrower, with the
permission of the customer. An investigation revealed that
there were instances where the customer would subsequently
cancel the sales contract with the borrower, but the funds
were not returned by the borrower to BNB. In other
instances, the borrower failed to perform on the retail
sales contract even though BNB had provided funds to the
borrower so that the borrower could complete the terms of
the sales contract. In addition, the borrower often failed
to pay off other lenders which has further impacted BNB's
collateral position. As a result, management has recognized
as a loss any cancelled sales contracts plus the estimated
loss associated with contracts in the progress of
construction.
Additional funds were advanced by BNB on consumer loans, as
described above, in 1999. BNB also advanced loans for the
direct benefit of the borrower in 1999. As a result of the
events which occurred in April 1999, BNB has recognized
additional losses of $5.7 million in the first quarter of
1999 related to these loans. The accompanying Consolidated
Financial Statements as of December 31, 1998, presented the
restated results.
F-17
<PAGE>
A summary of the effects of the restatement follows (in
thousands, except per share data:
Consolidated Balance Sheet
December 31, 1998
As previously
Reported as Restated
Assets
Cash and due from banks $ 9,439 $ 9,439
Loans held for sale 1,734 1,734
Trading securities 2,281 2,281
Securities available for sale 184,995 184,995
Securities held to maturity 12,516 12,516
Loans 217,679 206,452
Less allowance
for possible loan losses (4,529) (5,475)
Net loans 213,150 200,977
Premises and equipment, net 7,377 7,377
Accrued income receivable 2,780 2,731
Other assets 12,077 16,233
Total assets $446,349 $438,283
Liabilities and Shareholders' Equity
Liabilities
Noninterest bearing deposits:
Demand $ 30,219 $ 30,219
Interest bearing deposits:
Demand 42,437 42,437
Savings 88,265 88,265
Time 143,430 143,430
Total deposits 304,351 304,351
Securities sold under
repurchase agreements 6,239 6,239
Federal funds purchased and
other short term borrowings 3,950 3,950
Long-term debt 91,401 91,401
Accrued interest on deposits
and other borrowings 896 896
Other liabilities 6,082 6,082
Total liabilities 412,919 412,919
Shareholders' equity
Preferred stock 0 0
Common stock 1,321 1,321
Surplus 7,854 7,854
Treasury stock (1,400) (1,400)
Retained earnings:
Unappropriated 26,004 17,938
Appropriated for contingencies 850 850
Accumulated other comprehensive
income (1,199) (1,199)
Total shareholders' equity 33,430 25,364
Total liabilities and
shareholders'equity $446,349 $438,283
F-18
<PAGE>
Consolidated Statement of Income (Loss)
Year Ended December 31, 1998
As previously
Reported as Restated
Interest Income
Loans and lease financing:
Taxable $ 20,972 $ 20,923
Tax-exempt 271 271
Investment securities:
Taxable 7,720 7,720
Tax-exempt 1,241 1,241
Dividends 336 336
Interest on trading securities 68 68
Interest on federal funds sold 228 228
Total interest income 30,836 30,787
Interest Expense
Deposits 11,671 11,671
Other borrowings 4,809 4,809
Total interest expense 16,480 16,480
Net interest income 14,356 14,307
Provision for Possible Loan Losses 710 12,882
Net interest income after provision
for possible loan losses 13,646 1,425
Noninterest Income
Trust fees 463 463
Service charges on deposits 752 752
Other operating income 968 968
Gain on sale of real estate 383 383
Investment securities gains 1,400 1,400
Total noninterest income 3,966 3,966
Noninterest Expense
Salary and employee benefits 4,633 4,633
Net occupancy expense of premises 824 824
Equipment expense 933 933
Other operating expenses 3,106 3,106
Total noninterest expense 9,496 9,496
Income (loss) before
income taxes 8,116 (4,105)
Income Taxes (benefit) 1,969 (2,186)
Net income (loss) $ 6,147 (1,919)
Weighted Average Number of Shares
Outstanding 5,252,161 5,252,161
Earnings (loss) per common share $ 1.17 $ (0.37)
F-19
<PAGE>
Opinion of Independent Certified Public Accountants
Board of Directors
Belmont Bancorp.
St. Clairsville, Ohio
We have audited the accompanying consolidated balance sheets
of Belmont Bancorp. and subsidiaries as of December 31, 1998
and 1997, and the related consolidated statements of income,
changes in shareholders' equity, and cash flows, for each of
the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Belmont Bancorp. and subsidiaries at
December 31, 1998 and 1997, and the consolidated results of
its operations, changes in shareholders' equity, and cash
flows, for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted
accounting principles.
As discussed in Note 24, the 1998 financial statements have
been restated.
s/S.R.Snodgrass A.C.
S.R. Snodgrass A.C.
Wheeling, West Virginia
May 19, 1999
F-20
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<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
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<EPS-BASIC> (0.37)
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