<PAGE>
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
[X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2000
-------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
----------------------- -------------------
Commission File Number: 0-12724
Belmont Bancorp.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-1376776
--------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
325 Main St., Bridgeport, Ohio 43912
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(740)-695-3323
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days. X____ Yes ____ No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.:
Common Stock, $0.25 par value,
11,101,403 shares outstanding
as of August 4, 2000
1
<PAGE>
FORM 10-Q
BELMONT BANCORP.
June 30, 2000
INDEX
Part I. Financial information
Item 1. Financial Statements.................................... 3
Management's report on financial statements...................... 3
Consolidated Balance Sheets - June 30, 2000 and
December 31, 1999........................................... 4
Consolidated Statements of Income-Three Months Ended
June 30, 2000 and June 30, 1999............................. 5
Consolidated Statements of Income-Six Months
Ended June 30, 2000 and June 30, 1999....................... 6
Condensed Consolidated Statement of Cash Flows-Six Months
Ended June 30, 2000......................................... 7
Consolidated Statements of Changes in Shareholders' Equity
Three Months Ended June 30, 2000 and
Six Months Ended June 30, 2000.............................. 8
Notes to the Consolidated Financial Statements................... 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 12
Item 3. Quantitative and Qualitative Disclosure About
Market Risk............................................. 20
Part II - Other Information
Item 1. Legal Proceedings....................................... 20
Item 2. Changes in Securities and Use of Proceeds............... 21
Item 3. Defaults upon Senior Securities......................... 21
Item 4. Submission of Matters to a Vote of Security Holders..... 22
Item 5. Other Information....................................... 22
Item 6. Exhibits and Reports on Form 8-K........................ 22
Signatures....................................................... 22
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1--FINANCIAL STATEMENTS
MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS
The following consolidated financial statements and related notes of
Belmont Bancorp. (the "Company") and subsidiaries were prepared by management,
which has the primary responsibility for the integrity of the financial
information. The statements are prepared in conformity with generally accepted
accounting principles appropriate in the circumstances, and include amounts that
are based on management's best estimates and judgments. Financial information
elsewhere in the quarterly report is prepared on a basis consistent with that in
the financial statements.
In meeting its responsibility for the accuracy of the financial
statements, management relies on the Company's comprehensive system of internal
accounting controls. This system is intended to provide reasonable assurance
that assets are safeguarded and transactions are recorded to permit the
preparation of appropriate financial information. The system of internal
controls is characterized by an effective control oriented environment within
the Company which is augmented by written policies and procedures, internal
audits and the careful selection and training of qualified personnel.
The functioning of the accounting system and related internal
accounting controls is under the general oversight of the Audit Committee of the
Board of Directors, which is comprised of five outside directors. The
accounting system and related controls are reviewed by a program of internal
audits and by the Company's independent accountants. The Audit Committee meets
regularly with the contract internal auditor and the independent public
accountants to review the work of each and ensure that each group is properly
discharging its responsibilities. In addition, the Committee reviews and
approves the scope and timing of the internal and external audits and any
findings with respect to the system of internal controls. Reports of
examinations conducted by federal regulatory agencies are also reviewed by the
Committee.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Belmont
Bancorp and its subsidiaries, Belmont National Bank (the "Bank") and Belmont
Financial Network.
3
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
(Unaudited) ($000s except per share amounts)
June 30, December 31,
2000 1999
<S> <C> <C>
Assets
Cash and due from banks $ 10,830 $ 15,439
Federal funds sold 1,650 2,025
Loans held for sale 1,701 1,845
Securities available for sale at fair value 100,636 110,692
Loans 137,768 165,134
Less allowance for loan losses (7,505) (9,702)
------------------------------
Net loans 130,263 155,432
Premises and equipment, net 6,993 7,263
Deferred federal tax assets 8,342 8,823
Cash surrender value of life insurance 4,294 4,196
Federal taxes receivable -- 5,411
Accrued income receivable 1,478 1,751
Other assets 3,244 2,890
------------------------------
Total assets $ 269,431 $ 315,767
==============================
Liabilities
Non-interest bearing deposits:
Demand $ 23,058 $ 28,685
Interest-bearing deposits:
Demand 23,158 28,456
Savings 67,779 77,403
Time 109,075 120,888
------------------------------
Total deposits 223,070 255,432
Securities sold under repurchase agreements 1,722 6,093
Federal funds purchased and other short-term -- 19,740
borrowings
Long term borrowings 20,000 20,000
Accrued interest on deposits and other borrowings 738 747
Other liabilities 1,988 2,524
------------------------------
Total liabilities 247,518 304,536
------------------------------
Shareholders' Equity
Preferred stock - authorized 90,000 shares with
no par value; issued and outstanding, 16,500 shares
of Series A convertible preferred stock at 12/31/99 -- 1,650
Common stock - $0.25 par value, 17,800,000 shares
authorized; 11,153,195 shares issued at 6/30/00;
5,288,326 shares issued at 12/31/99 2,788 1,321
Additional paid-in capital 17,416 7,904
Treasury stock at cost (51,792 shares) (1,170) (1,170)
Retained earnings 7,715 7,129
Accumulated other comprehensive loss (4,836) (5,603)
------------------------------
Total shareholders' equity 21,913 11,231
------------------------------
Total liabilities and shareholders' equity $269,431 $315,767
==============================
</TABLE>
See the Notes to the consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Income
(Unaudited) ($000s except per share amounts)
For the Three Months Ended June 30
2000 1999
<S> <C> <C>
Interest Income
Loans:
Taxable $2,912 $ 4,172
Tax-exempt 66 72
Securities:
Taxable 1,031 1,710
Tax-exempt 535 530
Dividends 56 92
Interest on trading securities 0 34
Interest on federal funds sold 14 11
--------------------------------
Total interest income 4,614 6,621
--------------------------------
Interest Expense
Deposits 2,203 2,747
Other borrowings 429 1,352
--------------------------------
Total interest expense 2,632 4,099
--------------------------------
Net interest income 1,982 2,522
Provision for loan losses 0 1,871
--------------------------------
Net interest income after provision
for loan losses 1,982 651
Noninterest Income
Trust fees 105 104
Service charges on deposits 200 237
Interest on federal tax refund 256 0
Other operating income 156 200
Trading gains 0 50
Investment securities gains (losses) 1 (57)
Gain (loss) on sale of loans and loans held for sale (53) 3
--------------------------------
Total noninterest income 665 537
--------------------------------
Noninterest Expense
Salary and employee benefits 881 1,071
Net occupancy expense of premises 199 222
Equipment expenses 213 210
Other operating expenses 894 1,129
--------------------------------
Total noninterest expense 2,187 2,632
--------------------------------
Income (loss) before income taxes 460 (1,444)
Income Tax Benefit (66) (499)
--------------------------------
Net income (loss) $ 526 ($945)
================================
Basic and Diluted Earnings (loss) per Common Share $0.07 ($0.18)
================================
</TABLE>
See the Notes to the consolidated financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Income
(Unaudited) ($000s except per share amounts)
For the Six Months Ended June 30
2000 1999
Interest Income
<S> <C> <C>
Loans:
Taxable $5,939 $ 9,031
Tax-exempt 135 142
Securities:
Taxable 2,130 3,687
Tax-exempt 1,069 915
Dividends 114 180
Interest on trading securities 0 86
Interest on federal funds sold 42 48
----------------------------------
Total interest income 9,429 14,089
----------------------------------
Interest Expense
Deposits 4,484 5,639
Other borrowings 979 2,707
----------------------------------
Total interest expense 5,463 8,346
----------------------------------
Net interest income 3,966 5,743
Provision for loan losses 242 7,606
----------------------------------
Net interest income (loss) after provision
for loan losses 3,724 (1,863)
Noninterest Income
Trust fees 214 232
Service charges on deposits 407 424
Interest on federal tax refund 256 0
Other operating income 349 403
Trading losses 0 (10)
Investment securities losses 0 (17)
Gain (loss) on sale of loans and loans held for sale (60) 25
----------------------------------
Total noninterest income 1,166 1,057
----------------------------------
Noninterest Expense
Salary and employee benefits 1,862 2,153
Net occupancy expense of premises 414 473
Equipment expenses 430 439
Other operating expenses 1,966 1,839
----------------------------------
Total noninterest expense 4,672 4,904
----------------------------------
Income (loss) before income taxes 218 (5,710)
Income Tax Benefit (368) (2,156)
----------------------------------
Net income (loss) $ 586 ($3,554)
==================================
Basic and Diluted Earnings (loss) per Common Share $ 0.09 ($0.68)
===================================
</TABLE>
See the Notes to the consolidated financial statements.
6
<PAGE>
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2000 and 1999 ($000's)
<TABLE>
<CAPTION>
2000 1999
------------------------------------
<S> <C> <C>
Cash from operating activities $ 6,277 ($3,232)
Investing Activities
Proceeds from:
Maturities and calls of securities 2,005 171
Sales of securities available for sale 3,799 32,104
Principal collected on mortgage-backed securities 5,616 27,526
Sales of loans 2,563 6,922
Sales of other real estate owned 13 --
Sales of premises and equipment 9 --
Purchases of:
Securities available for sale (222) (27,754)
Premises and equipment (69) (468)
Changes in:
Federal funds sold 375 --
Loans 22,169 (4,314)
------------------------------------
Cash from investing activities 36,258 34,187
------------------------------------
Financing Activities
Proceeds from:
Issuance of common stock 9,329 --
Issuance of treasury stock -- 280
Payments on long-term debt -- (380)
Dividends paid on common stock -- (627)
Sale of branch deposits -- (10,311)
Changes in:
Deposits (32,362) (14,358)
Repurchase agreements (4,371) (842)
Short-term borrowings (19,740) (3,884)
------------------------------------
Cash from financing activities (47,144) (30,122)
------------------------------------
Increase (Decrease) in Cash and Cash Equivalents (4,609) 833
Cash and Cash Equivalents, Beginning of Year 15,439 9,439
------------------------------------
Cash and Cash Equivalents at June 30 $ 10,830 $ 10,272
====================================
</TABLE>
Cash payments for interest totaled $5,481,000 and $8,397,000 for the
six months ended June 30, 2000 and 1999, respectively. Cash payments for taxes
were $383,000 for the first six months of 1999; no payments for taxes were made
during 2000. The Company received a federal tax refund including interest of
$5,696,000 for the six months ended June 30, 2000.
Transfers from loans to other real estate owned totaled $84,000 and
$160,000 for the six months ended June 30, 2000 and 1999, respectively.
See the Notes to the consolidated financial statements.
7
<PAGE>
Consolidated Statement of Shareholders' Equity
For the Three Months Ended June 30, 2000
(Unaudited) ($000s)
<TABLE>
<CAPTION>
Accumulated
Addi- Other
tional Compre- Compre-
Preferred Common Paid-in Retained Treasury hensive hensive
Stock Stock Capital Earnings Stock Loss Income
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at the beginning of the period $ 1,650 $1,321 $ 7,904 $7,189 ($1,170) ($5,161)
Net income 526 $526
Common stock issued 1,261 8,068
Conversion of preferred stock (1,650) 206 1,444
Other comprehensive income, net of
tax
Unrealized gain on securities net of
reclassification adjustment 325 325
----------------------------------------------------------------
Balance, June 30, 2000 $ 0 $2,788 $17,416 $7,715 ($1,170) ($4,836)
==========================================================================
Comprehensive income $851
==========
</TABLE>
See the Notes to the consolidated financial statements.
Consolidated Statement of Shareholders' Equity
For the Six Months Ended June 30, 2000
(Unaudited) ($000s)
<TABLE>
<CAPTION>
Accumulated
Addi- Other
tional Compre- Compre-
Preferred Common Paid-in Retained Treasury hensive hensive
Stock Stock Capital Earnings Stock Loss Income
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999 $ 1,650 $1,321 $ 7,904 $7,129 ($1,170) ($5,603)
Net income 586 $ 586
Common stock issued 1,261 8,068
Conversion of preferred stock (1,650) 206 1,444
Other comprehensive income, net of
tax
Unrealized gain on securities net of
reclassification adjustment 767 767
-----------------------------------------------------------------------
Balance, June 30, 2000 $ 0 $2,788 $17,416 $7,715 ($1,170) ($4,836)
=======================================================================================
Comprehensive income $1,353
============
</TABLE>
See the Notes to the consolidated financial statements.
8
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
The foregoing financial statements are unaudited; however, in the opinion of
management, all adjustments necessary for a fair presentation of the financial
statements have been included. A summary of the Company's significant
accounting policies is set forth in Note 1 to the Consolidated Financial
Statements in the Company's Annual Report on Form 10K for the year ended
December 31, 1999.
Internal financial information is primarily reported and aggregated in the
banking line of business.
The average number of shares outstanding used to compute basic and diluted
earnings per share was as follows:
For the three months ended June 30, 2000 7,624,094 shares
For the three months ended June 30, 1999 5,236,534 shares
For the six months ended June 30, 2000 6,430,314 shares
For the six months ended June 30, 1999 5,234,309 shares
2. Related party transactions
The Company's and it Subsidiaries' directors and officers and their associates
were customers of, and had other transactions with the Bank in the ordinary
course of business during 2000. In management's opinion, 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 other persons and did not involve more than the
normal risk of collectibility.
3. Loans and Allowance for Loan Losses
Loans outstanding are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
($000s) 2000 1999
-------- ------------
<S> <C> <C>
Real estate-construction $ 11,360 $ 108
Real estate-mortgage 43,023 45,944
Real estate-secured by
nonfarm, nonresidential property 17,874 9,033
Commercial, financial and agricultural 57,420 96,730
Obligations of political subdivisions in the U.S. 3,079 3,181
Installment and credit card loans to
individuals 5,012 10,138
-------- ---------
Loans receivable $137,768 $165,134
======== =========
</TABLE>
Non-accruing loans amounted to $10,750,000 and $9,963,000 at June 30, 2000
and 1999, respectively. Loans past due 90 days and still accruing interest were
$28,000 and $19,000 at June 30, 2000 and 1999, respectively.
9
<PAGE>
Impaired loans were as follows:
<TABLE>
<CAPTION>
June 30, December 31,
($000s) 2000 1999
------- -----------
<S> <C> <C>
Impaired loans with no allocated allowance for loan losses $ 875 $ 352
Impaired loans with allocated allowance for loan losses 11,237 13,930
------- -----------
Total $12,112 $ 14,282
Amount of the allowance for loan losses allocated $ 2,949 $ 5,157
Interest income recognized during impairment $ 0 $ 0
Cash basis interest recognised $ 0 $ 0
</TABLE>
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
($000s) 2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, beginning of period $ 6,369 $6,681 $9,702 $5,475
Provision for loan losses 0 1,871 242 7,606
Loans charged-off 87 1,955 3,681 6,484
Recoveries on loans previously charged-off 1,223 335 1,242 335
-------------------------------------------------------------
Net charge offs (recoveries) (1,136) 1,620 2,439 6,149
-------------------------------------------------------------
Balance, end of period $ 7,505 $6,932 $7,505 $6,932
</TABLE>
The entire allowance represents a valuation reserve which is available for
future charge-offs.
4. Shareholders' Equity
On June 30, 2000, the Company completed a recapitalization plan it began in
November 1999 with the sale of $1.65 million of convertible stock to its Board
of Directors, which stock was subsequently converted into 825,000 shares of the
Company's common stock based on a common stock price of $2.00 per share. In
February 2000, the Company commenced the first of two successive public
offerings. In the initial offering, which closed in April 2000, the Company
sold 2,040,869 shares of common stock at $2.00 per share and received $4.1
million in gross offering proceeds. In the second offering, which began in May
2000 and closed in June 2000, the Company sold 3,000,000 shares of common stock,
also at $2.00 per share. The Company received $6.0 million in gross offering
proceeds in this fully subscribed follow-on offering.
In this recapitalization, the Company issued a total of 5,864,869 shares of
its common stock and received $11.7 million in aggregate gross offering
proceeds. After payment of aggregate offering costs of approximately $700,000,
the Company applied the net offering proceeds of $11.0 million to increase the
Bank's capital. As a result, the Bank's unaudited Tier 1 capital leverage ratio
of 6.8% at June 30, 2000, exceeded the 6.0% Tier 1 capital leverage ratio
required by the Office of the Comptroller of the Currency in the Consent Order
issued to the Bank in August 1999. The Consent Order requires the Bank to
10
<PAGE>
maintain a 6.0% Tier 1 capital leverage ratio for as long as the Consent Order
continues in effect.
5. Regulatory Matters
As described in its annual Form 10-K, the Company and the Bank continue to
operate under an agreement with the Federal Reserve Bank of Cleveland, the
Company's primary regulator, and a Consent Order with the Office of the
Comptroller of the Currency, the Bank's primary regulator. Each of the Company
and the Bank has complied with or is taking steps designed to comply with all of
the requirements imposed by its regulators. One of the provisions of the
Consent Order requires that the Bank achieve and maintain a Tier 1 capital
leverage ratio of at least 6.0%. At June 30, 2000, this requirement has been
achieved.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
SUMMARY
For the six months ended June 30, 2000, Belmont Bancorp. earned $586,000, or
$0.09 per common share, compared to a loss of $3,554,000, or a loss of $0.68 per
common share, for the first six months of 1999. For the quarter ended June 30,
2000, the Company earned $526,000, or $0.07 per common share, compared to a loss
of $945,000, or a loss of $0.18 per common share for the second quarter of 1999.
Earnings before income tax benefits were $460,000 for the three months ended
June 30, 2000, and $218,000 for the six months ended June 30, 2000. Losses
reported during 1999 were the result of loan loss provisions.
On March 16, 2000, a confirmation order was approved by the court in the
Schwartz Homes, Inc. bankruptcy. The Bank received settlement proceeds of
$1,212,000 on March 31, 2000, and applied the proceeds of this receipt to the
remaining credit exposure for the Schwartz homebuilder loans. During the second
quarter of 2000, the Bank received additional settlement proceeds of which
$1,160,000 was recorded as recoveries in the allowance for loan losses.
Another component of earnings for the second quarter of 2000 was interest
totaling $256,000 received on approximately $5.2 million in federal tax refunds.
The following table presents the annualized return on average shareholders'
equity and the annualized return on average assets for comparative periods of
2000 and 1999.
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, Ended June 30,
($000s) 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Return on average assets 0.76% -0.91% 0.41% -1.69%
Return on shareholders' equity 14.40% -16.94% 9.23% -31.86%
Average assets $275,752 $414,692 $286,417 $421,101
Average shareholders' equity $ 14,609 $ 22,316 $ 12,693 $ 22,310
</TABLE>
Average assets for the quarter declined to $276 million for the second
quarter of 2000, compared to $415 million for the second quarter of 1999. During
1999, the Company undertook a plan to reduce the assets of the Bank in seeking
to improve its capital ratios. Likewise, for the first six months of 2000,
average assets declined to $286 million from $421 million for the first six
months of 1999. Average shareholders' equity declined from $22 million for the
first six months of 1999 to $13 million for the first half of 2000 as the result
of losses reported during 1999 and price depreciation on the investment
portfolio classified as available for sale. The decline in market value in the
available for sale portfolio is primarily attributable to higher interest rates
which cause the price of bonds to decline.
12
<PAGE>
NET INTEREST INCOME
The primary source of revenue for the Company is net interest income which
is the spread between income earned on assets and interest paid on deposits and
borrowings used to fund those assets. Net interest income is affected by changes
in interest rates, changes in the average maturities of interest earning assets
and liabilities, and changes in the mix of assets and liabilities. Interest
earning assets include total loans, investments carried at amortized cost and
federal funds sold. Nonaccrual loans are included in average loan balances.
Interest bearing liabilities include interest bearing deposits and other
borrowings.
Net interest income declined $540,000 for the second quarter of 2000
compared to the second quarter quarter of 1999. This decline resulted
substantially from a smaller earning asset base. Average earning assets fell
from $385 million during the second quarter of 1999 to $255 million for the
second quarter of 2000. The taxable equivalent net interest margin was 3.55%
and 2.92% for the three months ended June 30, 2000 and 1999, respectively. The
yield on earning assets increased from 7.19% to 7.70% and the cost of interest
bearing liabilities fell from 4.55% to 4.50%.
Net interest income declined $1,777,000 for the first six months of 2000
compared to the same period last year. The average earning asset base fell from
$392 million for the first half of 1999 to $265 million for the first six months
of 2000. The taxable equivalent net interest margin improved to 3.42% for the
first six months of 2000 from 3.21% for the same period in 1999. The yield on
earning assets increased from 7.50% to 7.57%, and the cost of interest bearing
liabilities fell from 4.59% to 4.48%.
OTHER OPERATING INCOME
Other operating income, excluding securities gains and losses, improved
from $1,074,000 for the first six months of 1999 to $1,166,000 for the first
half of 2000. For the quarter ended June 30, 2000, other operating income,
excluding securities gains and losses, increased to $664,000 from $594,000 for
the comparable quarter last year. Included in Other Income for the second
quarter was $256,000 in interest received on federal tax refunds. For the second
quarter of 2000, losses on sale of loans included a valuation adjustment
totaling $55,000 to reduce the carrying value of loans classified as held for
sale to estimated market value. Changes in various categories of other income
are depicted in the table below.
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
($000s) 2000 1999 % Change 2000 1999 % Change
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Trust fees $ 105 $ 104 1.0% $ 214 $ 232 -7.8%
Service charges on deposits 200 237 -15.6% 407 424 -4.0%
Interest on federal tax refund 256 0 na 256 0 na
Gain (loss) on sale of loans (53) 3 -1866.7% (60) 25 -340.0%
Trading gains (losses) 0 50 -100.0% 0 (10) 100.0%
Other income 156 200 22.0% 349 403 -13.4%
-------------------------------------------------------------------------------
Subtotal 664 594 11.8% 1,166 1,074 8.6%
Investment securities gains (losses) 1 (57) 101.8% 0 (17) 100.0%
-------------------------------------------------------------------------------
Total $ 665 $ 537 23.8% $1,166 $1,057 10.3%
===============================================================================
</TABLE>
13
<PAGE>
OPERATING EXPENSES
The following table shows the dollar amounts and growth in various
components of operating expenses.
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
($000s) 2000 1999 % Change 2000 1999 % change
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Salaries and wages $ 720 $ 817 -11.9% $1,509 $1,608 -6.2%
Employee benefits 161 253 -36.4% 353 544 -35.1%
Occupancy expense 199 222 -10.4% 414 473 -12.5%
Furniture and equipment expense 213 210 1.4% 430 439 -2.1%
Telecommunication expense 38 52 -26.9% 92 107 -14.0%
Taxes other than payroll and real estate (20) 126 -115.9% 11 229 -95.2%
Supplies and printing 40 50 -20.0% 84 112 -25.0%
Insurance, including federal deposit
insurance 170 25 580.0% 365 60 508.3%
Amortization of intangibles 7 34 -79.4% 10 70 -85.7%
Legal fees 274 263 4.2% 536 292 83.6%
Consulting expense 1 162 -99.4% 73 174 -58.0%
Examinations and audits 76 62 22.6% 146 119 22.7%
Legal settlements 2 0 na 12 0 na
Other (individually less than 1% of
total income) 306 356 -14.0% 637 677 -5.9%
-------------------------------------------------------------------------
Total $2,187 $2,632 -16.9% $4,672 $4,904 -4.7%
=========================================================================
</TABLE>
With the exception of three categories of expense, operating expenses were
lower for the second quarter and the six months ended June 30, 2000, compared to
the same periods last year. The expense categories that realized increases for
these periods were insurance expense (including federal deposit insurance),
legal fees, and examination and audit expense.
Federal deposit insurance expense increased based upon a change in the
Bank's risk classification with the insurance fund. With an increase in the
Bank's capital ratios at June 30, 2000, based upon the Company's recent stock
offering, the risk classification is expected to improve. However, it is
unlikely that the insurance cost will be reduced until the first half of 2001
when capital ratios as of September 2000 will be used to assign the Bank's
capital group for the January through June 2001 assessment period. The
Company's fidelity bond, directors' and officers' liability policy and other
related policies expired with Progressive Insurance during July 2000. New
policies were obtained with other insurers and an option for coverage on prior
acts was purchased from Progressive Insurance. The new policies do not provide
coverage for acts occurring prior to the policies' effective dates. The annual
cost for these coverages is approximately $100,000 higher than the former
policies.
Legal expenses for the six months ended June 30, 2000, totaled $536,000 net
of $174,000 in legal fees recovered through proceeds received from the Schwartz
Homes Inc. bankruptcy settlement. Of the $536,000 in expense for the first
half of 2000, $189,000 is related to regulatory matters; $176,000 is related to
loan collection efforts; $111,000 is related to civil litigation against
Progressive Insurance and William Wallace, former Executive Vice President and
Chief Operating Officer of the Bank; $26,000 is related to a shareholder action
against the Company, the Board of Directors and several officers of the Bank;
and $34,000 is related to various other legal matters. The Company expects to
incur significant legal expenses in future periods as well. For the first six
months of 1999, legal expenses were $292,000.
14
<PAGE>
Examination and audit expense increased to $146,000 for the six months
ended June 30, 2000 from $119,000 for the same period last year. In October
1999, the Company dismissed its former independent auditors and appointed Crowe,
Chizek and Company, LLP to serve as its new independent auditors. The increase
in this expense relates to this change as well as a surcharge assessed to the
Bank by the Office of the Comptroller of the Currency for the cost of conducting
its examinations.
INVESTMENT SECURITIES
The amortized cost and estimated market values of securities available for
sale at June 30, 2000 are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
($000s) Cost Gains Losses Value
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies $ 8,292 $ 0 $ 507 $ 7,785
Obligations of states and political 44,375 47 4,910 39,512
subdivisions
Mortgage-backed securities 34,008 17 959 33,066
Collateralized mortgage obligations 14,322 7 626 13,703
Corporate trust preferred securities 3,104 0 317 2,787
Equity securities 3,862 70 149 3,783
-------------------------------------------------------------
Total $107,963 $141 $7,468 $100,636
=============================================================
</TABLE>
Market factors and prepayment speeds impact the yield and average lives of
mortgage-backed securities.
Rising interest rates cause bond prices to fall. Higher interest rates
contributed to price depreciation in the Company's bond portfolio. Particularly
affected are the municipal bonds because these bonds typically have longer
maturities than other bonds within the portfolio resulting in higher market
price depreciation. Unrealized losses in the investment portfolio are
considered temporary based on the current interest rate environment.
At June 30, 2000, the Company owned various bonds of a single issuer the
amortized cost of which exceeded 10% of total shareholders' equity. These
concentrations primarily occurred due to the decline in the Company's capital
during 1999. The following table details the issuer, amortized cost and
estimated market value of these bonds.
<TABLE>
<CAPTION>
($000s)
Issuer Amortized Cost Market Value
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
Privately Issued Collateralized Mortgage Obligations:
Norwest Asset Securities Corporation $ 3,540 $ 3,359
General Obligations:
Hampton Township, PA School District 4,337 3,894
Whisman, CA School District 2,358 2,062
Revenue Bonds:
Suburban Lancaster PA Sewer Authority 2,834 2,439
Equity Securities:
Federal Home Loan Bank stock 2,919 2,919
--------------------------------------
Total $15,988 $14,673
======================================
</TABLE>
15
<PAGE>
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The Corporation provides as an expense an amount which reflects incurred
loan losses. This provision is based on the growth of the loan portfolio and on
historical loss experience. The expense is called the provision for loan losses
in the Consolidated Statement of Income. Actual losses on loans and leases are
charged against the allowance built up on the Consolidated Balance Sheet through
the provision for loan losses. The amount of loans actually removed as assets
from the Consolidated Balance Sheets is referred to as charge-offs and, after
netting out recoveries of previously charged-off assets, becomes net charge-
offs.
For the first half of 2000, $242,000 was added to the allowance and charged
to expense compared to $7,606,000 in 1999. At June 30, 2000, the allowance for
loan losses to total loans was 5.38% compared to 3.46% last year. The ratio of
the Allowance for Loan Losses to non-performing assets was 68.85% at June 30,
2000. The following table details the Allowance for Loan Losses and also
includes various loan charge-off statistics for 2000 and 1999.
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
($000s) 2000 1999 2000 1999
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, beginning of period $ 6,369 $ 6,681 $ 9,702 $ 5,475
Provision for possible loan losses 0 1,871 242 7,606
Loans charged-off 87 1,955 3,681 6,484
Recoveries on loans previously charged-off 1,223 335 1,242 335
-----------------------------------------------------------------
Net charge offs (recoveries) (1,136) 1,620 2,439 6,149
Balance, end of period $ 7,505 $ 6,932 $ 7,505 $ 6,932
=================================================================
Loans outstanding $137,768 $197,515 $137,768 $197,515
Average loans $143,842 $203,093 $151,836 $203,160
Annualized net charge offs (recoveries)
as a percent of:
Average loans -3.16% 3.19% 3.21% 6.05%
Allowance for loan losses -60.55% 93.48% 65.02% 177.41%
Allowance for loan losses to:
Total loans at end of period 5.45% 3.51% 5.45% 3.51%
Non-performing assets 68.85% 68.05% 68.85% 68.05%
</TABLE>
16
<PAGE>
NON-PERFORMING ASSETS
Non-performing assets consist of (1) non-accrual loans and debt securities
on which the ultimate collectibility of the full amount of interest is
uncertain, (2) loans past due ninety days or more as to principal or interest
and (3) other real estate owned. A summary of non-performing assets follows:
<TABLE>
<CAPTION>
Non-performing assets June 30, Dec. 31, June 30,
($000s) 2000 1999 1999
------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-accrual loans $10,750 $13,769 $ 9,963
Ninety days past due loans
still accruing interest 28 541 19
Other real estate owned 121 0 205
---------------------------------------
Total $10,899 $14,310 $10,187
=======================================
Restructured loans included
in above totals $ 503 $ 0 30
Restructured loans in
compliance with modified terms
(not included in above totals) $ 1,115 $ 1,046 $ 1,357
</TABLE>
Loans restructured and in compliance with modified terms are not
included in total non-performing assets. Total non-performing assets were
$10,899,000 or 4.05% of total assets at June 30, 2000 compared to $10,187,000 or
2.56% of total assets at June 30, 1999.
In addition to the schedule of non-performing assets, management
prepares a watch list consisting of loans which they have determined require
closer monitoring to further protect the Company against loss. At June 30,
2000, the balance of loans and available credit classified by management as
substandard due to delinquency, a change in financial position, or other factors
and not included as non-performing assets totaled $16,842,000; loans classified
as doubtful totaled $222,000.
Impaired loans at June 30, 2000 compared to December 31, 1999 were as
follows:
<TABLE>
<CAPTION>
($000s) June 30, 2000 December 31, 1999
<S> <C> <C>
Impaired loans with no allocated allowance for loan losses $ 875 $ 352
Impaired loans with allocated allowance for loan losses 11,237 13,930
--------------------------------------
Total $12,112 $14,282
Amount of the allowance for loan losses allocated $ 2,949 $ 5,157
</TABLE>
LOAN CONCENTRATIONS
The Company uses the Standard Industry Code (SIC) system to determine
concentrations of credit risk by industry. No aggregate loan balances based on
a single SIC classification exceeded 10% of total loans.
Loans and credit facilities available to the amusement industry
(representing multiple SIC classifications) including amusement services and
manufacturers of amusement rides and concession trailers totaled $9.7 million,
or 6.9% of total loans, at June 30, 2000. Except for the amusement industry
loans, the concentrations of credit occurred as a result of reductions in the
Bank's Tier 1 capital. Tier 1 capital consists principally of shareholders'
equity less goodwill and a portion of deferred tax assets. Other concentrations
of credit as of June 30, 2000, are depicted in the table below based on
17
<PAGE>
the percentage of the Bank's Tier 1 capital. Concentrations exceeding 25% of
Tier 1 capital are detailed below.
<TABLE>
<CAPTION>
As of June 30, 2000
Loan Balance and % of
($000s) Available Credit Tier 1 Capital
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Amusement Industry-Services and Manufacturing $9,682 52.4%
Commercial Apartments and Rentals 5,940 32.2%
Commercial Office Buildings and Rentals 5,087 27.6%
</TABLE>
CONSENT ORDER AND FEDERAL RESERVE BANK AGREEMENT
As described in its annual Form 10-K, the Company and the Bank continue to
operate under an agreement with the Federal Reserve Bank of Cleveland, the
Company's primary regulator, and a Consent Order with the Office of the
Comptroller of the Currency, the Bank's primary regulator. Each of the Company
and the Bank has complied with or is taking steps designed to comply with all of
the requirements imposed by its regulators. One of the provisions of the Consent
Order requires that the Bank achieve and maintain a Tier 1 capital leverage
ratio of at least 6.0%. At June 30, 2000, this requirement has been achieved.
CAPITAL RESOURCES
The table below depicts the capital ratios for the Bank and for the Company
on a consolidated basis as of June 30, 2000. In addition, the table depicts the
regulatory requirements for classification as "adequately capitalized" under the
regulatory guidelines for Prompt Corrective Action. Tier 1 capital consists
principally of shareholders' equity less goodwill and a portion of deferred tax
assets, while Tier 2 capital consists of certain debt instruments and a portion
of the allowance for loan losses. Total capital consists of Tier 1 and Tier 2
capital. Under the Consent Order with the Office of the Comptroller of the
Currency, the Bank will not be treated as "well capitalized" even if it achieves
and maintains a Tier 1 capital leverage ratio of 5% (which would, absent the
Consent Order, be the "well capitalized" standard) unless and until the Consent
Order is terminated or modified to eliminate the capital requirement under the
Consent Order. The Consent Order requires the Bank achieve and maintain a 6%
Tier 1 leverage ratio.
<TABLE>
<CAPTION>
For Capital
Actual Adequacy Purposes(1)
Amount Ratio Amount Ratio
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
As of June 30, 2000:
Total risk based capital to risk weighted assets:
Consolidated 23,048 13.4% 13,709 8.0%
Bank 20,645 12.2% 13,527 8.0%
Tier 1 capital to risk weighted assets:
Consolidated 20,839 12.2% 6,855 4.0%
Bank 18,464 10.9% 6,764 4.0%
Tier 1 leverage ratio:
Consolidated 20,839 7.6% 10,987 4.0%
Bank 18,464 6.8% 10,902 4.0%(2)
</TABLE>
(1) These are also the standards to be "adequately capitalized" under Prompt
Corrective Action Provisions
(2) The Consent Order requires a 6% Tier 1 leverage ratio.
18
<PAGE>
On June 30, 2000, the Company completed a recapitalization plan it
began in November 1999 with the sale of $1.65 million of convertible stock to
its Board of Directors, which stock was subsequently converted into 825,000
shares of the Company's common stock based on a common stock price of $2.00 per
share. In February 2000, the Company commenced the first of two successive
public offerings. In the initial offering, which closed in April 2000, the
Company sold 2,040,869 shares of common stock at $2.00 per share and received
$4.1 million in gross offering proceeds. In the second offering, which began in
May 2000 and closed in June 2000, the Company sold 3,000,000 shares of common
stock, also at $2.00 per share. The Company received $6.0 million in gross
offering proceeds in this fully subscribed follow-on offering.
In this recapitalization, the Company issued a total of 5,864,869 shares of
its common stock and received $11.7 million in aggregate gross offering
proceeds. After payment of aggregate offering costs of approximately $700,000,
the Company applied the net offering proceeds of $11.0 million to increase the
Bank's capital. As a result, the Bank's unaudited Tier 1 capital leverage ratio
of 6.8% at June 30, 2000, exceeded the 6.0% Tier 1 capital leverage ratio
required by the Office of the Comptroller of the Currency in the Consent Order
issued to the Bank in August 1999. The Consent Order requires the Bank to
maintain a 6.0% Tier 1 capital leverage ratio for as long as the Consent Order
continues in effect.
LIQUIDITY
The Company meets its liability-based needs through the operation of the
Bank's branch banking network that gathers demand and retail time deposits. The
Bank also acquires funds through repurchase agreements and overnight federal
funds that provide additional sources of liquidity. Average total deposits were
$226.7 million for the second quarter of 2000 compared to $290.3 million for the
second quarter of 1999. For the six months ended June 30, 2000, average
deposits were $234.8 million versus $296.0 million for the first half of 1999.
At the end of January 1999, the Bank sold its Jewett, Ohio branch deposits
totaling approximately $10 million. The average deposit balance of a single,
public depository declined by $13.6 million from the first half of 1999 compared
to the first six months of 2000.
At June 30, 2000, total loans outstanding had declined by $27.4 million
since the end of 1999. As a result, the funding needs of the Bank to support
current loan demand has declined.
The Asset/Liability Committee meets weekly to monitor the funding position
of the Bank and to adjust offered rates on Bank products when appropriate.
The Bank also has secured and unsecured lines of credit with various
correspondent banks totaling $5,100,000 which may be used as an alternative
funding source; at June 30, 2000, none of these lines were utilized.
At June 30, 2000, the Bank had an unused credit line with the Federal Home
Loan Bank of Cincinnati (FHLB) for $17 million. Credit facilities at the FHLB
are subject to certain collateral requirements.
19
<PAGE>
FORWARD-LOOKING STATEMENTS
Management has made statements in this document that are forward-looking
statements. One can identify these statements by forward-looking words such as
"may," "will," "intend," "expect," "anticipate," "believe," "estimate," and
"continue" or similar words. Forward-looking statements may also use different
phrases. Forward-looking statements address, among other things, (1) the
Company's expectations; (2) projections of the Company's future results of
operations or of its financial condition; or (3) other "forward looking"
information.
Management believes it is important to communicate the Company's
expectations to its shareholders. However, events may occur that the Company
is not able to predict accurately or which it does not fully control that could
cause actual results to differ materially from those expressed or implied by
such forward-looking statements, including:
. The Company's or the Bank's inability to maintain adequate levels of
capital, as required by the Office of the Comptroller of the Currency or
the Federal Reserve Bank of Cleveland.
. the need to recognize loan losses or create additional loan loss reserves
due to additional problem loans.
. unforeseen adverse conditions in businesses or financial condition of the
Bank's borrowers.
. changes in general economic and business conditions and in the banking
industry in particular.
. changes in banking regulations.
ITEM 3-QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by Item 3 has been disclosed in Item 7A of the
Company's Annual Report on Form 10-K for the year ended December 31, 1999.
There has been no material change in the disclosure regarding market risk.
PART II - OTHER INFORMATION
Item 1. Legal proceedings
Other than as described below, since the date of the filing of the
Company's Annual Report on Form 10-K for the year ended December 31, 1999, there
have been no material new legal proceedings involving the Company or any
material developments to the proceedings described in such 10-K.
In April 2000, the Company filed a civil action in the Circuit Court of
Ohio County, West Virginia against Progressive Casualty Insurance Company of
Ohio and a former bank officer. The bank is seeking payment of a financial
institution bond issued by Progressive to the Company with a face amount of
$4.75 million. Progressive has declined to honor the bond claim. The bond
provides coverage to the bank for losses resulting from the dishonest and
fraudulent acts committed by an employee acting alone or in collusion with
others. In addition to demanding the
20
<PAGE>
$4.75 million judgment, the Company is seeking judgment against Progressive and
William Wallace, former chief operating officer of the Company, for compensatory
damages of $10 million and punitive damages of $15 million for total damages of
$25 million. In July 2000, this case was transferred to the United States
District Court for the Northern District of West Virginia upon a motion filed by
Progressive. Progressive subsequently filed a motion to transfer venue of the
case to the United States District Court for the Southern District of Ohio, the
situs for other litigation involving the parties. This motion is presently under
consideration by the West Virginia District Court.
Item 2. Changes in securities and use of proceeds
Recent Sale of Securities
In November 1999, 10 directors purchased $1.65 million of Series A
Convertible Preferred Stock which were converted in April 2000 into 825,000
shares of common stock at a price of $2.00 per share. These shares are treated
as "restricted securities" as that term is defined in Rule 144 under the
Securities Act of 1933. The Series A Convertible Preferred Stock was issued
pursuant to the exemption from registration under Section 4(2) of the Securities
Act of 1933 and rules thereunder. The common stock issued upon the conversion
of the Series A Convertible Preferred Stock was issued pursuant to the exemption
from registration under Section 3(a)(9) of the Securities Act of 1933.
The Company recently concluded two offerings of its $0.25 par value Common
Stock. The first offering (Commission file number 333-91035) commenced February
7, 2000 and concluded April 14, 2000. The effective date of the SEC
registration statement for which the use of proceeds information is being
disclosed was February 4, 2000. The second offering (Commission file number
333-36472) commenced May 17, 2000 and concluded June 30, 2000. The effective
date of the SEC registration statement for this offering was May 17, 2000. All
shares were issued at a price of $2.00 per share.
Gross offering proceeds were $4,080,000 and $6,000,000 for the first and
second offerings, respectively.
The cost of the first offering was $196,000 and there were no finders' fees
or commissions paid. There were no direct of indirect payments to directors,
officers, or affiliates of the Company.
The cost of the second offering was $555,000 including a selling commission
of $450,000 paid to Beaconsfield Financial Services, Inc. Following the
conclusion of the offering, David Giffin, who is a registered representative of
Beaconsfield Financial Service, Inc., was appointed to the Bank's Board of
Directors and has been nominated to serve on the Company's Board of Directors.
No other direct or indirect payments were made to directors, officers or
affiliates of the Company.
The net offering proceeds were $3,883,000 for the first offering and
$5,446,000 for the second offering. Common shares issued were 2,039,869 shares
for the first offering and 3,000,000 shares for the second offering. The net
proceeds of both offerings were used to increase the Tier 1 Capital of the Bank.
Item 3. Defaults upon senior securities
None
Item 4. Submission of matters to a vote of security shareholders
None
21
<PAGE>
Item 5. Other information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27. Financial Data Schedule
(b) Reports on Form 8-K.
None
SIGNATURES
Pursuant to the requirements 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.
Belmont Bancorp.
(Registrant)
/s/Wilbur Roat
By: Wilbur Roat
President & CEO
/s/Jane Marsh
By: Jane Marsh
Secretary
(Principal Financial and
Accounting Officer)
August 14, 2000
22
