<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
Annual report pursuant to Section 13 of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1996
Commission File No.: 0-25172
FIRST BELL BANCORP, INC.
(exact name of registrant as specified in its charter)
DELAWARE 25-1752651
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
Suite 1704, 300 Delaware Avenue, Wilmington, Delaware 19801
(Address of principal executive offices)
Registrant's telephone number, including area code: (302) 427-7883
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of class)
The registrant (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No .
--------- ----------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, i.e., persons other than directors and executive officers of the
registrant is $117,865,015 and is based upon the last sales price as quoted on
The Nasdaq Stock Market for March 3, 1997.
As of March 3, 1997, the Registrant had 7,718,150 shares outstanding
(excluding treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
The Annual Report to Stockholders for the year ended December 31, 1996 is
incorporated by reference into Part II of this Form 10-K.
The Proxy Statement for the 1997 Annual Meeting of Stockholders is
incorporated by reference into Part III of this Form 10-K.
<PAGE>
INDEX
<TABLE>
<CAPTION>
PART I PAGE
----
<S> <C> <C>
Item 1. Business...................................................... 1
Item 2. Properties.................................................... 31
Item 3. Legal Proceedings............................................. 31
Item 4. Submission of Matters to a Vote of Security Holders........... 31
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters............................................ 31
Item 6. Selected Financial Data........................................ 31
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 31
Item 8. Financial Statements and Supplementary Data.................... 32
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure......................... 32
PART III
Item 10. Directors and Executive Officers of the Registrant............. 32
Item 11. Executive Compensation......................................... 32
Item 12. Security Ownership of Certain Beneficial Owners
and Management................................................. 32
Item 13. Certain Relationships and Related Transactions................. 32
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.................................................... 33
SIGNATURES 35
</TABLE>
<PAGE>
PART I
Item 1. Business
General
First Bell Bancorp, Inc. (the "Company") was organized by the Board of
Directors of Bell Federal Savings and Loan Association of Bellevue (the
"Association") for the purpose of acquiring all of the capital stock of the
Association to be issued in connection with the Association's conversion from
mutual to stock form, which was consummated on June 29, 1995, (the
"Conversion"). At December 31, 1996, the Company had consolidated total assets
of $656.2 million and total equity of $86.4 million. The Company was
incorporated under Delaware law and is a savings and loan holding company
subject to regulation by the Office of Thrift Supervision ("OTS"), the Federal
Deposit Insurance Corporation ("FDIC") and the Securities and Exchange
Commission ("SEC"). Currently, the Company does not transact any material
business other than through its subsidiary, the Association. All references to
the Company include the Association unless otherwise indicated, except that
references to the Company prior to June 29, 1995 are to the Association.
Bell Federal Savings and Loan Association of Bellevue was originally
founded in 1891 as the Commercial Building and Loan Association, a state
chartered building and loan association. In 1941, the Association converted to
a federally chartered mutual savings and loan association and changed its name
to First Federal Savings and Loan Association of Bellevue. The Association
again changed its name in 1971 to Bell Federal Savings and Loan Association of
Bellevue. The Association's deposits are insured up to applicable limits by the
Savings Association Insurance Fund ("SAIF"). The Association's business is
primarily conducted through six branch offices located throughout the suburban
Pittsburgh, Pennsylvania area and its principal office in the borough of
Bellevue. The Company's principal executive office is located at Suite 1704,
300 Delaware Avenue, Wilmington, Delaware 19801 and its executive office
telephone number is (302) 427-7883.
The principal business of the Company is to operate a traditional customer
oriented savings and loan association. The Company attracts retail deposits
from the general public and invests those funds primarily in fixed-rate, owner-
occupied, single family conventional mortgage loans and, to a much lesser
extent, residential construction loans, multi-family loans, and consumer loans.
The Company's revenues are derived principally from interest on conventional
mortgage loans, and, to a much lesser extent, interest and dividends on
investment securities and short-term investments, and other fees and service
charges. The Company's primary source of funds is deposits and borrowings from
the Federal Home Loan Bank (FHLB).
The Association is subject to extensive regulation, supervision and
examination by the OTS, its primary regulator, and the FDIC, which insures its
deposits. The Association is a member of the FHLB.
<PAGE>
Market Area and Competition
The Association has been, and continues to be, a community-oriented
savings institution offering a variety of financial services to meet the needs
of the communities it serves. Its primary market area is in the areas
surrounding its offices, while its lending activities extend throughout
Allegheny County and parts of Beaver, Butler, Washington and Westmoreland
Counties, in Pennsylvania. In addition to its principal office in Bellevue, the
Association operates six other retail offices, all of which are located in
Allegheny County.
The communities in Allegheny County are composed mostly of stable,
residential neighborhoods of predominantly one-and two-family residences and
middle-to-upper-income families. Management believes that, to a large degree,
the economic vitality of these communities depends on the economic vitality of
the City of Pittsburgh.
The Greater Pittsburgh area has been in the process of restructuring over
the past decade. Once centered on heavy manufacturing, primarily steel, its
economic base is now more diverse, including technology, health and business
services. Several "Fortune 500" industrial firms are headquartered in the
Greater Pittsburgh area, including USX Corp., Westinghouse Electric Corp. and
Aluminum Company of America. The largest employers in Pittsburgh, by the number
of local employees, include University of Pittsburgh Medical Center, USAirways,
the University of Pittsburgh, Mellon Bank Corp. and Westinghouse. Seven
colleges and universities are located in the Greater Pittsburgh area.
The Association serves its market area with a wide selection of
residential loans and other retail financial services. Management considers the
Association's reputation for customer service as its major competitive advantage
in attracting and retaining customers in its market area. The Association also
believes it benefits from its community orientation, as well as its established
deposit base and level of core deposits.
Lending Activities
Loan and Mortgage-Backed Securities Portfolio Composition. The loan
portfolio consists primarily of conventional mortgage loans secured by one- to
four-family, owner-occupied residences, and, to a much lesser extent,
residential construction loans, multi-family loans and consumer loans. Mortgage
loans are originated to be held in the portfolio. At December 31, 1996, total
loans receivable were $547.2 million, of which $524 million, or 95.9%, were
conventional mortgage loans. Of the conventional mortgage loans outstanding at
that date, 97.9% were fixed-rate loans. At December 31, 1996, the loan portfolio
also included $19.9 million of residential construction loans; $1.2 million of
multi-family loans; $297,000 of residential second mortgage loans; and $949,000
of other consumer loans. The Association also offers FHA/VA qualifying one-to
four-family residential mortgage loans.
The types of loans originated are regulated by federal law and
regulations. Interest rates charged on loans are affected principally by the
demand for such loans and the supply of money available for lending purposes.
These factors are, in turn, affected by general and economic conditions,
monetary policies of the federal government, legislative and tax policies and
governmental budgetary matters.
2
<PAGE>
Set forth below is a table showing the loan origination, purchase and
sales activity for the periods indicated.
<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------
1996 1995 1994
----------------------------------
(In thousands)
<S> <C> <C> <C>
Loans receivable at beginning of period...... $432,863 $322,914 $256,686
-------- -------- --------
Additions:
Originations of mortgages(1)(2)............. 168,915 112,264 106,393
Purchase of conventional mortgages.......... -- 24,361 --
-------- -------- --------
601,778 136,625 106,393
-------- -------- --------
Reductions:
Transfer of mortgage loans to foreclosed
real estate............................... 229 287 28
Repayments.................................. 54,339 26,389 40,137
Loan sales.................................. -- -- --
-------- -------- --------
Total reductions............................ 54,568 26,676 40,165
-------- -------- --------
Total loans receivable at end of period..... $547,210 $432,863 $322,914
======== ======== ========
Mortgage-backed securities at beginning
of period.................................. $ -- $ 4,870 $ 6,605
Purchases................................... -- -- --
Sales....................................... -- 3,990 --
Repayments.................................. -- 878 1,738
Premium amortization........................ -- 2 3
-------- -------- --------
Mortgage-backed securities at end of period.. $ -- $ -- $ 4,870
======== ======== ========
</TABLE>
- ------------------------
(1) Includes conventional mortgages and residential construction loans.
(2) The Association originated no multi-family or second mortgage loans during
the periods shown.
3
<PAGE>
The following table sets forth the composition of the loan portfolio and
mortgage-backed securities portfolio in dollar amounts and in percentages of the
portfolio at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------------- ------------------- ------------------- ------------------- ---------------------
Percent of Percent of Percent of Percent of Percent of
Amount Total Amount Total Amount Total Amount Total Amount Total
-------- ---------- ------- ----------- ------- ----------- ------- ----------- -------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Conventional mortgages. $524,867 95.92% $409,807 94.67% $304,760 94.38% $242,849 94.59% $240,400 94.48%
Residential
construction loans.... 19,877 3.63 19,692 4.55 14,090 4.36 9,052 3.53 6,589 2.56
Multi-family loans..... 1,220 0.22 2,075 0.48 2,646 0.82 3,497 1.38 6,017 2.34
Second mortgage loans.. 297 0.05 330 0.08 354 0.11 340 0.13 347 0.14
-------- ------ ------- ------ -------- ------ -------- ------ -------- ------
Total real estate
loans.............. 546,261 99.83 431,904 99.78 321,850 99.67 255,738 99.63 253,353 99.52
Consumer loans:
Loans on deposit
accounts.............. 938 0.17 937 0.22 1,018 0.32 869 0.34 1,070 0.42
Home improvement loans. 11 -- 22 -- 46 0.01 79 0.03 150 0.06
-------- ------- -------- ------ -------- ------ -------- ------ -------- ------
Total consumer loans 949 0.17 959 0.22 1,064 0.33 948 0.37 1,220 0.48
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans receivable..... 547,210 100.00% 432,863 100.00% 322,914 100.00% 256,686 100.00% 254,573 100.00%
====== ====== ====== ====== ======
Less:
Undisbursed portion of
loans in process........ 11,120 11,182 8,834 4,251 3,949
Deferred net loan
origination fees........ 4,610 5,537 5,510 4,393 4,470
Allowance for loan losses 665 575 575 598 602
-------- -------- -------- -------- --------
Loans receivable,
net................ $530,815 $415,569 $307,995 $247,444 $245,552
======== ======== ======== ======== ========
Mortgage-backed securities:
GNMA..................... -- -- -- -- $ 702 14.42% $ 868 13.14% $ 1,157 11.83%
FHLMC.................... -- -- -- -- 2,103 43.18 3,070 46.48 4,794 49.00
FNMA..................... -- -- -- -- 2,065 42.40 2,616 39.61 3,511 35.89
Others................... -- -- -- -- -- -- 51 0.77 321 3.28
-------- ------- -------- ------- -------- ------- -------- ------ -------- ------
Total
mortgage-backed
securities........ $ -- --% $ -- --% $ 4,870 100.00% $ 6,605 100.00% $ 9,783 100.00%
======== ======= ======== ======= ======== ====== ======== ====== ======== ======
</TABLE>
4
<PAGE>
Loan Maturity Schedule. The following table sets forth certain information
at December 31, 1996 regarding the dollar amount of loans maturing in the
portfolio based on their original contractual terms to maturity. The table does
not include the effect of prepayments or scheduled principal amortization.
Prepayments and scheduled principal amortization on loans totalled $54.3
million, $26.4 million and $40.1 million for the years ended December 31, 1996,
1995 and 1994, respectively.
<TABLE>
<CAPTION>
At December 31, 1996
---------------------------------------------------------------------------------------------
More than More than More than More than More than
Three Three Six Months One Year Three Years Five Years
Months Months to to Twelve to Three to Five to Ten More than
or Less Six Months Months Years Years Years Ten Years Total
---------- ------------ ----------- ----------- ----------- ----------- ----------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning Assets:
Real estate loans:
One-to four-family adjustable-
rate loans................... $ -- $ -- $ -- $ -- $ -- $ 154 $ 10,962 $ 11,116
One-to four-family fixed-rate
loans........................ 174 6 15 75 1,109 17,874 494,498 513,751
Residential construction loans.. -- -- -- -- -- -- 19,877 19,877
Multi-family.................... 23 75 -- 228 61 534 299 1,220
Second mortgage loans........... 238 -- -- 59 -- -- -- 297
------ ----- ------ ---- ------ ------- -------- -------
Total real estate loans........ 435 81 15 362 1,170 18,562 525,636 546,261
====== ===== ====== ==== ====== ======= ======== ========
Consumer loans........................ 938 -- -- 4 7 -- -- 949
------ ----- ------ ---- ------ ------- -------- --------
Total loans.................... $1,373 $81 $15 $366 $1,177 $18,562 $525,636 $547,210
====== ===== ====== ==== ====== ======= ======== ========
</TABLE>
5
<PAGE>
The following table sets forth the dollar amount of all loans at December 31,
1996 which have fixed or adjustable interest rates, and which are due after
December 31, 1997.
<TABLE>
<CAPTION>
Due After December 31, 1997
Fixed Adjustable Total
--------- ---------- ---------
(In thousands)
<S> <C> <C> <C>
Real estate loans:
Conventional mortgages.... $513,556 $11,116 $524,672
Residential construction.. 19,691 186 19,877
Multi-family.............. 1,099 23 1,122
Consumer loans.............. 11 -- 11
-------- ------- --------
Total loans............ $534,357 $11,325 $545,682
======== ======= ========
</TABLE>
One-to Four-Family Residential Mortgage Lending. The residential
mortgage loans are primarily secured by owner-occupied, one-to four-family,
residences. Loan originations are generally obtained from existing or past
customers, members of the local communities served, or referrals from local real
estate agents, attorneys and builders. The Association primarily originates
fixed-rate loans, but also offers adjustable-rate mortgage ("ARM") loans. At
December 31, 1996, conventional mortgage loans totalled $524.9 million, or
95.9%, of total loans at such date. Of the Association's conventional mortgage
loans secured by one-to four-family residences, $513.8 million, or 97.9%, were
fixed-rate loans.
Originated mortgage loans are held in the loan portfolio and are
secured by properties located within the Association's primary market area.
Historically, the market interest rates of mortgage loans in the Pittsburgh area
have been below national averages. The mortgage loan portfolio has increased
from $253.4 million at December 31, 1992 to $546.3 million at December 31, 1996.
The Association from time to time purchases one-to four-family
mortgage loans and loan participations. A number of these loans are secured by
properties located outside the Association's market area, such as other regions
of Pennsylvania, California, Illinois, Maryland, New York, Texas, Virginia,
Utah, North Carolina, Tennessee and Georgia. The Association did not purchase
any mortgage loans or participations in 1996. At December 31, 1996, the
Association had $26.4 million in purchased mortgage loans and loan
participations serviced by others, totalling 4.8% of the total loan portfolio at
that date, primarily secured by one-to four-family residences. The Association
intends to continue purchasing loans to supplement reduced loan demand as
needed. Loans purchased by the Association generally must meet the same
underwriting criteria as loans originated by the Association.
6
<PAGE>
The Association currently does not sell loans in the secondary market,
although it has done so in past years. Most of the loan portfolio is
underwritten in conformity with Federal National Mortgage Association ("FNMA")
secondary market requirements. The Association has been approved by the FNMA to
sell loans in the secondary market, and may sell loans to FNMA in the future;
however, there is no assurance that the Association will be able to originate
loans for sale in the secondary market or, that if originated, such loans will
be sold in the secondary market. Should the Association decide to sell mortgage
loans in the future, the lower interest rates on such loans, characteristic of
the Pittsburgh market, may tend to diminish the demand for such loans in the
secondary market.
With the exception of Community Reinvestment Act ("CRA") loans, the
Association's maximum loan-to-value ratio on conventional mortgage loans is 80%.
As a result, a majority of borrowers are previous homeowners, whom the
Association believes to be relatively stable borrowers. The Association also
offers FHA/VA qualifying one-to four-family residential mortgage loans. One-to
four-family residential mortgage loans do not provide for negative amortization.
Mortgage loans in the portfolio generally include due-on-sale clauses, which
provide the Association with the contractual right to demand the loan
immediately due and payable in the event that the borrower transfers ownership
of the property that is subject to the mortgage. It is the Association's policy
to enforce due-on-sale clauses. The residential mortgage loans originated are
generally for terms to maturity from 15 to 30 years. At December 31, 1996, the
maximum one-to four-family loan amount is $400,000, unless otherwise approved by
the Board of Directors.
Presently, three (3) ARM loans are offered; a one-year, five-year and
7/1 ARM loan. The one-year ARM loan has an interest rate that adjusts annually
based on a spread of 2.50 percentage points above the rate on one-year United
States Treasury securities. The one-year ARM loan is subject to a limitation on
interest rate increases and decreases of 2.0% per year, a lifetime ceiling on
interest rate increases of 6.0% above the origination rate, and a floor rate
equal to the origination interest rate. This mortgage can convert to a fixed-
rate loan at specified times during the first five years. The five-year ARM
loan has an interest rate that adjusts every five years based on a spread of
2.75 percentage points above the rate on five-year United States Treasury
securities. The five-year ARM loan is subject to a limitation on interest rate
increases and decreases of 3.0% per change, a lifetime ceiling on the interest
rate of 6.0% above the origination rate, and a floor rate equal to the
origination interest rate. The 7/1 ARM loan has an interest rate that remains
constant for the first seven years and then the interest rate adjusts annually
based on a spread of 2.50 percentage points above the rate on one-year United
States Treasury securities. After the initial seven years, this ARM loan is
subject to a limitation on interest rate increases and decreases of 2.0% per
year, a lifetime ceiling on interest rate increases of 6.0% above the
origination rate, and a floor equal to the origination interest rate. The
mortgage can convert to a fixed-rate loan at the first change date.
The volume and types of ARM loans originated are affected by such
market factors as the level of interest rates, competition, consumer preferences
and the availability of funds. In recent years, demand for ARM loans has been
weak due to the low interest rate environment
7
<PAGE>
and consumer preference for fixed rate loans. In addition, management's
strategy has been to emphasize fixed-rate loans. In 1996, only $1.1 million of
the $168.9 million, or .6%, of loans originated were adjustable mortgages.
Although ARM loans will continue to be offered, there can be no assurance that
in the future ARM loans will be originated in sufficient volume to constitute a
significant portion of the loan portfolio.
In an effort to provide financing for low and moderate income home
buyers, additional single family residential mortgage loans are offered to
moderate income borrowers and residents of the CRA neighborhoods, with terms of
up to 30 years. Such loans must be secured by a single family, owner-occupied
unit. These loans are originated using modified underwriting guidelines with
reduced down payments and expenses. Private mortgage insurance is normally
required. Because the Association typically charges a lower rate of interest,
lower mortgage origination fees and a discount on closing costs on its CRA
loans, a lower rate of return is expected on such loans, as compared to other
residential mortgage loans. For the years ended December 31, 1996, 1995 and
1994, the Association originated 24, 71 and 54 loans under the CRA loan program,
respectively, totalling $1.1 million, $2.9 million and $2.0 million,
respectively.
Residential Construction Loans. The Association originates loans for
the construction of one-to four-family residential properties. Such loans are
made on contract directly to the home buyer. Residential construction loans are
subject to the same maximum loan amounts as conventional mortgage loans.
Residential construction loans are made for terms of up to one year, at which
time the loans convert to permanent conventional mortgage financing.
Residential construction loans are generally offered at the Association's
prevailing interest rate. An additional fee may be charged for construction
servicing. Advances are made to builders as phases of construction of the
property are completed. As of December 31, 1996, the Association's residential
construction loans totalled $19.9 million, or 3.6% of the total loan portfolio.
Of these construction loans, $11.1 million had been committed, but were
undisbursed as of that date.
Construction lending involves greater risks than other loans due the
fact that loan funds are advanced upon the security of the project under
construction, predicated on the future value of the property upon completion of
construction. Moreover, because of the uncertainties inherent in estimating
construction costs, delays resulting from labor problems, material shortages or
weather conditions and other unpredictable contingencies, it is relatively
difficult to evaluate accurately the total funds required to complete a project
and to establish the related loan-to-value ratio. Because of these factors, the
analysis of prospective construction loan projects requires an expertise that is
different in significant respects from that which is required for residential
mortgage lending.
Multi-Family Loans. In prior years, the Association also originated
multi-family loans. As of December 31, 1996, the Association's total loan
portfolio contained 26 multi-family loans, totalling $1.2 million, or 0.2%, of
total loans. Since 1991, the Association has not originated
8
<PAGE>
any multi-family mortgage loans. In the future, the Association may originate a
limited number of multi-family loans on a case-by-case basis.
The multi-family loans in the Association's portfolio consist of both
fixed-rate and adjustable-rate loans which were originated at prevailing market
rates. The Association's policy has been to originate multi-family loans only
in its market area. In making multi-family loans, the Association considers
primarily the ability of net operating income generated by the real estate to
support the debt service, the financial resources and income level and
managerial expertise of the borrower, the marketability of the property, and the
Association's lending experience with the borrower.
Second Mortgage Loans. The Association has in the past originated
second mortgage loans on owner-occupied, one-to four-family residences where the
Association holds the first mortgage. These loans generally are originated as
adjustable-rate loans with terms of up to 10 years. The Association offers
second mortgage loans with maximum combined loan-to-value ratios of up to 80%.
At December 31, 1996, the Association had $297,000, or 0.1% of total loans, in
second mortgage loans.
Consumer Loans. The Association also offers secured consumer loans.
At December 31, 1996, the Association's consumer loans totalled $949,000, or
0.2% of the Association's total loan portfolio. Of that amount, loans secured by
deposit accounts totalled $938,000, or 98.8%, and home improvement loans
totalled $11,000, or 1.2%, of total consumer loans.
Loan Servicing and Loan Fees. Servicing on all of the loans that have
been sold has been retained. Fees are received for these servicing activities,
which include collecting and remitting loan payments, inspecting the properties
and making certain insurance and tax payments on behalf of the borrowers. At
December 31, 1996, the Association was servicing $4.2 million of loans for
others. Loan servicing income was $14,000, $17,000 and $20,000 for the years
ended December 31, 1996, 1995 and 1994, respectively. The Association receives
income in the form of service charges and other fees on loans. For the years
ended December 31, 1996, 1995 and 1994, the Association earned $644,000,
$733,000 and $806,000, respectively, in service charges and other fees.
Mortgage-backed Securities. During 1995, the Association reclassified
all of its mortgage-backed securities as available-for-sale and subsequently
sold them at a gain of $68,000. The sale was the result of the Financial
Accounting Standard Board giving a one time exclusion to companies under the
Statement of Financial Accounting Standard No. 115 ("SFAS"), "Accounting for
Certain Debt and Equity Securities." This exclusion allowed companies to
reclassify their portfolio into the three different categories: trading,
available-for-sale, or held-to-maturity without affecting the remaining
portfolio. The Association may invest in mortgage-backed securities in the
future to offset any significant decrease in demand for one- to four-family
loans.
9
<PAGE>
Loan Approval Procedures and Authority. Loan approval authority has
been granted by the Board of Directors to the Association's Loan Committee. All
mortgage loans must be approved by the Loan Committee. As of December 31, 1996,
any loan application over $400,000 must be approved by the Board of Directors.
Upon receipt of a completed loan application from a prospective
borrower, the Association generally orders a credit report, verifies employment,
income and other information, and, if necessary, obtains additional financial or
credit related information. An appraisal of the real estate used for collateral
is also obtained. All appraisals are performed by licensed or certified third
party appraisers. The Board of Directors annually approves the independent
appraisers used by the Association and reviews the Association's appraisal
policy. When the information is obtained and an appraisal is completed, loans
are presented for approval to the Association's Loan Committee. The Loan
Committee must approve all one-to four-family mortgage loans originated by the
Association.
The Association's policy is to require either title insurance or an
attorney's opinion of title, and hazard insurance on all real estate loans.
Borrowers are required to advance funds together with each payment of principal
and interest to a mortgage escrow account from which the Association makes
disbursements for items such as real estate taxes, hazard insurance premiums and
private mortgage insurance premiums, if required.
Asset Quality
Loan Collection. When a borrower fails to make a required payment on
a loan, the Association takes a number of steps to induce the borrower to cure
the delinquency and restore the loan to a current status. The borrower is sent
a written notice of non-payment when the loan is 15 days past due. In the event
payment is not then received, additional letters and phone calls generally are
made. If the loan is still not brought current and it becomes necessary to take
legal action, which typically occurs after a loan is delinquent 120 days or
more, the Association may commence foreclosure proceedings against the real
property that secures the loan. Decisions as to when to commence foreclosure
actions are made on a case by case basis. If a foreclosure action is instituted
and the loan is not brought current, paid in full, or refinanced within 30 days
of delivery of the notice of default and intent to foreclose, the real property
securing the loan is generally sold at foreclosure or by the Association as soon
thereafter as practicable.
On purchased mortgage loans or loan participations, monthly reports
are received from loan servicers in order to monitor the loan portfolio. Based
upon servicing agreements with the servicers of the loans, the Association
relies upon the servicer to contact delinquent borrowers, collect delinquent
amounts and to initiate foreclosure proceedings, when necessary, all in
accordance with applicable laws, regulations and the terms of the servicing
agreements between the Association and its servicing agents.
10
<PAGE>
Delinquent Loans. At December 31, 1996, 1995 and 1994,
delinquencies in the loan portfolio were as follows:
<TABLE>
<CAPTION>
At December 31, 1996 At December 31, 1995
-------------------------------------------------------------------------------------------------------
60 - 89 Days 90 Days or More 60 - 89 Days 90 Days or More
------------------------ ---------------------- ----------------------- -----------------------
Principal Principal Principal Principal
Number of Balance of Number of Balance of Number of Balance of Number of Balance of
Loans Loans Loans Loans Loans Loans Loans Loans
----- ---- -------- ----- ----- ----- ----- -----
(Dollars in thousands) (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Conventional mortgage loans 4 $ 258 8 $ 400 2 $ 54 7 $ 333
Multi-family loans......... -- -- -- -- -- -- -- --
Consumer loans............. -- -- -- -- -- -- -- --
-------- ----- --- ----- ------ ------ ----- -----
Total loans........... 4 $ 258 8 $ 400 2 $ 54 7 $ 333
======== ===== === ===== ======= ====== ===== =====
Delinquent to total loans.. 0.05% 0.08% 0.01% 0.08%
===== ===== ====== ======
At December 31, 1994
-----------------------------------------------------------------------
60 - 89 Days 90 Days or More
--------------------------- --------------------------
Principal Principal
Number of Balance of Number of Balance of
Loans Loans Loans Loans
----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Conventional mortgage loans 4 $131 15 $726
Multi-family loans......... -- -- -- --
Consumer loans............. -- -- 1 15
--- ---- ---
Total loans........... 4 $131 16 $741
===== ==== === ======
Delinquent loans to total loans 0.04% 0.23%
==== ====
</TABLE>
11
<PAGE>
Non-Performing Loans and Real Estate Owned. The following table sets forth
information regarding non-accrual mortgage and other loans and real estate owned
("REO"). Interest is not accrued on loans past due 90 days or more. The
Association had investments in real estate or in substance foreclosure at
December 31, 1996 of $229,000. During the years ended December 31, 1996, 1995
and 1994, the amounts of interest income that would have been recorded on non-
accrual loans, had they been current, totalled $24,000, $25,000 and $34,000,
respectively. Interest income recorded on non-accrual loans was $22,000,
$16,000 and $22,000 for each of the years ended December 31, 1996, 1995 and
1994, respectively.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual delinquent mortgage loans........ $ 400 $ 333 $ 726 $ 621 $ 469
Non-accrual delinquent other loans........... -- -- 15 63 14
----- ----- ----- ----- -----
Total non-performing loans................. 400 333 741 684 483
Real estate owned............................ 229 178 30 -- 130
----- ----- ----- ----- -----
Total non-performing assets............... $ 629 $ 511 $ 771 $ 684 $ 613
===== ===== ===== ===== =====
Total non-performing loans to total loans.... 0.08% 0.08% 0.23% 0.27% 0.19%
Total non-performing assets to total assets.. 0.10% 0.10% 0.19% 0.18% 0.17%
</TABLE>
Classified Assets. Federal regulations and the Association's policy
require the classification of loans and other assets, such as debt and equity
securities considered to be of lesser quality, as "Substandard," "Doubtful" or
"Loss" assets. An asset is considered "Substandard" if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. "Substandard" assets include those characterized by
the distinct possibility that the institution will sustain some loss if the
deficiencies are not corrected. Assets classified as "Doubtful" have all of the
weaknesses inherent in those classified "Substandard," with the added
characteristic that the weaknesses present make collection or liquidation in
full, on the basis of currently existing facts, conditions, and values, highly
questionable and improbable. Assets classified as "Loss" are those considered
uncollectible and of such little value that their continuance as assets without
the establishment of a specific loss reserve is not warranted. Assets which do
not currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are required to be designated "Special Mention" by management.
At December 31, 1996, classified assets totalled $629,000, or .10% of total
assets, and consisted of eight conventional mortgage loans and two properties
held as real estate owned, all of which were classified as "Substandard".
12
<PAGE>
Allowance for Loan Losses, Investments in Real Estate and Real Estate
Owned. The allowance for loan losses is established and maintained through a
provision for loan losses based on management's evaluation of the risk inherent
in the loan portfolio and the condition of the local economy in the Company's
market area. Such evaluation, which includes a review of all loans on which
full collectibility is not reasonably assured, considers among other matters,
the estimated fair value of the underlying collateral, economic and regulatory
conditions, and other factors that warrant recognition of an adequate loan loss
allowance. Management believes that the allowance for loan losses is adequate
to cover losses inherent in the portfolio as of December 31, 1996. Although
management believes it uses the best information available to make
determinations with respect to the allowance for loan losses, future adjustments
may be necessary if economic and other conditions differ substantially from the
economic and other conditions in the assumptions used in making the initial
determinations, such as a material increase in the balance of the loan
portfolio.
In addition, the OTS and FDIC, as an integral part of their examination
process, periodically review the allowance for loan losses and real estate owned
and investments in real estate valuations. Such agencies may require the
recognition of additions to the allowance or additional writedowns based on
their judgments about information available to them at the time of their
examination. The OTS, in conjunction with the other federal banking agencies,
adopted an interagency policy statement on the allowance for loan and lease
losses. The policy statement provides guidance for financial institutions on
both the responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation guidelines. Generally, the policy
statement recommends that institutions have effective systems and controls to
identify, monitor and address asset quality problems; that management analyze
all significant factors that affect the collectibility of the portfolio in a
reasonable manner; and that management establish acceptable allowance evaluation
processes that meet the objectives set forth in the policy statement. As a
result of the declines in local and regional real estate market values and the
significant losses experienced by many financial institutions, there has been a
greater level of scrutiny by regulatory authorities of the loan portfolios of
financial institutions undertaken as part of the examination of institutions by
the OTS and the FDIC. While management believes that it has established an
adequate allowance for loan losses, there can be no assurance that regulators,
in reviewing the loan portfolio, will not request a material increase at that
time in the allowance for loan losses, thereby negatively affecting the
financial condition and earnings at such time.
13
<PAGE>
The following table sets forth the allowance for loan losses at the dates
indicated.
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------
1996 1995 1994 1993 1992
------------------------------------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
Allowance for loan losses:
Balance at beginning of period........... $ 575 $ 575 $ 598 $ 602 $ 636
Charge-offs:
Conventional mortgages............... -- -- (19) (53) (5)
Residential construction............. -- -- -- -- --
Multi-family......................... -- -- -- (44) (29)
Consumer............................. -- -- -- -- --
----- ----- ------ ------ ------
Total charge-offs.................. -- -- (19) (97) (34)
Total recoveries......................... -- -- 4 -- 975
Provision for (recovery of) loan
losses............................... 90 -- (4) 93 (975)
----- ----- ------ ------ ------
Balance at end of period(1).............. $ 665 $ 575 $ 575 $ 598 $ 602
===== ===== ====== ====== ======
Ratio of net charge-offs during the
period to average loans
outstanding during the period........ --% --% 0.01% 0.04% 0.01%
Ratio of allowance for loan
losses to total loans at the end of
the period........................... 0.12% 0.13% 0.18% 0.23% 0.24%
Ratio of allowance for loan
losses to non-performing assets
at the end of the period............. 1.06x 1.13x 74.58% 87.43% 98.21%
</TABLE>
- --------------------------
(1) The total amount of the allowance for loan losses for each of the periods
shown was allocated to mortgage loans. At the end of each reported period,
mortgage loans represented in excess of 99.5% of total loans.
Investment Activities
As a member of the FHLB System, the Association is required to maintain
liquid assets at minimum levels which vary from time to time. The Association
increases or decreases its liquid investments depending on the availability of
funds, the comparative yields on liquid investments in relation to the return on
loans and in response to its interest rate risk management. To meet liquidity
obligations, federally chartered savings institutions have authority to invest
in various types of assets, including U.S. Treasury obligations, securities of
various federal agencies, mortgage-backed and mortgage-related securities,
certain certificates of deposit of insured banks and savings institutions,
certain bankers acceptances, repurchase agreements, loans of federal funds, and,
subject to certain limits, corporate securities,
14
<PAGE>
commercial paper and mutual funds. The Association's liquid investments
primarily consist of federal funds sold, U.S. Government securities, federal
agency securities and interest-bearing deposits. Historically, the Association
has maintained its liquid assets at levels well above the minimum regulatory
requirements. At December 31, 1996, $106.7 million, or 16.3%, of the
Association's total assets were invested in short-term investments.
The Company's Investment Committee, which is appointed by the Chief
Executive Officer, formulates the investment policy of the Company. The
Company's Investment Committee reports all purchases and sales of investments to
the Board of Directors. The policy of the Association is to invest funds among
various categories of investments and maturities to meet the day-to-day,
cyclical and long-term changes in assets and liabilities. In establishing its
investment strategies, the Company considers its cash position, the condition of
its loans, the stability of deposits, its capital position, its interest rate
risk and other factors.
Investment Securities. OTS guidelines regarding investment portfolio
policy and accounting require insured institutions to categorize securities and
certain other assets as held for "investment," "sale," or "trading." The
Association's investment policy provides for "held for investment" and
"available for sale" portfolios. Although the Association's investment policy
assumes that all investments and loans will qualify to be held-to-maturity, the
policy allows for the sale of investments in certain specific instances, such as
when the quality of an asset deteriorates, or when regulatory changes require
that an asset be disposed. Currently, all of the Association's investment
securities are classified as held-to-maturity. Management has the intent, and
believes that the Association will be able to hold such investment securities
until maturity. The Association's investment securities portfolio is accounted
for on an amortized cost basis. At December 31, 1996, the Association had total
investments of $19.0 million, of which $15.0 million consisted of U.S.
Government Treasury securities. The investment in such securities have maximum
terms to maturity of up to eight years. In addition, such securities have a
zero risk weight for risk-based capital purposes thereby corresponding with
management's emphasis on maintaining quality assets and a strong capital
position.
15
<PAGE>
The following table sets forth certain information regarding the carrying
and market values of the portfolio of investment securities at the dates
indicated:
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------
1996 1995 1994
----------------------------------------- -------------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
-------- ------- -------- ------ -------- ------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>>
Investment securities:
U.S. Treasury securities.. $14,960 $15,384 $19,949 $20,927 $44,711 $44,033
Other investments......... 4 45 4 41 4 22
FHLB Stock................ 3,999 3,999 3,009 3,009 2,409 2,409
------- ------- ------- ------- ------- -------
Total investments....... $18,963 $19,428 $22,962 $23,977 $47,124 $46,464
======= ======= ======= ======= ======= =======
</TABLE>
The following table sets forth the carrying values, market values and
average yields for the Association's investment portfolio by maturity, call
date or repricing date, whichever is first, at December 31, 1996.
<TABLE>
<CAPTION>
One Year or Less One to Five Years Five to Ten Years Total Securities
--------------------- ------------------------ ---------------------- -------------------------------
Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Market Average
Value Yield Value Yield Value Yield Value Value Yield
-------- -------- -------- -------- -------- -------- -------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Securities:
U.S. Treasury securities... $4,999 6.54% $4,989 6.98% $4,972 7.36% $14,960 $15,384 6.96%
</TABLE>
16
<PAGE>
Sources of Funds
General. The lending and investment activities are predominantly funded by
savings deposits, borrowings, interest and principal payments on loans and other
investments and loan origination fees.
Deposits. Deposits serve as the predominant source of funds. The
Association offers interest rates on deposits that are usually among the highest
rates offered in the Greater Pittsburgh market area to maintain a strong
depositor base. Deposits consist of savings and club accounts, interest-bearing
and non-interest-bearing demand deposit accounts, money market deposit accounts
and certificates of deposit. The Association relies on its competitive pricing
policies and customer service to maintain deposit growth. In addition, the
Association has sought to increase its deposit base by emphasizing certificates
of deposit with terms ranging from three months to 10 years. The Association's
policy of offering aggressively priced deposit products has produced an overall
increase in total deposits of 48.7%, from $325.4 million at December 31, 1992 to
$483.9 million at December 31, 1996. The flow of deposits is influenced
significantly by general economic conditions, changes in money market and
prevailing interest rates and competition.
The following table presents the deposit activity for the periods
indicated.
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1996 1995 1994
---------- -------- ----------
(In thousands)
<S> <C> <C> <C>
Deposits............................... $805,469 $730,809 $533,016
Withdrawals............................ 725,862 714,030 572,272
-------- -------- --------
Net increase before interest credited.. 79,607 16,779 5,744
Interest credited...................... 12,923 10,951 8,891
-------- -------- --------
Net increase in deposits............... $ 92,530 $ 27,730 $ 14,635
======== ======== ========
</TABLE>
The following table indicates the amount of the certificates of deposit of
$100,000 or more by the time remaining until maturity as of December 31, 1996.
<TABLE>
<CAPTION>
Amount
---------------
(In thousands)
Maturity Period:
<S> <C>
Three months or less........... $ 6,204
Over three through six months.. 4,153
Over six through 12 months..... 10,720
Over 12 months................. 15,230
-------
Total....................... $36,307
=======
</TABLE>
17
<PAGE>
The following table sets forth the distribution of the average deposit
accounts and borrowings for the periods indicated and the weighted average
nominal interest rates on each category of deposits presented.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------ -------------------------------- ---------------------------------
Weighted Weighted Weighted
Average Average Average
Average Nominal Average Nominal Average Nominal
Balance Interest Rate Balance Interest Rate Balance Interest Rate
--------- --------- -------- --------- ---------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Money market and NOW
deposits.................. $ 42,088 $ 1,040 2.47% $ 40,388 $ 1,069 2.65% $ 43,124 $ 1,087 2.52%
Savings deposits............ 81,715 2,314 2.83 85,020 2,371 2.79 113,770 3,406 2.99
Certificates of deposit..... 323,199 18,504 5.73 256,350 14,992 5.85 202,422 10,238 5.06
Borrowings.................. 5,833 191 3.27 -- -- -- -- -- --
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities........... $452,835 $22,409 4.87% $381,758 $18,432 4.83% $359,316 $14,732 4.10%
======== ======= ======== ======= ======== =======
</TABLE>
18
<PAGE>
The following table presents the amount of certificate accounts outstanding
based upon original contractual periods to maturity, at December 31, 1996, and
based upon contracted rates, at December 31, 1995 and 1994.
<TABLE>
<CAPTION>
Period to Maturity from December 31, 1996 At December 31,
-------------------------------------------------------------------------- -----------------
Less One to Two to Three to Four to Five to Total
Than One Two Three Four Five Ten December
Year Years Years Years Years Years 31, 1996 1995 1994
-------- -------- ------- --------- ------- ------- -------- -------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Certificate Accounts:
3.00% to 5.50%....... $50,794 $ 46,509 $ 4,272 $ 7,263 $205 $ 4,314 $113,357 $118,738 $140,249
5.501% to 6.00%...... 11,247 71,765 11,206 20,237 117 7,396 121,968 60,213 27,965
6.001% to 6.50%...... -- 43,298 12,672 23,197 183 19,018 98,368 60,420 32,677
6.501% to 7.50%...... -- -- 1,988 13,730 150 14,992 30,860 30,460 13,392
7.501% to 8.50%...... -- -- -- -- -- 3,630 3,630 5,259 7,272
8.501% to 9.50%...... -- -- -- -- -- 4,345 4,345 4,579 5,489
9.501% to 10.50%..... -- -- -- -- -- 266 266 572 1,476
10.501% to 11.50%.... -- -- -- -- -- -- -- -- 223
11.501% to 12.50%.... -- -- -- -- -- -- -- -- 35
--------- -------- ------- ------- ---- ------- -------- -------- --------
$62,041 $161,572 $30,138 $64,427 $655 $53,961 $372,794 $280,241 $228,778
========= ======== ======= ======= ==== ======= ======== ======== ========
</TABLE>
Borrowings
During 1996, the Association borrowed $70.0 million. These borrowings have
a contractual maturity of five years and carry an interest rate based on the 3-
month London Interbank offered rate ("LIBOR rate") adjusted quarterly, The
interest rate on these borrowings was 4.92% at December 31, 1996. The
borrowings are secured by the assets of the Comany. Currently the funds are
invested in federal funds sold, but will be used to purchase adjustable
mortgage-backed securities. At December 31, 1996, the Association had committed
to purchase $32.8 million in adjustable mortgage-backed securities.
Subsidiary Activities
The Association does not maintain any subsidiaries.
REGULATION AND SUPERVISION
General
The Company, as a savings and loan holding company, is required to file
certain reports with, and otherwise comply with the rules and regulations of the
OTS under the Home Owners' Loan Act, as amended (the "HOLA"). In addition, the
activities of savings institutions, such as the Association, are governed by the
HOLA and the Federal Deposit Insurance Act ("FDI Act").
19
<PAGE>
The Association is subject to extensive regulation, examination and
supervision by the OTS, as its primary federal regulator, and the FDIC, as the
deposit insurer. The Association is a member of the FHLB System and its deposit
accounts are insured up to applicable limits by the SAIF managed by the FDIC.
The Association must file reports with the OTS and the FDIC concerning its
activities and financial condition in addition to obtaining regulatory approvals
prior to entering into certain transactions such as mergers with, or
acquisitions of, other savings institutions. The OTS and/or the FDIC conduct
periodic examinations to test the Association's safety and soundness and
compliance with various regulatory requirements. This regulation and
supervision establishes a comprehensive framework of activities in which an
institution can engage and is intended primarily for the protection of the
insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes. Any change in such regulatory
requirements and policies, whether by the OTS, the FDIC or the United States
Congress, could have a material adverse impact on the Company, the Association
and their operations. Certain of the regulatory requirements applicable to the
Association and to the Company are referred to below or elsewhere herein. The
description of statutory provisions and regulations applicable to savings
institutions and their holding companies set forth in this Form 10-K does not
purport to be a complete description of such statutes and regulations and their
effects on the Association and the Company.
Holding Company Regulation
The Company is a non-diversified unitary savings and loan holding company
within the meaning of the HOLA. As a unitary savings and loan holding company,
the Company generally is not restricted under existing laws as to the types of
business activities in which it may engage, provided that the Association
continues to be a qualified thrift lender ("QTL"). See "Federal Savings
Institution Regulation - QTL Test." Upon any non-supervisory acquisition by the
Company of another savings institution or savings bank that meets the QTL test
and is deemed to be a savings institution by the OTS, the Company would become a
multiple savings and loan holding company (if the acquired institution is held
as a separate subsidiary) and would be subject to extensive limitations on the
types of business activities in which it could engage. The HOLA limits the
activities of a multiple savings and loan holding company and its non-insured
institution subsidiaries primarily to activities permissible for bank holding
companies under Section 4(c)(8) of the Bank Holding Company Act ("BHC Act"),
subject to the prior approval of the OTS, and certain activities authorized by
OTS regulation.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution or holding company thereof,
without prior written approval of the OTS; acquiring or retaining, with certain
exceptions, more than 5% of a non-subsidiary company engaged in activities other
than those permitted by the HOLA; or acquiring or retaining control of a
depository institution that is not insured by the FDIC. In evaluating
applications by holding companies to acquire savings institutions, the OTS must
consider the financial and managerial
20
<PAGE>
resources and future prospects of the company and institution involved, the
effect of the acquisition on the risk to the insurance funds, the convenience
and needs of the community and competitive factors.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies and (ii) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions. The
states vary in the extent to which they permit interstate savings and loan
holding company acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, HOLA does prescribe such restrictions on subsidiary
savings institutions as described below. The Association must notify the OTS 30
days before declaring any dividend to the Company. In addition, the financial
impact of a holding company on its subsidiary institution is a matter that is
evaluated by the OTS and the agency has authority to order cessation of
activities or divestiture of subsidiaries deemed to pose a threat to the safety
and soundness of the institution.
Federal Savings Institution Regulation
Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 3% tier I capital (to total assets) ratio and an 8% total capital (to
risk-weighted assets) ratio. In addition, the prompt corrective action
standards discussed below also establish, in effect, a minimum 2% tangible
capital standard, a 4% leverage tier I capital ratio (3% for institutions
receiving the highest rating on the CAMELS financial institution rating system),
and, together with the total capital standard itself, a 4% tier I risk-based
capital standard. Tier I is defined as common stockholders' equity (including
retained earnings), certain noncumulative perpetual preferred stock and related
surplus, and minority interests in equity accounts of consolidated subsidiaries
less intangibles other than certain purchased mortgage servicing rights and
credit card relationships. The OTS regulations also require that, in meeting
the tangible, tier I and total capital standards, institutions must generally
deduct investments in and loans to subsidiaries engaged in activities not
permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of tier I (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of 4% and 8%, respectively.
In determining the amount of risk-weighted assets, all assets, including certain
off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%,
as assigned by the OTS capital regulation based on the risks OTS believes are
inherent in the type of asset. The components of tier I (core) capital are
equivalent to those discussed earlier. The components of supplementary capital
currently include cumulative preferred stock, long-term perpetual preferred
stock, mandatory convertible securities, subordinated debt and
21
<PAGE>
intermediate preferred stock and the allowance for loan and lease losses limited
to a maximum of 1.25% of risk-weighted assets. Overall, the amount of
supplementary capital included as part of total capital cannot exceed 100% of
core capital.
The OTS regulatory capital requirements also incorporate an interest rate
risk component. Savings institutions with "above normal" interest rate risk
exposure are subject to a deduction from total capital for purposes of
calculating their risk-based capital requirements. A savings institution's
interest rate risk is measured by the decline in the net portfolio value of its
assets (i.e., the difference between incoming and outgoing discounted cash flows
from assets, liabilities and off-balance sheet contracts) that would result from
a hypothetical 200 basis point increase or decrease in market interest rates
divided by the estimated economic value of the institution's assets. In
calculating its total capital under the risk-based capital rule, a savings
institution whose measured interest rate risk exposure exceeds 2% must deduct an
amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
institution's assets. The Director of the OTS may waive or defer a savings
institution's interest rate risk component on a case-by-case basis. A savings
institution with assets of less than $300 million and risk-based capital ratios
in excess of 12% is not subject to the interest rate risk component, unless the
OTS determines otherwise. For the present time, the OTS has deferred
implementation of the interest rate risk component. At December 31, 1996, the
Association met each of its capital requirements, in each case on a fully
phased-in basis and it is anticipated that the Association will not be subject
to the interest rate risk component.
The following table presents the Association's capital position at December
31, 1996 relative to fully phased-in regulatory requirements.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt
Adequacy Correction Action
Actual Purposes Provisions
--------------- -------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital (to risk-weighted assets)... $80,102 27.51% $23,298 8.00% $29,123 10.00%
Tier I Capital (to risk-weighted assets).. 79,451 27.28% N/A N/A 17,474 6.00%
Tier I Capital (to total assets).......... 79,451 12.16% 19,599 3.00% 32,816 5.00%
Tangible Capital.......................... 79,451 12.16% 9,800 1.50% N/A N/A
</TABLE>
Liquidation Account
In accordance with OTS conversion regulations, a liquidation account was
established in an amount equal to the retained earnings of the Association as of
June 30, 1995, which approximated $37.4 million. In the unlikely event of
liquidation of the Association, eligible accountholders would be entitled to
receive distributions of any assets remaining after payment of all creditors'
claims, but before any distributions are made to the Association's stockholders,
equal to their proportionate interests at that time in the liquidation account.
22
<PAGE>
Prompt Corrective Regulatory Action. Under the OTS prompt corrective action
regulations, the OTS is required to take certain supervisory actions against
undercapitalized institutions, the severity of which depends upon the
institution's degree of undercapitalization. Generally, a savings institution
is considered "well capitalized" if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of tier I capital to risk-weighted assets is
at least 6%, its ratio of tier I to total assets is at least 5%, and it is not
subject to any order or directive by the OTS to meet a specific capital level.
A savings institution generally is considered "adequately capitalized" if its
ratio of total capital to risk-weighted assets is at least 8%, its ratio of tier
I (core) capital to risk-weighted assets is at least 4%, and its ratio of tier 1
capital to total assets is at least 4% (3% if the institution receives the
highest CAMELS rating). A savings institution that has a ratio of total capital
to risk-weighted assets of less than 8%, a ratio of tier I capital to risk-
weighted assets of less than 4% or a ratio of tier 1 capital to total assets of
less than 4% (3% or less for institutions with the highest examination rating)
is considered to be "undercapitalized." A savings institution that has a total
capital ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage
ratio that is less than 3% is considered to be "significantly undercapitalized"
and a savings institution that has a tangible capital to assets ratio equal to
or less than 2% is deemed to be "critically undercapitalized." Subject to a
narrow exception, the banking regulator is required to appoint a receiver or
conservator for an institution that is "critically undercapitalized." The
regulation also provides that a capital restoration plan must be filed with the
OTS within 45 days of the date a savings institution receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Compliance with the plan must be guaranteed by any parent
holding company. In addition, numerous mandatory supervisory actions become
immediately applicable to an undercapitalized institution, including, but not
limited to, increased monitoring by regulators and restrictions on growth,
capital distributions and expansion. The OTS could also take any one of a
number of discretionary supervisory actions, including the issuance of a capital
directive and the replacement of senior executive officers and directors.
Insurance of Deposit Accounts. Deposits of the Association are presently
insured by the SAIF. Both the SAIF and the Bank Insurance Fund ("BIF"), (the
deposit insurance fund that covers most commercial bank deposits), are
statutorily required to be recapitalized to a 1.25% of insured reserve deposits
ratio. Until recently, members of the SAIF and BIF were paying average deposit
insurance premiums of between 24 and 25 basis points. The BIF met the required
reserve in 1995, whereas the SAIF was not expected to meet or exceed the
required level until 2002 at the earliest. This situation was primarily due to
the statutory requirement that SAIF members make payments on bonds issued in the
late 1980's by the Financing Corporation ("FICO") to recapitalize the
predecessor to the SAIF.
In view of the BIF's achieving the 1.25% ratio, the FDIC ultimately adopted
a new assessment rate schedule of from 0 to 27 basis points under which 92% of
BIF members paid an annual premium of only $2,000. With respect to SAIF member
institutions, the FDIC adopted a final rule retaining the previously existing
assessment rate schedule applicable to SAIF member institutions of 23 to 31
basis points. As long as the premium differential continued, it may have had
adverse consequences for SAIF members, including reduced earnings and an
23
<PAGE>
impaired ability to raise funds in the capital markets. In addition, SAIF
members, such as the Association were placed at a substantial competitive
disadvantage to BIF members with respect to pricing of loans and deposits and
the ability to achieve lower operating costs.
On September 30, 1996, the President signed into law the Deposit Insurance
Funds Act of 1996 (the "Funds Act") which, among other things, imposed a special
one-time assessment on SAIF member institutions, including the Association, to
recapitalize the SAIF. As required by the Funds Act, the FDIC imposed a special
assessment of 65.7 basis points on SAIF assessable deposits held as of March 31,
1995, payable November 27, 1996 (the "SAIF Special Assessment"). The SAIF
Special Assessment was recognized by the Association as an expense in the
quarter ended September 30, 1996 and is generally tax deductible. The SAIF
Special Assessment recorded by the Association amounted to $2.5 million on a
pre-tax basis and $1.5 million on an after-tax basis.
The Funds Act also spreads the obligations for payment of the FICO bonds
across all SAIF and BIF members. Beginning on January 1, 1997, BIF deposits
will be assessed for FICO payment of 1.3 basis points, while SAIF deposits will
pay 6.48 basis points. Full pro rata sharing of the FICO payments between BIF
and SAIF members will occur on the earlier of January 1, 2000 or the date the
BIF and SAIF are merged. The Funds Act specifies that the BIF and SAIF will be
merged on January 1, 1999, provided no savings associations remain as of that
time.
As a result of the Funds Act, the FDIC recently voted to effectively lower
SAIF assessments to 0 to 27 basis points as of January 1, 1997, a range
comparable to that of BIF members. However, SAIF members will continue to make
the FICO payments described above. The FDIC also lowered the SAIF assessment
schedule for the fourth quarter of 1996 to 18 to 27 basis points. Management
cannot predict the level of FDIC insurance assessments on an on-going basis,
whether the savings association charter will be eliminated or whether the BIF
and SAIF will eventually be merged.
The Association's assessment rate for fiscal 1996 was 23 basis points and
the premium paid for this period was $945,000. A significant increase in SAIF
insurance premiums would likely have an adverse effect on the operating expenses
and results of operations of the Association.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Association does not know of any practice, condition
or violation that might lead to termination of deposit insurance.
Thrift Rechartering Legislation. The Funds Act provides that the BIF and
SAIF will merge on January 1, 1999 if there are no more savings associations as
of that date. That legislation also requires that the Department of Treasury
submit a report to Congress by March 31, 1997 that makes recommendations
regarding a common financial institutions charter,
24
<PAGE>
including whether the separate charters for thrifts and banks should be
abolished. Various proposals to eliminate the federal thrift charter, create a
uniform financial institutions charter and abolish the OTS were introduced in
Congress. The bills would require federal savings institutions to convert to a
national bank or some type of state charter by a specified date (January 1, 1998
in one bill, June 30, 1998 in the other) or they would automatically become
national banks. Converted federal thrifts would generally be required to
conform their activities to those permitted for the charter selected and
divestiture of nonconforming assets would be required over a two year period,
subject to two possible one year extensions. State chartered thrifts would
become subject to the same federal regulation as applies to state commercial
banks. Holding companies for savings institutions would become subject to the
same regulation as holding companies that control commercial banks with a
limited grandfather provision for unitary savings and loan holding company
activities. The Association is unable to predict whether such legislation would
be enacted and, if so, the extent to which the legislation would restrict or
disrupt its operations or whether the BIF and SAIF funds will eventually merge.
Loans to One Borrower. Under the HOLA, savings institutions are generally
subject to the limits on loans to one borrower applicable to national banks.
Generally, savings institutions may not make a loan or extend credit to a single
or related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if such loan is secured by readily-marketable collateral, which is
defined to include certain financial instruments and bullion. At December 31,
1996, the Association's limit on loans to one borrower was $7.0 million. At
December 31, 1996, the Association's largest aggregate outstanding balance of
loans to one borrower was $452,000.
QTL Test. The HOLA requires savings institutions to meet a QTL test. Under
the QTL test, a savings and loan association is required to maintain at least
65% of its "portfolio assets" (total assets less: (i) specified liquid assets up
to 20% of total assets; (ii) intangibles, including goodwill; and (iii) the
value of property used to conduct business) in certain "qualified thrift
investments" (primarily residential mortgages and related investments, including
certain mortgage-backed securities) in at least 9 months out of each 12 month
period.
A savings institution that fails the QTL test is subject to certain
operating restrictions and may be required to convert to a bank charter. As of
December 31, 1996, the Association maintained 99.9% of its portfolio assets in
qualified thrift investments and, therefore, met the QTL test.
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution that exceeds
all fully phased-in capital requirements before and after a proposed capital
distribution ("Tier 1 Association") and has not been advised by the OTS that it
is in need of more than normal supervision, could, after prior notice but
without obtaining approval of the OTS, make capital distributions during a
calendar year equal to the greater of (i) 100% of its net earnings to date
during the calendar year
25
<PAGE>
plus the amount that would reduce by one-half its "surplus capital ratio" (the
excess capital over its fully phased-in capital requirements) at the beginning
of the calendar year or (ii) 75% of its net income for the previous four
quarters. Any additional capital distributions would require prior regulatory
approval. In the event the Association's capital fell below its regulatory
requirements or the OTS notified it that it was in need of more than normal
supervision, the Association's ability to make capital distributions could be
restricted. In addition, the OTS could prohibit a proposed capital distribution
by any institution, which would otherwise be permitted by the regulation, if the
OTS determines that such distribution would constitute an unsafe or unsound
practice. In December 1994, the OTS proposed amendments to its capital
distribution regulation that would generally authorize the payment of capital
distributions without OTS approval provided that the payment does not cause the
institution to be undercapitalized within the meaning of the prompt corrective
action regulation. However, institutions in a holding company structure would
still have a prior notice requirement. At December 31, 1996, the Association
was a Tier 1 (Association).
Liquidity. The Association is required to maintain an average daily balance
of specified liquid assets equal to a monthly average of not less than a
specified percentage of its net withdrawable deposit accounts plus short-term
borrowings. This liquidity requirement is currently 5% but may be changed from
time to time by the OTS to any amount within the range of 4% to 10% depending
upon economic conditions and the savings flows of member institutions. OTS
regulations also require each member savings institution to maintain an average
daily balance of short-term liquid assets at a specified percentage (currently
1%) of the total of its net withdrawable deposit accounts and borrowings payable
in one year or less. Monetary penalties may be imposed for failure to meet
these liquidity requirements. The Association's liquidity and short-term
liquidity ratios for December 31, 1996 were 11.5% and 10.3% respectively, which
exceeded the applicable requirements. The Association has never been subject to
monetary penalties for failure to meet its liquidity requirements.
Assessments. Savings institutions are required to pay assessments to the
OTS to fund the agency's operations. The general assessments, paid on a semi-
annual basis, are computed upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the Association's latest
quarterly thrift financial report. The assessments paid by the Association for
the fiscal year ended December 31, 1996 totalled $113,000.
Branching. OTS regulations permit nationwide branching by federally
chartered savings institutions to the extent allowed by federal statue. This
permits federal savings institutions to establish interstate networks and to
geographically diversify their loan portfolios and lines of business. The OTS
authority preempts any state law purporting to regulate branching by federal
savings institutions.
Transactions with Related Parties. The Association's authority to engage in
transactions with related parties or "affiliates" (e.g.., any company that
controls or is under common control with an institution, including the Company
and its non-savings institution subsidiaries) is limited by Sections 23A and 23B
of the Federal Reserve Act ("FRA"). Section 23A limits the aggregate amount of
covered transactions with any individual affiliate to 10% of the capital and
surplus
26
<PAGE>
of the savings institution. The aggregate amount of covered transactions with
all affiliates is limited to 20% of the savings institution's capital and
surplus. Certain transactions with affiliates are required to be secured by
collateral in an amount and of a type described in Section 23A and the purchase
of low quality assets from affiliates is generally prohibited. Section 23B
generally provides that certain transactions with affiliates, including loans
and asset purchases, must be on terms and under circumstances, including credit
standards, that are substantially the same or at least as favorable to the
institution as those prevailing at the time for comparable transactions with
non-affiliated companies. In addition, savings institutions are prohibited from
lending to any affiliate that is engaged in activities that are not permissible
for savings & loan holding companies and no savings institution may purchase the
securities of any affiliate other than a subsidiary.
The Association's authority to extend credit to executive officers,
directors and 10% shareholders ("insiders"), as well as entities such persons
control, is governed by Sections 22(g) and 22(h) of the FRA and Regulation O
thereunder. Among other things, such loans are required to be made on terms
substantially the same as those offered to unaffiliated individuals and to not
involve more than the normal risk of repayment. Recent legislation created an
exception for loans made pursuant to a benefit or compensation program that is
widely available to all employees of the institution and does not give
preference to insiders over other employees. Regulation O also places
individual and aggregate limits on the amount of loans the Association may make
to insiders based, in part, on the Association's capital position and requires
certain board approval procedures to be followed.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring actions
against the institution and all institution-affiliated parties, including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors to institution of receivership, conservatorship or termination of
deposit insurance. Civil penalties cover a wide range of violations and can
amount to $25,000 per day, or even $1 million per day in especially egregious
cases. Under the FDI Act, the FDIC has the authority to recommend to the
Director of the OTS enforcement action to be taken with respect to a particular
savings institution. If action is not taken by the Director, the FDIC has
authority to take such action under certain circumstances. Federal law also
establishes criminal penalties for certain violations.
Standards for Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") and a final rule to implement safety and soundness standards
required under the FDI Act. The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes impaired. The
standards set forth in the Guidelines address internal controls and information
systems; internal audit system; credit underwriting; loan documentation;
interest rate risk exposure; asset growth; asset quality, earnings and
compensation, fees and benefits. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
Guidelines, the agency may require the institution to submit to the agency an
acceptable plan to
27
<PAGE>
achieve compliance with the standard, as required by the FDI Act. The final
rule establishes deadlines for the submission and review of such safety and
soundness compliance plans when such plans are required.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally required that reserves be maintained against aggregate
transaction accounts as follows: for accounts aggregating $49.3 million or less
(subject to adjustment by the Federal Reserve Board) the reserve requirement is
3%; and for accounts aggregating greater than $49.3 million, the reserve
requirement is $1.5 million plus 10% (subject to adjustment by the Federal
Reserve Board between 8% and 14%) against that portion of total transaction
accounts in excess of $49.3 million. The first $4.4 million of otherwise
reservable balances (subject to adjustments by the Federal Reserve Board) are
exempted from the reserve requirements. The Association is in compliance with
the foregoing requirements. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements imposed by the OTS.
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company and the Association report their income on a
unconsolidated basis and the accrual method of accounting, and are subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Association's reserve for bad debts
discussed below. The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to the Association or the Company. The Association has not been
audited by the IRS during the last five years. For its 1996 taxable year, the
Association is subject to a maximum federal income tax rate of 34%.
Bad Debt Reserves. For fiscal years beginning prior to December 31, 1995,
thrift institutions which qualified under certain definitional tests and other
conditions of the Internal Revenue Code of 1986 (the "Code") were permitted to
use certain favorable provisions to calculate their deductions from taxable
income for annual additions to their bad debt reserve. A reserve could be
established for bad debts on qualifying real property loans (generally secured
by interests in real property improved or to be improved) under (i) the
Percentage of Taxable Income Method (the "PTI Method") or (ii) the Experience
Method. The reserve for non-qualifying loans was computed using the Experience
Method.
The Small Business Job Protection Act of 1996 (the "1996 Act"), which was
enacted on August 20, 1996, requires savings institutions to recapture (i.e.,
take into income) certain portions of their accumulated bad debt reserves. The
1996 Act repeals the reserve method of accounting for bad debts effective for
tax years beginning after 1995. Thrift institutions that
28
<PAGE>
would be treated as small banks are allowed to utilize the Experience Method
applicable to such institutions, while thrift institutions that are treated as
large banks (those generally exceeding $500 million in assets) are required to
use only the specific charge-off method. As of December 31, 1996, the
Association had assets of $653.3 million and is therefore required to use only
the specific charge-off method. For the years prior to 1995, the Association
used the PTI method to calculate its bad debt reserves. Use of the PTI Method
had the effect of reducing the marginal rate of federal tax on the Association's
income to 31.28%, exclusive of any minimum or environmental tax, as compared to
the maximum corporate federal income tax rate of 35%.
A thrift institution required to change its method of computing reserves for
bad debts will treat such change as a change in method of accounting, initiated
by the taxpayer, and having been made with the consent of the IRS. Any Section
481(a) adjustment required to be taken into income with respect to such change
generally will be taken into income ratably over a six-taxable period beginning
after 1995, subject to the residential loan requirement.
Under the residential loan requirement provision, the recapture required by
the 1996 Act will be suspended for each of two successive taxable years,
beginning with the Association's current taxable year, in which the Association
originates a minimum of certain residential loans based upon the average of the
principal amounts of such loans made by the Association during its six taxable
years preceding its current taxable year.
Under the 1996 Act, for its current and future taxable years, the
Association is not permitted to make additions to its tax bad debt reserves. In
addition, the Association is required to recapture (i.e., take into income) over
a six year period the excess of the balance of its tax bad debt reserves as of
December 31, 1995 over the balance of such reserves as of December 31, 1987. As
a result of such recapture, the Association will incur an additional tax
liability of approximately $1.2 million.
Distributions. Under the 1996 Act, if the Association makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Association's unrecaptured tax bad debt reserves (including
the balance of its reserves as of December 31, 1987) to the extent thereof, and
then from the Association's supplemental reserve for losses on loans, to the
extent thereof, and an amount based on the amount distributed (but not in excess
of the amount of such reserves) will be included in the Association's income.
Non-dividend distributions include distributions in excess of the Association's
current and accumulated earnings and profits, as calculated for federal income
tax purposes, distributions in redemption of stock, and distributions in partial
or complete liquidation. Dividends paid out of the Association's current or
accumulated earnings and profits will not be so included in the Association's
income.
The amount of additional taxable income triggered by a non-dividend is an
amount that, when reduced by the tax attributable to the income, is equal to the
amount of the distribution. Thus, if the Association makes a non-dividend
distribution to the Company, approximately one and one-half times the amount of
such distribution (but not in excess of the amount of such
29
<PAGE>
reserves) would be includable in income for federal income tax purposes,
assuming a 35% federal corporate income tax rate. The Association does not
intend to pay dividends that would result in a recapture of any portion of its
bad debt reserves.
SAIF Recapitalization Assessment. The Funds Act levies a 65.7 cent fee on
every $100 of thrift deposits held on March 31, 1995. For financial statement
purposes, this assessment must be reported as an expense for the quarter ended
September 30, 1996. The Funds Act includes a provision which states that the
amount of any special assessment paid to capitalize SAIF under this legislation
is deductible under Section 162 of the Code in the year of payment.
Corporate Alternative Minimum Tax. The Internal Revenue Code (the "Code")
imposes a tax on alternative minimum taxable income ("AMTI") at a rate of 20%.
The excess of the tax bad debt reserve deduction using the percentage of taxable
income method over the deduction that would have been allowable under the
experience method is treated as a preference item for purposes of computing the
AMTI. Only 90% of AMTI can be offset by net operating loss carryovers. AMTI is
increased by an amount equal to 75% of the amount by which the Association's
adjusted current earnings exceeds its AMTI (determined without regard to this
preference and prior to reduction for net operating losses). In addition, for
taxable years beginning after December 31, 1986, an environmental tax of .12% of
the excess of AMTI (with certain modifications) over $2.0 million is imposed on
corporations, including the Association, whether or not an Alternative Minimum
Tax ("AMT") is paid. The Association does not expect to be subject to AMT, but
is subject to the environmental tax liability.
Dividends Received Deduction and Other Matters. The Company may exclude
from its income 100% of dividends received from the Association as a member of
the same affiliated group of corporations. The corporate dividends received
deduction is generally 70% in the case of dividends received from unaffiliated
corporations with which the Company and the Association will not file a
consolidated tax return, except that if the Company owns more than 20% of the
stock of a corporation distributing a dividend, 80% of any dividends received
may be deducted.
State and Local Taxation
The Association is subject to the Mutual Thrift Institutions Tax of the
Commonwealth of Pennsylvania based on the Association's financial net income
determined in accordance with generally accepted accounting principles with
certain adjustments. The tax rate under the Mutual Thrift Institutions Tax is
11.5%. Interest on state and federal obligations is excluded from net income. An
allocable portion of net interest expense incurred to carry the obligations is
disallowed as a deduction. Three year carryforwards of losses are allowed. The
Company is subject to the Capital Stock Tax of the Commonwealth of Pennsylvania.
Personnel
As of December 31, 1996, the Association had 52 full-time employees and 7
part-time employees. The employees are not represented by a collective
bargaining unit, and the Association considers its relationship with its
employees to be good.
30
<PAGE>
Item 2. Properties
The Company conducts its business by maintaining an office at 300 Delaware
Avenue, Suite 1704, Wilmington, Delaware 19801. The Association conducts its
business through its main office located at 532 Lincoln Avenue, Pittsburgh,
Pennsylvania 15202 and six full-service branch offices, all of which are located
in Allegheny County. Four of the Association's branch offices are leased. Loan
originations are processed at the administrative office. The Association
believes that its current facilities are adequate to meet the present and
immediately foreseeable needs of the Association and the Company. During 1996,
the building in which the Association's downtown Pittsburgh branch was located
was sold. The branch was moved to a new location in the same area.
Item 3. Legal Proceedings
Neither the Company nor its subsidiary are involved in any pending legal
proceedings other than routine legal proceedings occurring in the ordinary
course of business, which in the aggregate involve amounts which are believed by
management to be immaterial to the financial condition and results of the
operations of the Association.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Information relating to the market for Registrant's common equity and
related stockholder matters appears under "Shareholder Information" on page 46
in the Registrant's 1996 Annual Report to Stockholders and is incorporated
herein by reference. Information relating to the return of capital for
Registrant's appears under "Notes to Consolidated Financial Statements Years
Ended December 31, 1996, 1996 and 1994" on page 26 in the Registrant's 1996
Annual Report to stockholders and is incorporated herein by reference.
Item 6. Selected Financial Data
The above-captioned information appears under "Selected Financial and Other
Data of the Company" in the Registrant's 1996 Annual Report to Stockholders on
pages 2 and 3 is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The above-captioned information appears under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Registrant's
1996 Annual Report to Stockholders on pages 8 through 20 and is incorporated
herein by reference.
31
<PAGE>
Item 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements of First Bell Bancorp, Inc. and its
subsidiary, together with the report thereon by Deloitte & Touche LLP appears in
the Registrant's 1996 Annual Report to Stockholders on pages 21 through 43 and
are incorporated herein by reference.
Item 9. Change in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information relating to Directors and Executive Officers of the
Registrant is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 28, 1997,
at pages 5 and 6.
Item 11. Executive Compensation
The information relating to directors' compensation and executives'
compensation is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 28, 1997,
at pages 8 through 18 (excluding the Compensation Committee Report and Stock
Performance Graph).
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information relating to security ownership of certain beneficial owners
and management is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 28, 1997,
at pages 3, 5 and 6.
Item 13. Certain Relationships and Related Transactions
The information relating to certain relationships and related transactions
is incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held on April 28, 1997, at pages 19.
32
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as a part of this report:
(1) Consolidated Financial Statements of the Company are incorporated by
reference to the following indicated pages of the 1996 Annual Report to
Stockholders.
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors Report................................. 21
Consolidated Balance Sheets for the
December 31, 1996 and 1995................................ 22
Consolidated Statements of Income for the
Years Ended December 31, 1996, 1995 and 1994.............. 23
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1996, 1995 and 1994...... 24
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1996, 1995 and 1994.............. 25
Notes to Consolidated Financial Statements for the
Years Ended December 31, 1996, 1995 and 1994.............. 26-43
</TABLE>
The remaining information appearing in the 1996 Annual Report to Stockholders
is not deemed to be filed as part of this report, except as expressly provided
herein.
(2) All schedules are omitted because they are not required or applicable, or
the required information is shown in the consolidated financial statements
or the notes thereto.
(3) Exhibits
(a) The following exhibits are filed as part of this report.
3.1 Certificate of Incorporation of First Bell Bancorp, Inc.*
3.2 Bylaws of First Bell Bancorp, Inc.*
4.0 Stock Certificate of First Bell Bancorp, Inc.*
10.1 First Bell Bancorp, Inc. 1995 Master Stock Option Plan**
10.2 Bell Federal Savings and Loan Association of Bellevue Master Stock
Compensation Plan**
10.3 Bell Federal Savings and Loan Association of Bellevue 401(k)
Savings Plan*
10.4 Bell Federal Savings and Loan Association of Bellevue Employees
Pension Plan, as amended*
33
<PAGE>
10.5 Form of Bell Federal Savings and Loan Association of Bellevue
Supplemental Executive Retirement Plan*
10.6 Employment Agreement between First Bell Bancorp, Inc. and certain
executive officers, including Messers Eckert and Hinds**
10.7 Employment Agreement between Bell Federal Savings and Loan
Association of Bellevue and certain executive officers, including
Messers Eckert, Hinds and Adams**
11.0 Computation of earnings per share (filed herewith)
13.0 Portions of the 1996 Annual Report to Stockholders (filed
herewith)
27.0 Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K
None.
__________________________________
* Incorporated herein by reference into this document from the
Exhibits to Form S-1, Registration Statement, filed on November 9,
1994, as amended, Registration No. 33-86160.
** Incorporated herein by reference into this document from the
Exhibits to the Proxy Statement for the Annual Meeting of
Stockholders to be held on
April 29, 1996.
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Date: March 17, 1997 By: /s/ Albert H. Eckert II
----------------------------------
Albert H. Eckert II,
President, Chief Executive Officer
and Director
Date: March 17, 1997 By: /s/ Jeffrey M. Hinds
---------------------------------
Jeffrey M. Hinds
Executive Vice President, Chief Financial
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
/s/ Albert H. Eckert, II President, Chief Executive March 17, 1997
- ---------------------------- Officer and Director
Albert H. Eckert, II
/s/ Jeffrey M. Hinds Executive Vice President, March 17, 1997
- ---------------------------- Chief Financial Officer
Jeffrey M. Hinds and Director
Vice President and
- ---------------------------- Director
David F. Figgins
/s/ Thomas J. Jackson, Jr. Director March 17, 1997
- ----------------------------
Thomas J. Jackson, Jr.
/s/ Robert C. Baierl Secretary and Director March 17, 1997
- -----------------------------
Robert C. Baierl
/s/ William S. McMinn Vice President and March 17, 1997
- -------------------------- Director
William S. McMinn
35
<PAGE>
- -------------------------- Director
Peter E. Reinert
/s/ Jack W. Schweiger Director March 17, 1997
- ---------------------------
Jack W. Schweiger
/s/ Theodore R. Dixon Director March 17, 1997
- ---------------------------
Theodore R. Dixon
36
<PAGE>
Exhibit 11
FIRST BELL BANCORP, INC.
COMPUTATION OF EARNINGS PER SHARE
DECEMBER 31, 1996
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED
<S> <C>
Net income applicable to common stock $7,403,194
EARNINGS PER SHARE
Average number of common stock outstanding 8,051,429
LESS: Weighted average unallocated ESOP shares 649,305
----------
7,402,124
Earnings per share $1.0001
</TABLE>
<PAGE>
Table of Contents
- --------------------------------------------------------------------------------
Financial Highlights 2
- --------------------------------------------------------------------------------
Letter to Our Shareholders 4
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations 8
- --------------------------------------------------------------------------------
Independent Auditors' Report 21
- --------------------------------------------------------------------------------
Consolidated Financial Statements 22
- --------------------------------------------------------------------------------
Notes to Consolidatated Financial Statements 26
- --------------------------------------------------------------------------------
Executive Management and Directors 44
- --------------------------------------------------------------------------------
Shareholder Information 46
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1
<PAGE>
EXHIBIT 13
FIRST BELL BANCORP, INC. 1996 ANNUAL REPORT
Selected Financial and Other Data of the Company
- --------------------------------------------------------------------------------
The following table sets forth certain summary historical financial informa-
tion concerning the financial position of the Company for the period and at the
dates indicated. The financial data is derived in part from, and should be read
in conjunction with, the consolidated financial statements and related notes
contained elsewhere herein.
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Financial Condition Data:
Total assets.................. $656,183 $520,842 $406,813 $386,055 $358,860
Investments................... 14,964 19,953 44,715 12,676 4
Cash and cash equivalents..... 26,406 23,722 40,204 110,704 94,081
Total loans receivable, net... 530,815 415,569 307,995 247,444 245,552
Mortgage-backed securities,
at cost...................... -- -- 4,870 6,605 9,783
Deposits...................... 483,941 391,411 363,681 349,047 325,420
Borrowings.................... 70,000 -- -- -- --
Stockholders' equity.......... 86,433 118,482 34,575 29,560 24,729
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Selected Operating Data:
Interest income............... $ 41,007 $ 33,831 $ 26,420 $ 26,738 $ 27,522
Interest expense.............. 22,050 18,432 14,731 14,833 16,677
-------- -------- -------- -------- --------
Net interest income.......... 18,957 15,399 11,689 11,905 10,845
Provision for (recovery of)
loan losses................. 90 -- (4) 93 (975)
-------- -------- -------- -------- --------
Net interest income after
provision for (recovery of)
loan losses................. 18,867 15,399 11,693 11,812 11,820
Total other income............ 1,198 824 830 910 832
Total other expenses.......... 8,177 4,945 4,508 4,321 4,233
-------- -------- -------- -------- --------
Income before provision for
income taxes................. 11,888 11,278 8,015 8,401 8,419
-------- -------- -------- -------- --------
Provision for income taxes.... 4,485 4,345 3,000 3,294 2,884
-------- -------- -------- -------- --------
Net income before cumulative
effect of change in
accounting principle......... 7,403 6,933 5,015 5,107 5,535
Cumulative effect of change
in accounting for income
taxes........................ -- -- -- 276 --
-------- -------- -------- -------- --------
Net income after cumulative
effect of change in
accounting principle......... $ 7,403 $ 6,933 $ 5,015 $ 4,831 $ 5,535
======== ======== ======== ======== ========
</TABLE>
[GRAPH OF INVESTMENT RETURN] [GRAPH OF TOTAL LOANS (NET)]
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and
Other Data:
Stockholders' equity to assets
at period end................ 13.17% 22.75% 8.50% 7.66% 6.89%
Return on average assets (net
income divided by average
total assets)................ 1.30 1.48 1.26 1.30 1.62
Return on average equity (net
income divided by average
equity)...................... 6.75 8.38 15.57 17.75 25.36
Stockholders' equity to assets
ratio (average stockholders'
equity divided by average
total assets)................ 19.26 17.64 8.09 7.24 6.29
Dividend payout ratio......... 36.43 -- -- -- --
Average interest rate spread
(1).......................... 2.45 2.52 2.77 2.98 2.97
Net interest margin (2)....... 3.38 3.35 3.04 3.24 3.22
Other income to average
assets....................... 0.21 0.18 0.21 0.24 0.24
Other expenses to average
assets....................... 1.44 1.05 1.14 1.15 1.22
Non-performing assets to total
assets....................... 0.10 0.10 0.19 0.18 0.17
Non-performing loans to total
loans........................ 0.08 0.08 0.23 0.27 0.19
Allowance for loan losses to
total loans.................. 0.13 0.13 0.18 0.23 0.24
Allowance for loan losses to
non-performing assets........ 1.06x 1.13x 74.58 87.43 98.21
Efficiency ratio (3).......... 29.07 30.48 36.01 33.72 36.25
Net interest income to other
expenses..................... 2.32x 3.11x 2.59x 2.76x 2.56x
Net interest income after
provision for loan losses to
total other expenses......... 2.31x 3.11x 2.59x 2.73x 2.79x
Average interest-earning
assets to average interest-
bearing liabilities.......... 1.24x 1.21x 1.07x 1.06x 1.05x
Number of:
Depositor accounts........... 53,188 47,409 43,489 40,170 39,994
Full-service customer service
facilities................... 7 7 7 7 7
</TABLE>
- -------
(1) The interest rate spread represents the difference between the weighted-av-
erage yield on interest-earning assets and the weighted-average cost of in-
terest-bearing liabilities.
(2) The net interest margin represents net interest income as a percentage of
average interest-earning assets.
(3) The efficiency ratio represents the ratio of recurring other expenses to
recurring other income and net interest income.
[GRAPH OF TOTAL ASSETS] [GRAPH OF NET INCOME]
- --------------------------------------------------------------------------------
3
<PAGE>
FIRST BELL BANCORP, INC. 1996 ANNUAL REPORT
To Our Shareholders
- -------------------------------------------------------------------------------
In 1996, its first full year as a publicly-traded
corporation, First Bell Bancorp, Inc. registered
very satisfying financial performance. We also
demonstrated that we are equal to the broad range
of new challenges we now face.
The conversion from a mutual company to a public-
ly-owned company has been both rewarding and de-
manding. The opportunities we identified when we
made the transition in mid-1995 are as great as we
had believed, and the value we have added to the
institution can already be measured in some of the
accompanying charts. Of course, equally as large
are our responsibilities to our shareholders. In
this annual report, I want to give details of our
excellent financial performance during 1996, but
also--in the subsequent section--to discuss the
policies which underlay that performance and the
direction we intend to take First Bell Bancorp in
1997 and beyond.
Our net income for the year was $7.4 million, or
$1.00 per share, up 6.8% from 1995. We achieved
this growth despite a third quarter one time af-
ter-tax charge of $1.5 million, or $0.21 per
share, for the recapitalization of the Savings As-
sociation Insurance Fund. Increased income stemmed
from growth in the mortgage portfolio, offset by
higher interest paid on certificates of deposit
and lower interest income from the investment
portfolio. The average investment portfolio bal-
ance for 1996 decreased from $70.2 million to
$36.9 million.
First Bell Bancorp's earnings growth was accompa-
nied by an even more dramatic growth in assets, to
$656.2 million from $520.8 million in 1995, an in-
crease of 26.0%. This growth is attributable prin-
cipally to a $115.3 million increase in the mort-
gage loan portfolio, which was funded largely by
two sources:
.short-term investments, and
.a $92.5 million improvement in total deposit ac-
counts, which increased 23.6% over the preceding
year to $483.9 million. Asset quality remains
high: our non-performing assets were only
$629,000, or 0.1% of total assets, an unusually
low figure in the industry.
- -------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
The conversion of 1995 left First Bell Bancorp
with an excess of capital. The subsequent section
on our strategic agenda discusses our policy in
greater detail; briefly, however, we lowered total
consolidated stockholders' equity to $86.4 million
from $118.5 million in 1995. By another measure,
that reduction came to 13.2% of assets, compared
to 22.8% in the previous year. We accomplished
this reduction by three means:
.Return of capital--$22.7 million
.Cash dividends--$2.7 million
.Treasury and stock purchases--$16.5 million
These decreases were offset by our $7.4 million
net income and ESOP amendments of $2.4 million.
Our attention to careful mortgage underwriting
and to expense management in general continues to
produce excellent results. The Company's delin-
quency ratio is only 0.08% of total loans. The
loan loss allowance was $665,000, or 105.7% of
non-performing assets. Non-interest expense was
$8.2 million, up from $4.9 million in 1995 largely
because of increased Federal insurance premiums.
Even so, our ratio of total expenses to average
assets is one of the lowest in the industry at
1.4%.
We are proud to have added substantially to
shareholder value in 1996, and we believe the fu-
ture is promising. We believe our strategies are
sound; the economic environment appears favorable,
and we anticipate continued growth. More than any-
thing, we have confidence in the people who have
brought us so far. In the financial services in-
dustry, success is a direct outgrowth of the qual-
ity of human assets. First Bell Bancorp's are out-
standing, and I salute them on a year of great
achievement.
Sincerely,
Albert H. Eckert, II
President and Chief Executive
Officer
- --------------------------------------------------------------------------------
5
<PAGE>
FIRST BELL BANCORP, INC. 1996 ANNUAL REPORT
Strategic Agenda: Goals and Policies
- --------------------------------------------------------------------------------
The conversion to public ownership has thus far justified management's analy-
sis of the potential value which resided in the former Bell Federal Savings and
Loan Association. But that conversion must be accompanied by a dynamic vision
coupled with tested policies. This section provides a discussion of where man-
agement will take First Bell Bancorp, Inc. and the route it will travel.
The strategic agenda is relatively simple:
.to grow assets, and
.to improve return on equity.
Asset Growth
First Bell Bancorp is already the sixth largest financial institution head-
quartered in Allegheny County as measured by asset size. Continued asset growth
will come first and foremost from increased deposits. Our deposits grew sub-
stantially in 1996, and we anticipate continued progress.
We offer a full range of savings products--from Check-
ing, NOW and Money Market accounts, Passbook, Club and
Statement Savings accounts, IRA's and Certificates of Our commitment to
Deposit. Our savings yields are extremely competitive develop attractive
and we will continue aggressively to attract new depos- communities and
its. First Bell Bancorp has seven branch offices, five provide convenient
of which are equipped with ATMs. Late in 1996, we relo- hours will, we
cated our downtown office to an even more accessible and believe, continue
visible site. We have already begun to see increased de- to appeal to a
posits as a result. Our commitment to develop attractive growing customer
communities and provide convenient hours will, we be- base.
lieve, continue to appeal to a growing customer base.
We also intend to grow assets through our new and successful investments. In
1996, First Bell Bancorp initiated its first leveraged program. We borrowed $70
million from the Federal Home Loan Bank and have invested the funds in Federal
agency mortgage-backed pass-through securities. This is an investment with lit-
tle interest-rate risk, since both the pass-throughs and the borrowings carry
adjustable rates. Our returns from this first leveraged position have been sat-
isfying, and we expect to enlarge the position during 1997.
Return on Equity
Asset growth is the foundation of institutional growth. It will give us the
requisite size and resources for any future expansion. At the same time, howev-
er, professional investors--First Bell Bancorp is now more than 50%
institutionally held--look also to return on equity.
Regulatory requirements mandate extremely high capital reserves for recently
converted stock institutions. As a result, institutions converting to public
ownership find themselves with excess capital--which of course sharply reduces
return on equity ratios--that needs to be put to work, or otherwise redeployed.
At First Bell Bancorp, we took major strategic strides in 1996 toward reducing
capital. First, in March and July, we repurchased 5% of the Company's outstand-
ing stock--838,100 shares. The repurchase was executed through registered bro-
ker dealers at current market prices. Additionally, the Company's management
stock compensation plan purchased 343,850 shares in July.
In December, we returned $22.7 million of capital to shareholders. The return
was structured as a return of capital of $2.93 per share, which will be tax de-
ferred in most instances as long as the investor holds the shares. This return
of capital was accompanied by a $0.07 per share regular dividend. These pro-
grams together have reduced total consolidated stockholders' equity by 27.0% to
$86.4 million and contributed to the process of improving our return on equity.
- --------------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
Business Policies
Our confidence is rooted in our experience of working together and in the re-
sults we have achieved. The Company has a strong, closely-integrated management
team that has grown--and learned--together for several years. We have developed
and implemented a series of policies and business commitments to which we re-
main dedicated.
First Bell Bancorp will continue as a leading home mortgage lender in the
Pittsburgh area--consistently in the top ten--by maintaining its competitive
rates. Those rates spurred $168.9 million in mortgage originations during 1996.
We do expect mortgage originations to decline somewhat in 1997, although cash
flow from savings and from mortgage repayments are expected to be stronger. In
any event, we anticipate that net interest income will grow this year. The new
home construction market looks favorable from the vantage point of early 1997.
At the same time, we will carry on our policy of pru-
dent underwriting. We accept mortgages exclusively for The rigorous
single-family owner-occupied homes, and exclusively with management of
a 20% minimum down payment, except for specific targeted expenses has
lending programs. This policy has resulted in our very produced
low delinquency ratio of only 0.08% of total loans. With efficiency and
a portfolio in excess of 6,000 mortgages, we are nor- overhead ratios
mally forced to foreclose on only three to four a year. which are among
the best in the
The management team has also achieved a highly desirable industry.
expense profile. The rigorous management of expenses has
produced efficiency and overhead ratios which are among
the best in the industry. In 1996, excluding our assessment to recapitalize the
Savings Association Insurance Fund, our efficiency ratio--total recurring other
expenses to recurring other income and net interest income--was 29.1%. The
recurring expense to average assets ratio was 1.0% for 1996. The Company has
kept its branch offices small in number, although extremely productive. First
Bell Bancorp manages $11.8 million in assets per full time equivalent employee.
The average for all publicly traded, SAIF insured, institutions is $4.3 million
per full time equivalent employee. Our excellent service record and competitive
rates have created word-of-mouth business; consequently, we do not pay for
advertising.
In 1996, we undertook an investment in 50 personal computers for our staff
which has already begun to show results in productivity. First Bell Bancorp has
experienced improved efficiency when opening new accounts, completing teller
transactions, and providing customer services. Communications with our third
party computer service company have also improved. In the 8 full months since
the computers were installed, the computers have been on-line in excess of 99%
of our operating hours.
The newest episode in the 106-year old career of this
institution is exciting, challenging, and promising. We
Providing value to see great reason for confidence, in large part because
our customers and we are convinced of the efficiency of our cautious and
our shareholders prudent management philosophy. The new directions and
remains the ambitious goals have not distracted us from our central
foundation of our focus. Providing value to our customers and our share-
strategic agenda at holders remains the foundation of our strategic agenda
First Bell Bancorp, at First Bell Bancorp, Inc.
Inc.
- --------------------------------------------------------------------------------
7
<PAGE>
FIRST BELL BANCORP, INC. 1996 ANNUAL REPORT
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
General
First Bell Bancorp, Inc. (the "Company") is a Delaware corporation organized
by the Board of Directors of Bell Federal Savings and Loan Association of
Bellevue ("the Association") for the purpose of acquiring all of the capital
stock of the Association issued in the Association's conversion from a feder-
ally chartered mutual savings association to a federally chartered stock sav-
ings association (the "Conversion"). The Conversion was completed on June 29,
1995. The only significant assets of the Company are the capital stock of the
Association and the Company's loan to the Association's Employee Stock Owner-
ship Plan ("ESOP"). The business of the Company consists of an investment in
federal funds sold and the business of the Association. All references to the
Company include the Association unless otherwise indicated, except that refer-
ences to the Company prior to June 29, 1995, are to the Association.
Management Strategy
The Company operates a traditional savings and loan institution and seeks to
achieve profitability while maintaining a strong capital and liquidity posi-
tion. As a community oriented savings and loan, the Company's primary invest-
ment is in one- to four-family residential mortgage loans. The Company's pri-
mary source of funds is from retail deposit accounts and to a lesser extent,
borrowings from the Federal Home Loan Bank ("FHLB"). The Company's results of
operations are dependent primarily on net interest income, which is the differ-
ence between the income earned on its loan, mortgage-backed securities and in-
vestment securities portfolios, and its cost of funds, consisting primarily of
the interest paid on its deposits and borrowings from the FHLB. The Company's
results of operations are affected by its provision for loan losses and non-in-
terest expenses. The Company's results of operations are also significantly af-
fected by general economic and competitive conditions, particularly changes in
market interest rates, government policies and actions of regulatory authori-
ties. Future changes in applicable law, regulations or government policies may
materially impact the Company.
Conventional Residential Mortgage Lending
The Company has emphasized, and plans to continue to emphasize, originating
conventional one- to four-family residential mortgage loans for its portfolio
in its primary market area, the greater Pittsburgh metropolitan area. The Com-
pany originates primarily 15 and 30 year, fixed-rate mortgage loans. At Decem-
ber 31, 1996, conventional mortgage loans totalled $524.9 million, or 95.9% of
the total loan portfolio. At that date, $513.8 million, or 97.9% of the
Company's total loan portfolio consisted of fixed-rate mortgage loans. To a
lesser extent, the Company also originates residential construction loans on
one- to four-family properties. Such loans totalled $19.9 million, or 3.6% of
total loans at December 31, 1996.
For the years ended December 31, 1996, 1995 and 1994, the Company originated
$168.9 million, $112.3 million and $106.4 million, respectively, of conven-
tional mortgage and residential construction loans. In 1995, the Company pur-
chased $24.4 million in owner occupied single family conventional mortgage
loans from outside the Company's local market area. Originations and purchases
have generally exceeded prepayments, resulting in an increase in the Company's
total loan portfolio from $322.9 million at December 31, 1994 to $547.2 million
at December 31, 1996.
Deposit Growth as a Source of Funding
Deposit growth has been the integral source of funds and the means of growth
for the Company. In this regard, management has emphasized providing an in-
creased level of service to its customers in its local market area in order to
retain the deposit relationships with such customers. In addition, the Company
has increased its deposit base by pricing its deposit products typically among
the highest rates offered in the greater Pittsburgh market area. The deposit
base has increased steadily from $363.7 million at December 31, 1994 to $483.9
million at December 31, 1996. Considerable emphasis is placed on core deposit
relationships, consisting of passbook accounts, club
- --------------------------------------------------------------------------------
8
<PAGE>
- --------------------------------------------------------------------------------
accounts and statement savings accounts, which tend to be more stable and lower
cost than other types of higher yielding deposits. The majority of the growth
in deposit accounts, however, has come from certificates of deposit. Certifi-
cates of deposit are offered with terms ranging from three months to 10 years.
Certificates of deposit are priced at competitive rates. The growth of deposit
accounts is monitored to match operating requirements.
Asset Quality
As a result of the Company's long-term policy of originating loans secured by
one- to four-family, owner-occupied, primary residences that meet the Company's
underwriting standards, management believes the Company has maintained high as-
set quality. The Company originates mortgage loans almost entirely within its
primary market area. Of the conventional mortgage and residential construction
loan portfolio at December 31, 1996, 95.2% were secured by properties located
within the Company's primary market area. At December 31, 1996 non-performing
assets (defined as loans delinquent 90 days or more and real estate owned) rep-
resented 0.1% of total assets. The Company has established an allowance for
loan losses to provide for losses in its portfolio. The provision for loan
losses increased by $90,000 for the year ended December 31, 1996 due to the
28.1% increase in conventional mortgage loans from the year ended December 31,
1995. The privision for loan losses is $665,000 or 105.7% of total non-perform-
ing assets at December 31, 1996. The higher allowance ratio is due to manage-
ment's assessment of prospective national and local economic conditions, the
regulatory environment and inherent risks in the portfolio rather than to prob-
lem loans existing in the portfolio. Management believes that the current level
of reserves is adequate.
Low Operating Expenses
The Company's non-interest expenses principally consist of compensation and
employee benefits, federal deposit insurance premiums, occupancy and equipment
expenses and other general and administrative expenses. The ratio of other ex-
penses to average assets was 1.05% and 1.14% for the years ended December 31,
1995 and 1994, respectively. For the year ended December 31, 1996, this ratio
was 1.44%. The 1996 ratio was higher due to a one time charge of $2.5 million
to replenish the Savings Association Insurance Fund ("SAIF"). The ratio of
other expenses to average assets would have been 1.00% without this assessment.
Low operating costs are maintained by managing and monitoring overhead costs,
primarily through controlling the growth in personnel. At December 31, 1996,
the Company's seven offices and $653.2 million in assets were operated by a to-
tal of 52 full-time employees and seven part-time employees, resulting in an
average of $11.8 million in assets per employee. Expense ratios are controlled
through an efficient and effective product delivery system.
Maintaining High Liquidity
The Association is required to maintain an average daily balance of liquid as-
sets and short term liquid assets as a percentage of net withdrawable deposit
accounts plus short-term borrowings as defined by Office of Thrift Supervision
("OTS") regulations. The minimum required average liquidity and average short-
term liquidity ratios are currently 5.0% and 1.0%, respectively. Each of the
Association's average liquidity ratios were 10.3%, 14.9% and 23.0% at December
31, 1996, 1995 and 1994, respectively. The high level of liquidity reflects
management's strategy to offset the interest rate risk associated with the pre-
dominantly fixed-rate mortgage loan portfolio and fluctuates depending on the
operational needs of the Association.
The Company's most liquid assets are cash and short-term investments. The
level of the liquid assets are dependent on the operating, financing, lending
and investing activities during any given period. At December 31, 1996, 1995
and 1994, assets qualifying for short-term liquidity including cash and short-
term investments, totalled $109.6 million, $91.0 million and $84.9 million, re-
spectively. As part of its interest rate risk management, high levels of liquid
assets are maintained in order to partially offset the interest rate risk asso-
ciated with the predominantly fixed-rate loan portfolio. Thus, in a rising in-
terest rate environment, the liquid assets will reprice at a faster rate than
the long-term, fixed-rate mortgage loans, in order to help offset the increased
expense of interest-bearing liabilities.
- --------------------------------------------------------------------------------
9
<PAGE>
FIRST BELL BANCORP, INC. 1996 ANNUAL REPORT
- -------------------------------------------------------------------------------
Interest Rate Sensitivity Analysis
The matching of assets and liabilities may be analyzed by examining the ex-
tent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or lia-
bility is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that same time period. The interest rate sen-
sitivity gap is defined as the difference between the amount of interest-earn-
ing assets anticipated, based upon certain assumptions, to mature or reprice
within a specific time period and the amount of interest-bearing liabilities
anticipated, based upon certain assumptions, to mature or reprice within that
same time period. A gap is considered positive when the amount of interest
rate sensitive assets exceeds the amount of interest rate sensitive liabili-
ties. A gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. Accordingly,
in a rising interest rate environment, an institution with a positive gap
would be in a better position to invest in higher yielding assets, which would
result in the yield on its assets increasing at a pace closer to the cost of
its interest-bearing liabilities, than would be the case if it has a negative
gap. During a period of falling interest rates, an institution with a positive
gap would tend to have its assets repricing at a faster rate than one with a
negative gap, which would tend to restrain the growth of its net interest in-
come.
A significant portion of the Company's assets consist of long-term fixed-rate
residential mortgage loans, while substantially all of the Company's liabili-
ties consist of deposits and borrowings with considerably shorter terms. At
December 31, 1996, the Company had $513.8 million of long-term, fixed-rate
mortgage loans, or 97.9% of the Company's total loan portfolio. At December
31, 1996 net interest-bearing liabilities maturing or repricing within one
year exceeded net interest-earning assets maturing or repricing within the
same time period by $194.0 million, representing a negative cumulative one-
year interest rate sensitivity gap of 29.6% of total assets at that date. The
Company's cumulative three year interest rate sensitivity gap as defined
above, reflects net interest-bearing liabilities maturing or repricing within
three years exceeding net interest-earning assets maturing or repricing within
the same time period by $263.5 million, representing a negative gap of 40.2%.
As a result, the yield on interest-earning assets of the Company will adjust
to changes in interest rates at a slower rate than the cost of the Company's
interest-bearing liabilities, and any significant increase in interest rates
will have an adverse effect on the Company's results of operations. There can
be no assurance, therefore, that the Company will be able to maintain compara-
ble rates of return on its assets in the future.
In an effort to manage the interest rate risk associated with the predomi-
nantly fixed-rate loan portfolio, the Company maintains high levels of liquid
assets to enable it to more quickly respond to changes in interest rates. At
December 31, 1996, the Company's total short-term investment portfolio and
cash was $109.6 million.
The following table sets forth the amount of interest-earning assets and in-
terest-bearing liabilities outstanding at December 31, 1996, which are antici-
pated, based upon certain assumptions described below, to reprice or mature in
each of the future time periods shown. The amounts of assets and liabilities
shown which reprice or mature during a particular period were determined in
accordance with the earlier of term to (i) repricing or (ii) the contractual
terms of the asset or liability. While a conventional gap measure may be use-
ful, it is limited in its ability to predict trends in future earnings. It
makes no presumptions about changes in prepayment tendencies, deposit or loan
maturity preferences or repricing time lags that may occur in response to a
change in the interest rate environment. This table was prepared utilizing
prepayment rates from the historical prepayment rates experienced by the Com-
pany, which management believes to be reasonable. Accordingly, fixed-rate
mortgage loans on one- to four- family residences with remaining terms to ma-
turity of more than 10 years are assumed to prepay at a rate of 6% per year
and are net of deferred loan origination fees and the allowance for loan loss-
es. Decay rates of 14% for passbook accounts, 17% for NOW accounts and 31% for
money market deposit accounts were assumed. In addition, it is assumed that
fixed maturity deposits are not withdrawn prior to maturity. The passbook, NOW
and money market decay rates are based on assumptions determined by the OTS.
Although management believes the assumptions are reasonable, they should not
be regarded as necessarily indicative of the actual decay rates that may be
experienced in the future.
- -------------------------------------------------------------------------------
10
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 1996
---------------------------------------------------------------------------------------------
MORE MORE THAN MORE MORE MORE
THREE THAN THREE SIX MONTHS THAN ONE THAN THREE THAN FIVE MORE
MONTHS MONTHS TO TO TWELVE YEAR TO YEARS TO YEARS TO THAN
OR LESS SIX MONTHS MONTHS THREE YEARS FIVE YEARS TEN YEARS TEN YEARS TOTAL
-------- ---------- ---------- ----------- ---------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Real Estate Loans:
ARM Loans............. $ 2,569 $ 53 $ 202 $ 76 $ 6,847 $ 1,369 $ -- $ 11,116
Fixed Rates Loans..... 7,801 7,633 15,265 57,431 51,303 128,915 240,127 508,476
Residential
Construction
Loans................ -- -- -- -- -- -- 8,757 8,757
Multi-Family.......... 23 75 -- 228 61 534 299 1,220
Second Mortgage Loans. 297 -- -- -- -- -- -- 297
Consumer Loans......... 938 -- -- 4 7 -- -- 949
Interest-bearing
Deposits.............. 23,872 -- -- -- -- -- -- 23,872
Federal Funds Sold..... 72,875 -- -- -- -- -- -- 72,875
Investment securities.. -- 4,999 -- 4,989 0 4,972 4 14,964
FHLB Stock............. -- -- -- -- -- -- 3,999 3,999
-------- -------- --------- --------- --------- --------- -------- --------
Total Interest-Earning 108,376 12,761 15,467 62,728 58,218 135,790 253,186 646,525
Assets.................
INTEREST-BEARING LIABILITIES:
Passbook, Club and
Other Accounts........ 2,327 2,327 4,654 14,889 11,012 16,563 14,714 66,486
Money Market and NOW
Accounts.............. 2,349 2,349 4,697 12,861 7,871 9,287 5,248 44,661
Certificate Accounts... 66,723 56,850 107,535 104,452 19,529 17,705 -- 372,794
Borrowings............. 70,000 -- -- -- -- -- -- 70,000
Advances by Borrowers
for Taxes and
Insurance............. 10,822 -- -- -- -- -- -- 10,822
-------- -------- --------- --------- --------- --------- -------- --------
Total Interest-Bearing
Liabilities............ 152,221 61,526 116,886 132,202 38,412 43,555 19,962 564,762
-------- -------- --------- --------- --------- --------- -------- --------
Interest Sensitivity
Gap.................... $(43,844) $(48,764) $(101,418) $ (69,474) $ 19,806 $ 92,235 $233,224 $ 81,762
======== ======== ========= ========= ========= ========= ======== ========
Cumulative Interest
Sensitivity Gap........ $(43,844) $(92,609) $(194,027) $(263,501) $(243,695) $(151,460) $ 81,764 $ 81,764
======== ======== ========= ========= ========= ========= ======== ========
Cumulative Interest
Sensitivity Gap as a
Percentage of Total
Assets................. (6.68%) (14.11%) (29.57%) (40.16%) (37.14%) (23.08%) 12.46% 12.46%
Cumulative Net Interest-
Earning Assets as a
Percentage of
Cumulative Interest-
Bearing Liabilities.... 71.20% 56.67% 41.32% 43.07% 51.38% 72.20% 114.48% 114.48%
</TABLE>
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market inter-
est rates, while interest rates on other types may lag behind changes in market
rates.
Net Portfolio Value
The Company's interest rate sensitivity is monitored by management through se-
lected interest rate risk measures produced internally and by the OTS. Using
data from the Association's quarterly Thrift Financial Reports, the OTS mea-
sures the Association's interest rate risk by modeling the change in net port-
folio value ("NPV") over a variety of interest rate scenarios. NPV is the pres-
ent value of expected cash flows from assets, liabilities and off-balance sheet
contracts. A NPV ratio, in any interest rate scenario, is defined as the NPV in
that rate scenario divided by the market value of assets in the same scenario.
The interest rate risk measures used by the OTS include an interest rate risk
"Exposure Measure" or "post-shock" NPV ratio and a "Sensitivity Measure." A low
"post-shock" NPV ratio indicates greater exposure to interest rate risk.
Greater exposure can result from a low initial NPV ratio or high sensitivity to
changes in interest rates. The Sensitivity Measure is the decline in the NPV
ratio, in basis points, caused by a 200 basis point increase or decrease in
rates, whichever produces a larger decline.
- --------------------------------------------------------------------------------
11
<PAGE>
FIRST BELL BANCORP, INC. 1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
As of December 31, 1996, the Association's NPV, as measured by the OTS, was
$84.9 million or 12.9% of the market value of assets. Following a 200 basis
point increase in interest rates, the Association's "post-shock" NPV was $50.4
million, or 8.2% of the market value of assets. The change in the NPV ratio or
the Association's Sensitivity Measure was (41.0)%. Under OTS capital require-
ments which have not yet been fully implemented, the decline in the NPV ratio
at December 31, 1996 would reflect an above average interest rate risk. If the
regulations are finalized as proposed, the Company would remain in compliance
with the fully phased in capital requirements. Management reviews the quarterly
OTS measurements and compares them to evaluations produced through internally
generated simulation models. These measures are used in conjunction with NPV
measures to identify excessive interest rate risk.
Liquidity and Capital Resources
The Company's sources of funds are deposits, borrowings and principal and in-
terest payments on loans, and, to a lesser extent, mortgage-backed securities.
While maturities and scheduled amortization of loans and mortgage-backed secu-
rities are predictable sources of funds, deposit flows and mortgage prepayments
are strongly influenced by changes in general interest rates, economic condi-
tions and competition.
The Company is required to maintain an average daily balance of liquid assets
and short term liquid assets as a percentage of net withdrawable deposit ac-
counts plus short-term borrowings as defined by OTS regulations. The minimum
required liquidity and short-term liquidity ratios are currently 5.0% and 1.0%,
respectively. Each of the Association's average liquidity ratios were 10.3%,
14.9% and 23.0%, at December 31, 1996, 1995 and 1994, respectively. The overall
increases in liquidity reflect management's strategy to maintain a high level
of liquidity as the primary means of managing interest rate risk.
The Company's most liquid assets are cash and short-term investments. The lev-
els of liquid assets are dependent on the operating, financing, lending and in-
vesting activities during any given period. At December 31, 1996, 1995 and
1994, assets qualifying for short-term liquidity, including cash and short term
investments, totalled $109.6 million, $91.0 million and $84.9 million, respec-
tively.
The primary investment activity of the Company is the origination of mortgage
loans. During the years ended December 31, 1996, 1995 and 1994, the origination
of mortgage loans, including residential construction loans in the amounts of
$168.9 million, $112.3 million and $106.4 million, respectively. No other loans
were originated during those periods. No mortgage-backed securities were pur-
chased during these periods. The lending and investing activities are funded
primarily by deposits, borrowings, principal repayments on loans and mortgage-
backed securities, and operations. Other investments primarily include securi-
ties of the United States Government ("U.S. Government securities") and securi-
ties of various federal agencies.
At December 31, 1996, loan commitments were $17.3 million. The Company antici-
pates that it will have sufficient funds available to meet its current loan
origination commitments. Certificates of deposit which are scheduled to mature
in one year or less from December 31, 1996 totalled $231.1 million. Management
believes that a significant portion of such deposits will remain with the Com-
pany. As a member of the FHLB, the Association has the ability to borrow from
the FHLB, if necessary. As of December 31, 1996, the Association had $70.0 mil-
lion in outstanding borrowings and $379.2 million in additional borrowing ca-
pacity from the FHLB. These funds were invested in federal funds sold at Decem-
ber 31,1996. The Company had committed to purchase $32.8 million in adjustable
rate mortgage-backed securities at December 31, 1996. In January 1997, the FHLB
borrowings were used to complete the purchase of the adjustable rate mortgage-
backed securities.
Impact of Inflation and Changing Prices
The Financial Statements and Notes thereto presented herein have been prepared
in accordance with Generally Accepted Accounting Principles ("GAAP"), which re-
quire the measurement of financial position and operating results in terms of
historical dollars without considering the changes in the relative purchasing
power of money over time due to inflation. The impact of inflation is reflected
in the increased cost of the Company's operations. Unlike
- --------------------------------------------------------------------------------
12
<PAGE>
- --------------------------------------------------------------------------------
industrial companies, nearly all of the assets and liabilities of the Company
are monetary in nature. As a result, interest rates have a greater impact on
the Company's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same ex-
tent as the price of goods and services.
Rate/Volume Analysis
The following table presents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing liabili-
ties have affected the Company's interest income and interest expense during
the periods indicated. Information is provided in each category with respect to
(i) changes attributable to changes in volume (changes in volume multiplied by
prior rate), (ii) changes attributable to changes in rate (changes in rate mul-
tiplied by prior volume) and (iii) the changes attributable to the combined im-
pact of volume and rate. The changes in interest due to both rate and volume in
the rate/volume analysis table have been allocated to changes due to rate and
volume in proportion to the absolute amounts of the changes in each.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1996 VS. 1995 1995 VS. 1994
INCREASE (DECREASE) IN INCREASE (DECREASE) IN
NET INTEREST INCOME DUE TO NET INTEREST INCOME DUE TO
-------------------------------- ---------------------------------
TOTAL TOTAL
INCREASE INCREASE
VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
--------- ------- ------------ --------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Interest-earning assets:
Investment securities.... $ (2,053) $ (29) $ (2,082) $ (1,626) $ 1,241 $ (385)
Conventional loans....... 9,807 (626) 9,181 6,898 (589) 6,309
Other loans.............. (6) (4) (10) 1 2 3
Mortgage-backed
securities.............. (311) -- (311) (120) 37 (83)
Federal funds sold....... 566 (168) 398 -- 1,567 1,567
--------- ------- ---------- --------- -------- ---------
Total interest-
earning assets....... 8,022 (826) 7,176 5,153 2,258 7,411
--------- ------- ---------- --------- -------- ---------
Interest-bearing
liabilities:
Passbook, club and
other accounts.......... (92) 35 (57) (861) (174) (1,035)
Money Market and NOW
accounts................ 45 (74) (29) (69) 5,187 (18)
Certificate accounts..... 3,909 (397) 3,512 2,728 1,933 4,753
Borrowings............... 191 -- 191 -- -- --
--------- ------- ---------- --------- -------- ---------
Total interest-
bearing liabilities.. 3,862 (245) 3,617 1,798 1,902 3,700
--------- ------- ---------- --------- -------- ---------
Net change in net
interest income.......... $ 4,140 $ (581) $ (3,559) $ 3,355 $ 356 $ 3,711
========= ======= ========== ========= ======== =========
</TABLE>
- --------------------------------------------------------------------------------
13
<PAGE>
FIRST BELL BANCORP, INC. 1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
Average Balances, Interest and Average Yields
The following table sets forth certain information relating to the Company's
balance sheet at December 31, 1996, and average balance sheets and statements
of income for the years ended December 31, 1996, 1995 and 1994, and reflect the
average yield on assets and average cost of liabilities for the periods indi-
cated. Such yields and costs are derived by dividing income or expense by the
average monthly balance of assets or liabilities, respectively, for the periods
shown. Average balances are derived from month-end balances. The yields and
costs include fees which are considered adjustments to yields.
<TABLE>
<CAPTION>
YEAR ENDED
AT DECEMBER 31, 1996 DECEMBER 31, 1996
------------------------ ----------------------------
AVERAGE AVERAGE
BALANCE YIELD/COST BALANCE INTEREST YIELD/COST
------------ ----------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest-earning Assets:
Investment securities
(1).................... $ 42,836 5.97% $ 36,869 $ 2,224 6.09%
Conventional loans
(2)(6)................. 529,865 7.29 487,322 36,727 7.54
Other loans............. 949 7.06 944 71 7.52
Mortgage-backed
securities............. -- -- -- -- --
Federal funds sold...... 72,875 5.42 35,075 1,965 5.60
------------ -------- -------
Total interest-
earning assets...... 646,525 6.99 560,210 41,007 7.32
Non-interest-earning
assets.............. 9,658 9,437
------------ --------
TOTAL ASSETS........ $ 656,183 $569,647
============ ========
Interest-bearing
Liabilities:
Passbook, club and
other accounts (5)..... 77,308 2.91% 81,715 2,314 2.83%
Money market and NOW
accounts............... 44,661 2.59 42,088 1,040 2.47
Certificate accounts.... 372,794 5.94 323,199 18,504 5.73
Borrowings.............. 70,000 4.92 5,833 191 3.27
------------ -------- -------
Total interest-
bearing liabilities.. 564,763 5.12 452,835 22,049 4.87
-------
Non-interest-bearing
liabilities.......... 4,987 7,082
------------ --------
TOTAL LIABILITIES... 569,750 459,916
Stockholders' equity.... 86,433 109,730
------------ --------
Total liabilities and
stockholders' equity... $ 656,183 $569,646
============ ========
Net interest income/net
interest rate spread
(3)...................... 1.87% $18,958 2.45%
=======
Net yield on average
interest-earning assets
(4)...................... 3.38%
Ratio of average
interest-earning assets
to average
interest-bearing
liabilities............ 1.24
</TABLE>
- -------
(1) Includes interest-bearing deposits in other financial institutions and
FHLB.
(2) Includes non-accrual loans, deferred net loan origination fees, undisbursed
portion of loans in process, and allowance for loan losses.
(3) Net interest rate spread represents the difference between the average
yield on interest-earning assets, and the average cost of interest- bearing
liabilities.
(4) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
(5) Includes advances by borrowers for taxes and insurance.
(6) Interest on conventional loans includes loan fees of $990, $508, and $735
for the years ended December 31, 1996, 1995 and 1994, respectively.
- --------------------------------------------------------------------------------
14
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1995 1994
---------------------------- ----------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
-------- -------- ---------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning Assets:
Investment securities
(1).................... $ 70,180 $ 4,326 6.16% $107,166 $ 4,711 4.40%
Conventional loans
(2)(6)................. 359,376 27,546 7.66 271,265 21,237 7.83
Other loans............. 1,025 81 7.90 1,007 78 7.75
Mortgage-backed
securities............. 3,713 311 8.38 5,346 394 7.37
Federal funds sold...... 25,769 1,567 6.08 -- -- --
-------- ------- -------- -------
Total interest-
earning assets....... 460,063 33,831 7.35 384,784 26,420 6.87
Non-interest-earning
assets............... 9,078 10,136
-------- --------
TOTAL ASSETS........ $469,141 $394,920
======== ========
Interest-bearing
Liabilities:
Passbook, club and
other accounts (5)..... 85,020 2,371 2.79% 113,770 3,406 2.99%
Money market and NOW
accounts............... 40,388 1,069 2.65 43,124 1,087 2.52
Certificate accounts.... 256,350 14,992 5.85 202,422 10,238 5.06
Borrowings.............. -- -- -- -- --
-------- ------- -------- -------
Total interest-
bearing liabilities.. 381,758 18,432 4.83 359,316 14,731 4.10
------- -------- -------
Non-interest-bearing
liabilities.......... 4,633 3,398
-------- --------
TOTAL LIABILITIES... 386,391 362,714
Stockholders' equity.... 82,750 32,206
-------- --------
Total liabilities and
stockholders' equity... $469,141 $394,920
======== ========
Net interest income/net
interest rate spread
(3)...................... $15,399 2.52% $11,689 2.77%
======= =======
Net yield on average
interest-earning assets
(4)...................... 3.35% 3.04
Ratio of average
interest-earning assets
to average interest-
bearing liabilities...... 1.21 1.07
</TABLE>
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15
<PAGE>
FIRST BELL BANCORP, INC. 1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
Comparison of Financial Condition at December 31, 1996 and December 31, 1995
The following table sets forth information concerning the composition of the
Company's assets, liabilities and stockholders' equity at December 31, 1996 and
1995.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------
1996 1995
----------------- -----------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents.................. $ 26,406 4.02% $ 23,722 4.56%
Federal funds sold......................... 72,875 11.11% 52,025 9.99%
Investment securities...................... 14,964 2.28% 19,953 3.83%
Conventional loans, net.................... 529,866 80.75% 414,610 79.60%
Other loans................................ 949 .14% 959 .18%
FHLB stock................................. 3,999 .61% 3,009 .58%
Other assets............................... 7,124 1.09% 6,654 1.26%
-------- ------ -------- ------
TOTAL ASSETS............................. $656,183 100.00% $520,842 100.00%
======== ====== ======== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits................................... $483,941 73.75% $391,411 75.15%
Borrowings................................. 70,000 10.67% -- --
Other liabilities.......................... 15,809 2.41% 10,949 2.10%
Stockholders' equity....................... 86,433 13.17% 118,482 22.75%
-------- ------ -------- ------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY.................................. $656,183 100.00% $520,842 100.00%
======== ====== ======== ======
</TABLE>
Assets
Total assets increased by $135.4 million, or 26.0% to $656.2 million at Decem-
ber 31, 1996, from $520.8 million at December 31, 1995. The increase in total
assets was primarily the result of conventional mortgage loans increasing by
$115.3 million or 27.8% to $529.9 million at December 31, 1996 from $414.6 mil-
lion at December 31, 1995. Mortgage originations totaled $168.9 million in the
year-ended December 31, 1996. In addition, federal funds sold increased by
$20.9 or 40.1% to $72.9 million at December 31, 1996 from $52.0 million at De-
cember 31, 1995. Cash and cash equivalents increased $2.7 million or 11.3% to
$26.4 million at December 31, 1996 from $23.7 million for the comparable 1995
period. The increase in conventional mortgage loans, federal funds sold and
cash and cash equivalents were funded primarily through the increase in depos-
its, and the proceeds from borrowings of $70.0 million.
Liabilities
Total liabilities increased by $167.4 million or 41.6% to $569.7 million at
December 31, 1996 from $402.3 million at December 31, 1995. This increase was
primarily due to increases in deposits, borrowings, advances by borrowers for
taxes and insurance, dividends payable and other liabilities. Total deposits
increased $92.5 million or 23.6% to $483.9 million at December 31, 1996 from
$391.4 million at December 31, 1995. This increase was due to certificates of
deposits increasing by $92.6 million during 1996. At December 31, 1996,
borrowings were $70.0 million. There were no borrowings outstanding at December
31, 1995. At December 31, 1996, the borrowing proceeds were invested in federal
funds sold but will be used to purchase adjustable rate mortgage-backed securi-
ties. As of year end, the Company had committed to purchase $32.8 million in
adjustable rate mortgage-backed securities. Advances by borrowers for taxes and
insurance increased $2.3 million or 26.7% to $10.8 million at December 31, 1996
from $8.5 million at December 31, 1995. This increase was due to the increase
conventional mortgage loans.
- --------------------------------------------------------------------------------
16
<PAGE>
- --------------------------------------------------------------------------------
Dividends payable and other liabilities at December 31, 1996 were $3.0 million
compared to $1.4 million at December 31, 1995. This $1.6 million or 116.5% in-
crease was primarily due to the dividend payable and accruals for employee ben-
efit plans at December 31, 1996.
Capital
Stockholders equity decreased by $32.1 million, or 27.0% to $86.4 million at
December 31, 1996, from $118.5 million at December 31, 1995. On December
31,1996, the Company paid a distribution to its stockholders at the rate of
$3.00 per share. Of the $3.00 per share payment, $2.93 was accounted for as a
return of capital. A return of capital, normally, reduces the stockholders' tax
basis in each share of stock and income taxes are deferred until the stock is
subsequently sold. The remaining $0.07 per share was treated as an ordinary
taxable dividend. The total amount of this distribution was $22.7 million.
Stockholders equity was further reduced by the purchase of $16.5 million of
Treasury and Master Stock Compensation Plan ("MRP") stock, and additional ordi-
nary dividends of $2.2 million. Offsetting these decreases was net income for
the year of $7.4 million and ESOP adjustments of $2.0 million.
Comparison of Operating Results for the Years Ended December 31, 1996and
December 31, 1995
General
Net income for the year ended December 31, 1996 increased by $470,000 or 6.8%
to $7.4 million from $6.9 million for the year ended December 31, 1995. This
increase was the result of net interest income increasing by $3.6 million, off-
set by an increase in federal insurance premiums of $2.6 million and an in-
crease of $553,000 in compensation, payroll taxes, and fringe benefits.
Interest Income
Interest income increased by $7.2 million, or 21.2% to $41.0 million for the
year ended December 31, 1996 from $33.8 million for the year ended December 31,
1995. This increase was primarily due to interest on conventional mortgage
loans increasing $9.2 million or 33.3% to $36.7 million for the year ended De-
cember 31, 1996 from $27.5 million for the year ended December 31, 1995. The
increased interest on conventional mortgage loans was the result of the average
balance of conventional mortgage loans increasing by $127.9 million or 35.6% to
$487.3 million for the year ended December 31, 1996 from $359.4 million for the
comparable 1995 period. In addition, interest on federal funds sold increased
by $398,000 or 25.4% to $2.0 million for the year ended December 31, 1996 from
$1.6 million for the year ended December 31, 1995. Again this increase was pri-
marily the result of the average balance of federal funds sold increasing to
$35.1 million during 1996 from $25.8 million during 1995. Offsetting these in-
creases was a decrease of interest on interest-bearing deposits and other in-
vestment securities. Interest on interest-bearing deposits decreased by $1.4
million, or 63.3% to $791,000 for the year ended December 31, 1996 from $2.2
million for the year ended December 31, 1995. This decrease was the result of
the average balance of interest-bearing deposits falling to $15.6 million for
1996 from $37.9 million during 1995. Interest earned on other investments was
$1.2 million for the year ended December 31, 1996 compared to $2.0 million for
the same 1995 period. The $761,000 decrease was the result of the average bal-
ance in other investment securities decreasing by $11.9 million, or 40.6% to
$17.5 million during 1996 from $29.4 million during 1995.
Interest Expense
Interest expense increased $3.6 million or 19.6% during 1996 rising to $22.0
million in 1996 from $18.4 million in 1995. This increase was primarily due to
an increase in interest paid on certificate accounts of $3.5 million. This was
the result of the average balance on certificate accounts increasing by $66.9
million or 26.1% to $323.2 million during 1996 from $256.3 million during 1995.
Also, interest on borrowings was $191,000 in 1996. There were no borrowings in
1995.
- --------------------------------------------------------------------------------
17
<PAGE>
FIRST BELL BANCORP, INC. 1996 ANNUAL REPORT
- -------------------------------------------------------------------------------
Net Interest Income
Net interest income represents the difference between income on interest-
earning assets and expense on interest-bearing liabilities. Net interest in-
come depends upon the volume of interest-earning assets and interest-bearing
liabilities and the interest rate earned or paid on them. Net interest income
increased $3.6 million or 23.1% to $19.0 million for the year ended December
31, 1996 from $15.4 million for the year ended December 31, 1995. The increase
in net interest income was primarily due to average interest-earning assets
increasing by $100.0 million or 21.8%, to $560.0 million during 1996 from
$460.0 million in 1995. Offsetting this was the increase in average interest-
bearing liabilities and a slight decrease in the net interest rate spread. Av-
erage interest-bearing liabilities increased in 1996 to $452.8 million from
$381.8 million in 1995. The net interest rate spread decreased by seven basis
points falling to 2.45% in 1996 from 2.52% in 1995.
Provision for Loan Losses
An additional $90,000 was recorded to the provision for loan losses during
1996 as compared to no provision in 1995. This additional amount was recorded
in 1996 as the result of the $115.3 million increase in conventional mortgage
loans. At December 31, 1996 the allowance for loan losses to non-performing
assets was 105.7% as compared to 112.5% at December 31, 1995.
In determining the provision for loan losses, management assesses the risk
inherent in its loan portfolio, including, but not limited to, an evaluation
of the concentration of loans secured by properties located in the Pittsburgh
area, the trends in national and local economies, trends in the real estate
market and in the Company's loan portfolio and the level of non-performing
loans and assets. The Company's history of loan losses has been minimal, which
management believes is a reflection of the Company's underwriting standards.
There were no charge-offs for the year ended December 31, 1996 or 1995. Man-
agement believes that the current level of loan loss reserve is adequate to
cover losses inherent in the portfolio as of such date. However, there can be
no assurance that the Company will not sustain losses in future periods.
Other Income
Other income for the year ended December 31, 1996 was $1.2 million compared
to $824,000 for the year ended December 31, 1995. The $374,000 increase was
due to a gain of $536,000 on the sale of the building in which our Wood Street
branch office was located. The Company's downtown Pittsburgh branch was moved
to a new location in the same area during 1996. Offsetting this gain was a de-
cline in service fees and charges of $89,000 and no gain on the sale of mort-
gage-backed securities. There was a $68,000 gain on mortgage-backed securities
in 1995.
Other Expenses
Total other expenses increased $3.2 million or 65.4% to $8.1 million for the
year ended December 31, 1996 from $4.9 million for the year ended December 31,
1995. The increase was primarily due to the increases in federal insurance
premiums and compensation, payroll taxes and fringe benefits. Federal insur-
ance premiums increased to $3.4 million in 1996 from $848,000 in 1995. The
$2.6 million increase was the result of the one time assessment of $2.5 mil-
lion to replenish the Savings Association Insurance Fund. On September 30,
1996, the President signed into law the Deposit Insurance Funds Act of 1996
(the "Funds Act") which, among other things, imposed a special one-time as-
sessment on SAIF member institutions, including the Association to recapital-
ize the SAIF. As required by the Funds Act, the Federal Deposit Insurance Cor-
poration ("FDIC") imposed a special assessment of 65.7 basis points on SAIF
assessable deposits held as of March 31, 1995. Compensation, payroll taxes and
fringe benefits increased by $553,000 or 24.1% to $2.8 million for the year
ended December 31, 1996 compared to $2.3 million for the year ended December
31, 1995. The increase was the result of the implementation of the MRP during
1996.
- -------------------------------------------------------------------------------
18
<PAGE>
- --------------------------------------------------------------------------------
Income Taxes
Income taxes increased by $140,000 to $4.5 million for the year ended December
31, 1996 from $4.3 million for the year ended December 31, 1995. This was the
result of income before the provision for income taxes increasing to $11.9 mil-
lion for the year ended December 31, 1996 as compared to $11.3 million for the
comparable 1995 period. The annualized effective income tax rate for the peri-
ods ended December 31, 1996 and 1995 were 37.7% and 38.5%, respectively.
Comparison of Operating Results for the Years Ended December 31, 1995 and
December 31, 1994
General
Net income for the year ended December 31, 1995 increased by $1.9 million, or
38.2%, to $6.9 million from $5.0 million for the year ended December 31, 1994.
This increase was due primarily to the increase in net interest income of $3.7
million, offset by an increase in taxes of $1.3 million and an increase of
$467,000 in compensation, payroll taxes and fringe benefits as a result of the
funding of the ESOP Plan which began on June 29, 1995.
Interest Income
Interest income increased by $7.4 million, or 28.1% to $33.8 million for the
year ended December 31, 1995, from $26.4 million for the year ended December
31, 1994. The increase in interest income was primarily the result of interest
earned on conventional mortgage loans rising $6.3 million, or 29.7% to $27.5
million for the year ended December 31, 1995 from $21.2 million for the year
ended December 31, 1994. The increase in interest earned on conventional mort-
gage loans was primarily due to an increase of $88.1 million, or 32.5%, in the
average balance of conventional mortgage loans for the year ended December 31,
1995 from the comparable 1994 period. The balance of conventional mortgage
loans increased in response to continued strong demand for such loans due to
the Company's competitive pricing strategy, as well as the purchase of $24.4
million of such loans. In addition, interest on federal funds sold was $1.6
million for the year ended December 31, 1995. The Association earned no inter-
est on federal funds sold for the comparable 1994 period. Offsetting these in-
creases, was a decrease of $495,000 or 18.7% in interest earned on interest-
bearing deposits. The decrease was primarily due to the average balance of
interest-bearing deposits declining $26.0 million to $37.9 million or 40.7% for
the year ended December 31, 1995 as compared to an average balance of $63.9
million for the year ended December 31, 1994.
Interest Expense
Interest expense was $18.4 million for the year ended December 31, 1995 as
compared to $14.7 million for the year ended December 31, 1994. The $3.7 mil-
lion, or 25.1% increase was primarily due to an overall increase of $22.4 mil-
lion in the average balance of deposits to $381.8 million for the year ended
December 31, 1995, from $359.3 million for the comparable 1994 period, and an
increase of 73 basis points in the average rate paid on deposits, reflecting
both the rising interest rate environment and the shift from other deposit ac-
counts to higher costing certificates of deposit.
Net Interest Income
Net interest income increased for the year ended December 31, 1995 to $15.4
million from $11.7 million for the year ended December 31, 1994. The average
yield on interest-earning assets increased 48 basis points from 6.87% at Decem-
ber 31, 1994 to 7.35% at December 31, 1995. The average cost of interest-bear-
ing liabilities increased from 4.10% at December 31, 1994 to 4.83% at December
31, 1995. The net decrease in the Company's net interest rate spread was offset
by the additional interest earned from the growth of the Company's interest-
earning assets.
- --------------------------------------------------------------------------------
19
<PAGE>
FIRST BELL BANCORP, INC. 1996 ANNUAL REPORT
- -------------------------------------------------------------------------------
Provision for Loan Losses
No additional provision for loan losses were recorded for the years ended De-
cember 31, 1995 and 1994. At December 31, 1995, the allowance for loan losses
equalled 112.5% of total non-performing assets, as compared to 74.6% as of De-
cember 31, 1994. There were no charge-offs for the years ended December 31,
1995 and 1994.
Other Expenses
Total other expenses increased $437,000 or 9.7% from $4.5 million for the
year ended December 31, 1994 to $4.9 million for the year ended December 31,
1995. The increase was the result of the implementation of the Association's
Employee Stock Ownership Plan ("ESOP"), the additional cost of Federal Deposit
Insurance premiums due to the growth in the Company's deposit accounts and ad-
ditional expenses associated with becoming a public company.
Income Taxes
Income taxes for the year ended December 31, 1995 increased $1.3 million to
$4.3 million, from $3.0 million for the year ended December 31, 1994. This was
the result of an increase in income before taxes of $3.3 million for the year
ended December 31, 1995, compared to the year ended December 31, 1994. The
annualized effective income tax rate for the periods ended December 31, 1995
and 1994 were 38.5% and 37.4% respectively.
Private Securities Litigation Reform Act Safe Harbor Statement
In addition to historical information, this Annual Report may include certain
forward looking statements based on current management expectations. The
Company's actual results could differ materially from those management expec-
tations. Factors that could cause future results to vary from current manage-
ment expectations include, but are not limited to, general economic condi-
tions, legislative and regulatory changes, monetary and fiscal policies of the
federal government, changes in tax policies, rates and regulations of federal,
state and local tax authorities, changes in interest rates, deposit flows, the
cost of funds, demand for loan products, demand for financial services, compe-
tition, changes in the quality or composition of the Company's loan and in-
vestment portfolios, changes in accounting principles, policies or guidelines,
and other economic, competitive, governmental and technological factors af-
fecting the Company's operations, markets, products, services and prices. Fur-
ther description of the risks and uncertainties to the business are included
in detail in Item 1, "Business" of the Company's 1996 From 10-K.
- -------------------------------------------------------------------------------
20
<PAGE>
Independent Auditors' Report
- --------------------------------------------------------------------------------
To the Board of Directors and Stockholders of First Bell Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of First Bell
Bancorp, Inc. and subsidiary, as of December 31, 1996 and 1995, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of First Bell Bancorp's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall fi-
nancial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of First Bell Bancorp, Inc. and sub-
sidiary as of December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996 in conformity with generally accepted accounting principles.
Pittsburgh, Pennsylvania
January 24, 1997 (February 24,
1997 as to Note 22)
- --------------------------------------------------------------------------------
21
<PAGE>
FIRST BELL BANCORP, INC. 1996 ANNUAL REPORT
Consolidated Balance Sheets
(In thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
ASSETS -------- --------
<S> <C> <C>
CASH AND CASH EQUIVALENTS:
Cash on hand................................................................. $ 980 $ 735
Noninterest-bearing deposits................................................. 1,554 1,262
Interest-bearing deposits.................................................... 23,872 21,725
-------- --------
Total cash and cash equivalents............................................ 26,406 23,722
FEDERAL FUNDS SOLD............................................................. 72,875 52,025
INVESTMENT SECURITIES HELD-TO-MATURITY--at cost (fair value of $15,429
and $20,968 at December 31, 1996 and 1995, respectively)...................... 14,964 19,953
CONVENTIONAL LOANS--net of allowance for loan losses of $665
and $575 at December 31, 1996 and 1995, respectively.......................... 529,866 414,610
OTHER LOANS--Net............................................................... 949 959
REAL ESTATE OWNED.............................................................. 229 178
PREMISES AND EQUIPMENT--Net.................................................... 3,692 3,601
FEDERAL HOME LOAN BANK STOCK--At cost.......................................... 3,999 3,009
ACCRUED INTEREST RECEIVABLE.................................................... 2,758 2,677
OTHER ASSETS................................................................... 445 108
-------- --------
Total assets............................................................... $656,183 $520,842
======== ========
<CAPTION>
1996 1995
LIABILITIES AND STOCKHOLDERS' EQUITY -------- --------
<S> <C> <C>
DEPOSITS:
Passbook, club and other accounts............................................ $ 66,486 $ 71,723
Money market and NOW accounts................................................ 44,661 39,447
Certificate accounts......................................................... 372,794 280,241
-------- --------
Total deposits............................................................. 483,941 391,411
BORROWINGS..................................................................... 70,000 --
ADVANCES BY BORROWERS FOR TAXES AND INSURANCE.................................. 10,822 8,545
ACCRUED INTEREST ON DEPOSITS................................................... 503 338
ACCRUED INTEREST ON BORROWINGS................................................. 191 --
ACCRUED INCOME TAXES........................................................... 81 23
DEFERRED TAX LIABILITY......................................................... 1,244 673
DIVIDENDS PAYABLE ON COMMON STOCK.............................................. 713 --
OTHER LIABILITIES.............................................................. 2,255 1,370
-------- --------
Total liabilities.......................................................... 569,750 402,360
STOCKHOLDERS' EQUITY:
Preferred stock ($.01 par value, 2,000,000 shares authorized;
no shares issued or outstanding)............................................ -- --
Common stock ($.01 par value; 20,000,000 shares authorized;
8,596,250 shares issued and 7,758,150 and 8,596,250 outstanding)............ 86 86
Additional paid-in capital................................................... 61,063 83,524
Unearned ESOP shares......................................................... (4,454) (6,636)
Unearned MRP shares.......................................................... (4,792) --
Treasury stock, at cost...................................................... (11,684) --
Retained earnings--substantially restricted.................................. 46,214 41,508
-------- --------
Total stockholders' equity................................................. 86,433 118,482
-------- --------
Total liabilities and stockholders' equity................................. $656,183 $520,842
======== ========
</TABLE>
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
22
<PAGE>
Consolidated Statements of Income
(In thousands, except per share amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
INTEREST AND DIVIDEND INCOME:
Conventional loans.................................. $36,727 $27,546 $21,237
Interest-bearing deposits........................... 791 2,156 2,651
Mortgage-backed securities.......................... -- 311 394
Federal funds sold.................................. 1,965 1,567 --
Investment securities held-to-maturity.............. 1,214 1,975 1,913
Other loans......................................... 71 81 78
Federal Home Loan Bank stock........................ 239 195 147
------- ------- -------
Total interest and dividend income................ 41,007 33,831 26,420
------- ------- -------
INTEREST EXPENSE:
Deposits............................................ 21,859 18,432 14,731
Borrowings.......................................... 191 -- --
------- ------- -------
Total interest expense:........................... 22,050 18,432 14,731
------- ------- -------
NET INTEREST INCOME................................... 18,957 15,399 11,689
PROVISION FOR (RECOVERY OF) LOAN LOSSES............... 90 -- (4)
------- ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR (RECOVERY OF) LOAN LOSSES........................ 18,867 15,399 11,693
------- ------- -------
OTHER INCOME:
Service fees and charges............................ 644 733 806
Gain on sales of mortgage-backed securities
available-for-sale................................. -- 68 --
Gain on sale of premise............................. 536 -- --
Other income........................................ 18 23 24
------- ------- -------
Total other income................................ 1,198 824 830
------- ------- -------
OTHER EXPENSES:
Compensation, payroll taxes and fringe benefits..... 2,844 2,291 1,824
Federal insurance premiums.......................... 3,418 848 810
Office occupancy expense, excluding depreciation.... 459 478 465
Depreciation........................................ 244 240 295
Computer services................................... 206 212 199
Other expenses...................................... 1,006 876 915
------- ------- -------
Total other expenses.............................. 8,177 4,945 4,508
------- ------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES.............. 11,888 11,278 8,015
------- ------- -------
PROVISION FOR INCOME TAXES:
Current:
Federal............................................ 3,189 2,966 1,820
State.............................................. 725 726 517
Deferred expense.................................... 571 653 663
------- ------- -------
Total provision for income taxes.................. 4,485 4,345 3,000
------- ------- -------
NET INCOME............................................ $ 7,403 $ 6,933 $ 5,015
======= ======= =======
PRIMARY AND FULLY DILUTED EARNINGS PER SHARE (1)...... $ 1.00 $ 0.52 $ --
======= ======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING (1)............... 7,402 7,934 --
======= ======= =======
</TABLE>
- -------
(1) Amounts for the year ending December 31, 1995 represent earnings per share
and weighted average shares outstanding based on the period shares
outstanding since the conversion to the capital stock form of ownership
(see Note 2).
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
23
<PAGE>
FIRST BELL BANCORP, INC. 1996 ANNUAL REPORT
Consolidated Statements of Changes in Stockholders' Equity
(In thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNEARNED
PREFERRED STOCK COMMON STOCK ADDITIONAL ESOP SHARES
----------------- ------------- PAID-IN --------------
SHARES AMOUNT SHARES AMOUNT CAPITAL SHARES AMOUNT
------- ------- ------ ------ ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1993................... -- $ -- -- $-- $ -- -- $ --
Net income............ -- -- -- -- -- -- --
------- ------- ----- --- -------- ---- -------
BALANCE, DECEMBER 31,
1994................... -- -- -- -- -- -- --
Net proceeds from
initial public
offering............. -- -- 8,596 86 83,454 (688) (6,877)
Allocation of ESOP
shares............... -- -- -- -- 70 24 241
Net income............ -- -- -- -- -- -- --
------- ------- ----- --- -------- ---- -------
BALANCE, DECEMBER 31,
1995................... -- -- 8,596 86 83,524 (664) (6,636)
Purchase of treasury
stock................ -- -- -- -- -- -- --
Purchase of MRP
shares............... -- -- -- -- -- -- --
Allocation of ESOP
shares............... -- -- -- -- 203 29 202
Return of capital
($2.93 per share).... -- -- -- -- (22,664) 5 1,980
Dividends ($.37 per
share)............... -- -- -- -- -- -- --
Net income............ -- -- -- -- -- -- --
------- ------- ----- --- -------- ---- -------
BALANCE, DECEMBER 31,
1996................... -- $ -- 8,596 $86 $ 61,063 (630) $(4,454)
======= ======= ===== === ======== ==== =======
</TABLE>
<TABLE>
<CAPTION>
UNEARNED
MRP SHARES TREASURY STOCK
-------------- --------------- RETAINED
SHARES AMOUNT SHARES AMOUNT EARNINGS TOTAL
------ ------- ------ -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993. -- $ -- -- $ -- $29,560 $ 29,560
Net income............... -- -- -- -- 5,015 5,015
---- ------- ---- -------- ------- --------
BALANCE, DECEMBER 31, 1994. -- -- -- -- 34,575 34,575
Net proceeds from initial
public offering......... -- -- -- -- -- 76,663
Allocation of ESOP
shares.................. -- -- -- -- -- 311
Net income............... -- -- -- -- 6,933 6,933
---- ------- ---- -------- ------- --------
BALANCE, DECEMBER 31, 1995. -- -- -- -- 41,508 118,482
Purchase of treasury
stock................... -- -- (838) (11,684) -- (11,684)
Purchase of MRP shares... (344) (4,792) -- -- -- (4,792)
Allocation of ESOP
shares.................. -- -- -- -- -- 405
Return of capital ($2.93
per share).............. -- -- -- -- 5 (20,684)
Dividends ($.37 per
share).................. -- -- -- -- (2,697) (2,697)
Net income............... -- -- -- -- 7,403 7,403
---- ------- ---- -------- ------- --------
BALANCE, DECEMBER 31, 1996. (344) $(4,792) (838) $(11,684) $46,214 $ 86,433
==== ======= ==== ======== ======= ========
</TABLE>
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
24
<PAGE>
Consolidated Statements of Cash Flows
(In thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
--------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................... $ 7,403 $ 6,933 $ 5,015
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation................................ 244 240 295
Deferred income taxes....................... 571 653 663
Amortization of premiums and accretion of
discounts.................................. (11) (358) (923)
Provision for (recovery of) loan losses..... 90 -- (4)
Gain on sale of mortgage-backed securities
available-for-sale......................... -- (68) --
Compensation expense--allocation of ESOP
shares..................................... 405 311 --
Dividends payable........................... (713) -- --
Gain on sale of premise..................... (536) -- --
Increase or decrease in assets and
liabilities:
Accrued interest receivable................ (81) (615) (574)
Accrued interest on deposits and
borrowings................................ 356 149 96
Accrued income taxes....................... 58 135 --
Other assets............................... (337) 502 (517)
Other liabilities.......................... 1,598 (50) (156)
--------- --------- --------
Net cash provided by operating activities.... 9,047 7,832 3,895
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities............ -- (4,878) (93,431)
Purchase of Federal Funds.................... (20,850) (52,025) --
Proceeds from maturities of investment
securities held-to-maturity................. 5,000 30,000 62,310
Principal paydowns on mortgage-backed
securities held-to-maturity................. -- 878 1,738
Proceeds from sale of mortgage-backed
securities available-for-sale............... -- 4,058 --
Net increase in conventional loans........... (115,575) (83,615) (60,458)
Purchase of conventional mortgage loans...... -- (24,361) --
Net decrease (increase) in other loans....... 10 106 (116)
Redemption (purchase) of Federal Home Loan
Bank stock.................................. (990) (600) 10
Net proceeds from sale of real estate owned.. 178 149 (2)
Net proceeds from sale of premises........... 915 -- --
Purchase of premises and equipment........... (714) (35) (117)
--------- --------- --------
Net cash used in investing activities....... (132,026) (130,323) (90,066)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in demand deposits, NOW accounts
and savings accounts........................ (23) (23,734) 36,809
Net increase in certificate accounts......... 92,553 51,463 51,443
Net increase in advances by borrowers for
taxes and insurance......................... 2,277 1,617 1,037
Borrowings................................... 70,000 -- --
Dividends paid............................... (1,984) -- --
Net proceeds from sale of stock.............. -- 76,663 --
Return of capital............................ (20,684) -- --
Purchase of treasury stock................... (11,684) -- --
Purchase of MRP shares....................... (4,792) -- --
--------- --------- --------
Net cash provided by financing activities.... 125,663 106,009 15,671
--------- --------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................... 2,684 (16,482) (70,500)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR... 23,722 40,204 110,704
--------- --------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR......... $ 26,406 $ 23,722 $ 40,204
========= ========= ========
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest on deposits and advances by
borrowers for taxes and insurance.......... $ 21,693 $ 18,283 $ 14,635
Income taxes................................ 3,870 3,557 2,472
Noncash transactions:
Transfers from conventional loans to real
estate acquired through foreclosure........ 229 287 28
Increase in additional paid-in capital--ESOP
share allocation........................... 203 70 --
</TABLE>
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
25
<PAGE>
FIRST BELL BANCORP, INC. 1996 ANNUAL REPORT
Notes to Consolidated Financial Statements Years Ended December 31, 1996, 1995
and 1994
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of First Bell
Bancorp, Inc. ("First Bell") and its wholly-owned subsidiary, Bell Federal
Savings and Loan Association of Bellevue ("the Association" or "Bell Feder-
al", collectively "the Company"). All significant intercompany transactions
have been eliminated in consolidation. The investment in Bell Federal on
First Bell's financial statements is carried at the parent company's equity
in the underlying net assets.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and with general practices within
the banking industry. In preparing such financial statements, management is
required to make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the period. Actual results
could differ from those estimates.
2. CONVERSION TO CAPITAL STOCK FORM OF OWNERSHIP
On July 18, 1994, the Board of Directors of Bell Federal Savings and Loan
Association of Bellevue adopted a plan of conversion, pursuant to which the
Association would convert from a federally chartered mutual savings and
loan association to a federally chartered capital stock savings and loan
association, with the concurrent formation of the holding company, First
Bell Bancorp, Inc.
On June 29, 1995, conversion from a mutual form of ownership to a stock
form was finalized. First Bell was capitalized through the initial sale of
8,596,250 shares of common stock to eligible account holders, an employee
benefit plan of the Association, supplemental eligible account holders,
other members of the Association, and the general public. First Bell then
used a portion of the proceeds from the sale to purchase all of the out-
standing shares of Bell Federal. This transaction was accounted for in a
manner similar to the pooling of interests method, and accordingly, the fi-
nancial statements as of and for the year ending December 31, 1994 reflect
the financial position and results of operations of Bell Federal.
On December 16, 1996, the Company declared a one-time cash distribution of
$3.00 per share. The Company obtained a private letter ruling from the
Internal Revenue Service which allowed them to treat $2.93 per share of
this distribution as a return of capital. The return of capital was
reflected as a reduction to additional paid-in-capital and unearned ESOP
shares in the Company's financial statements. For the stockholders, the
return of capital is treated as a reduction in the cost basis of the shares
and is not subject to income taxes until the shares are sold. The remaining
$.07 per share was treated as an ordinary dividend. The total distribution
paid was $23,274,450 on 7,758,150 shares of stock on December 31, 1996 to
shareholders of record as of December 20, 1996.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Federal Home Loan Bank System--The Association is a member of the Fed-
eral Home Loan Bank ("FHLB") system. As a member, the Association is re-
quired to maintain a minimum investment in capital stock of the FHLB of
not less than 1% of the Association's outstanding conventional mortgage
loans or 0.3% of its total assets. Deficiencies, if any, in the required
investment at the end of any reporting period are purchased in the sub-
sequent reporting period. The Association receives dividends on its FHLB
stock.
b. Cash and Cash Equivalents--For the purpose of presenting the consoli-
dated statements of cash flows, cash on hand and interest and noninter-
est-bearing deposits with original maturities of less than 90 days are
considered cash equivalents.
The Association services mortgage loans for the Federal National Mort-
gage Association. The Association is required to restrict cash balances
equal to the corresponding escrow funds. As of December 31, 1996 and
1995, restricted cash of approximately $165,000 and $198,000, respec-
tively, has been segregated on the books of the Association.
- --------------------------------------------------------------------------------
26
<PAGE>
- --------------------------------------------------------------------------------
The Association's reserve requirements imposed by the Federal Reserve
Bank averaged approximately $804,000 and $706,000 for the years ended
December 31, 1996 and 1995, respectively.
c. Investment and Mortgage-Backed Securities--First Bell follows Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Cer-
tain Debt and Equity Securities," for investment and mortgage-backed se-
curities. Investment and mortgage-backed securities that may be sold as
part of First Bell's asset/liability or liquidity management or in re-
sponse to or in anticipation of changes in interest rates and prepayment
risk or other factors are classified as available-for-sale and are car-
ried at fair market value. Unrealized gains and losses on such securi-
ties are reported net of related taxes as a separate component of stock-
holders' equity. Securities that the Company has the intent and ability
to hold to maturity are classified as held-to-maturity and are carried
at amortized cost. Realized gains and losses on sales of all securities
are reported in earnings and are computed using the specific identifica-
tion cost basis.
Premiums are amortized and discounts are accreted to maturity using the
level yield method. The Company does not maintain a trading account.
d. Conventional Loans--Interest on loans is credited to income as earned.
Interest earned that has not been collected is accrued. Interest accrued
on loans delinquent more than 90 days is offset by a reserve for
uncollected interest and is, therefore, not recognized as income. Origi-
nation fees and costs related to activities performed for a loan origi-
nation are deferred and recognized over the contractual life using the
level yield method in accordance with SFAS No. 91 "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring
Loans and Initial Direct Costs of Leases."
e. Servicing of Loans--The total amount of loans serviced for others was
$4,173,000, $4,739,000 and $5,648,000 at December 31, 1996, 1995 and
1994, respectively. Fees earned for servicing loans are reported as in-
come when the related loan payments are collected. Loan servicing costs
are charged to expense when incurred.
f. Allowance for Loan Losses--The allowance for loan losses is determined
by management, taking into consideration the past loan loss experience,
known and inherent risks in the portfolio, adverse situations which may
affect the borrowers' ability to repay and estimated values of under-
lying collateral and current economic conditions in the Association's
lending area. While management uses the best information available to
estimate losses on loans, future additions to the allowance may be nec-
essary for changes in economic conditions beyond the Association's con-
trol.
g. Real Estate Owned--Real estate owned is initially recorded at the lower
of carrying value or fair value less estimated costs to sell. Subse-
quently, such real estate is carried at the lower of fair value less es-
timated costs to sell or its initial recorded value. Reductions in the
carrying value of real estate subsequent to acquisition are recorded
through a valuation allowance. Costs related to the development and im-
provement of the real estate are capitalized, whereas those costs relat-
ing to holding the real estate are charged to expense.
Recovery of the carrying value of real estate acquired in settlement of
loans is dependent to a great extent on economic, operating and other
conditions that may be beyond the Company's control.
h. Premises and Equipment--Premises, equipment and leasehold improvements
are stated at cost less accumulated depreciation and amortization.
Depreciation and amortization are computed on a straight-line basis over
the estimated useful lives (3-50 years) or leasehold period, if shorter,
of the related assets.
i. Deposits--Interest on deposits is accrued and charged to operating ex-
pense monthly and is paid in accordance with the terms of the respective
accounts.
- --------------------------------------------------------------------------------
27
<PAGE>
FIRST BELL BANCORP, INC. 1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
j. Income Taxes--The Company follows the provisions of SFAS No. 109, "Ac-
counting for Income Taxes." SFAS No. 109 requires the asset and liabil-
ity method of accounting for income taxes, under which deferred income
taxes are recognized for the tax consequences of "temporary differences"
by applying enacted statutory tax rates to differences between the fi-
nancial statement carrying amounts and the tax bases of existing assets
and liabilities. Under SFAS No. 109, the effect on deferred taxes of a
change in tax rates is recognized in income in the period that includes
the enactment date.
k. Earnings Per Share--Primary earnings per share are computed by dividing
net income available to common stockholders by the weighted average num-
ber of common shares and, as appropriate, dilutive common stock equiva-
lents outstanding for the period. Stock options, if dilutive are consid-
ered to be common stock equivalents. The number of shares used to
compute primary and fully diluted earnings per share were 7,402,000 and
7,934,000 for 1996 and 1995. For 1995, earnings subsequent to the ini-
tial sale of common stock in the amount of $4,119,000 were used to com-
pute both primary and fully diluted earnings per share.
l. Treasury Stock--Treasury stock is recorded at cost.
m. Interest Rate Risk--A significant portion of the Company's assets con-
sist of long-term fixed-rate residential mortgage loans, while a signif-
icant portion of the Company's liabilities consist of deposits with con-
siderably shorter terms. As a result of these differences in the
maturities of assets and liabilities, any significant increase in inter-
est rates will have an adverse effect on the Company's results of opera-
tions. To manage this interest rate risk, the Company maintains high
levels of liquid assets to enable it to quickly respond to changes in
interest rates.
n. New Accounting Pronouncements--In the current year, the Company adopted
SFAS No. 123, "Accounting for Stock-Based Compensation." Based on the
adoption of SFAS No. 123, the Company has elected to measure compensa-
tion expense in accordance with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," and has disclosed the
required information in Note 15. The adoption of this standard is re-
flected in Note 15 to the financial statements.
4. MORTGAGE-BACKED SECURITIES
In November 1995, the Financial Accounting Standards Board ("FASB") issued
"A Guide to Implementation of Statement 115 on Accounting for Certain In-
vestments in Debt and Equity Securities." In connection with the adoption
of this guide, the Company transferred all mortgage-backed securities clas-
sified as held-to-maturity to available-for-sale, and subsequently sold all
such securities in 1995, resulting in a gain of $68,000. The amortized cost
of the transferred securities approximated $4,058,000. There were no mort-
gage-backed securities held by the Company at December 31, 1996 and 1995.
5. INVESTMENT SECURITIES HELD-TO-MATURITY
The following is a summary of investment securities held-to-maturity (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Treasury bills....................... $14,960 $424 $-- $15,384
Other investments.................... 4 41 -- 45
------- ---- --- -------
$14,964 $465 $-- $15,429
======= ==== === =======
</TABLE>
- --------------------------------------------------------------------------------
28
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Treasury bills........................ $19,949 $ 978 $-- $20,927
Other investments..................... 4 37 -- 41
------- ------ --- -------
$19,953 $1,015 $-- $20,968
======= ====== === =======
</TABLE>
The carrying value and fair value of investment securities held-to-maturity
by contractual maturity, are shown below (in thousands):
<TABLE>
<CAPTION>
1996
-----------------
AMORTIZED FAIR
COST VALUE
--------- -------
<S> <C> <C>
Due one year or less....................................... $ 4,999 $ 5,020
Due after one year through five years...................... 4,989 5,290
Due after five years through ten years..................... 4,976 5,119
------- -------
$14,964 $15,429
======= =======
</TABLE>
There were no sales of investment securities held-to-maturity during the
years ended December 31, 1996, 1995 and 1994.
6. CONVENTIONAL LOANS
The following is a summary of conventional loans (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
-------- --------
<S> <C> <C>
Conventional mortgages...................................... $524,867 $409,807
Residential construction loans.............................. 19,877 19,692
Multi-family loans.......................................... 1,220 2,075
Second mortgage loans....................................... 297 330
-------- --------
546,261 431,904
Less:
Deferred net loan origination fees.......................... 4,610 5,537
Undisbursed portion of construction loans in process........ 11,120 11,182
Allowance for loan losses................................... 665 575
-------- --------
$529,866 $414,610
======== ========
</TABLE>
Conventional mortgages consist of one- to four-family fixed and adjustable
rate loans. The Company grants loans throughout the greater Pittsburgh,
Pennsylvania metropolitan area. The Company's borrowers ability to repay
the loans outstanding is, therefore, dependent on the economy of that area.
Nonaccrual loans totaled $400,000 and $333,000 at December 31, 1996 and
1995, respectively. The Association does not accrue interest on loans past
due 90 days or more. Uncollected interest on total nonaccrual loans
amounted to $24,000, $25,000 and $34,000 for the years ended December 31,
1996, 1995 and 1994, respectively.
- --------------------------------------------------------------------------------
29
<PAGE>
FIRST BELL BANCORP, INC. 1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
7. OTHER LOANS
The following is a summary of other loans (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1995
------ ------
<S> <C> <C>
Loans secured by deposits....................................... $938 $937
Home improvement loans.......................................... 13 26
---- ----
951 963
Less unearned discounts on home improvement loans.............. 2 46
---- ----
$949 $959
==== ====
</TABLE>
8. ALLOWANCE FOR LOAN LOSSES
The following is an analysis of the changes in the allowance for loan
losses (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Balance at begining of year.......................... $575 $575 $598
Provision for (recovery of) loan losses.............. 90 -- (23)
Loans charged off.................................... -- -- (4)
Recovery of previous loan chargeoffs................. -- -- 4
---- ---- ----
Balance at end of year............................... $665 $575 $575
==== ==== ====
</TABLE>
9. PREMISES AND EQUIPMENT
The following is a summary of premises and equipment (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1995
------ ------
<S> <C> <C>
Land and land improvements..................................... $ 351 $ 421
Office buildings and leasehold improvements.................... 3,755 3,917
Furniture, fixtures and equipment.............................. 1,636 1,629
------ ------
5,742 5,967
Less accumulated depreciation and amortization................. 2,050 2,366
------ ------
$3,692 $3,601
====== ======
</TABLE>
During the quarter ended September 30, 1996, the Association's branch of-
fice, which was located in the central business district in the City of
Pittsburgh, was sold for $915,000 resulting in a gain of $536,000. The sale
of the building was the result of a redevelopment project undertaken by the
City of Pittsburgh to enhance the downtown retail business district. The
branch was relocated to a new leased location in the same general area.
The Company leases certain of its branch offices under various operating
leases. Some of these leases contain renewal and extension clauses. The
following is a summary of the future minimum lease payments under these op-
erating leases (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING MINIMUM LEASE
DECEMBER 31, PAYMENTS
------------ -------------
<S> <C>
1997 $151
1998 152
1999 154
2000 156
2001 160
2001 and thereafter 455
</TABLE>
- --------------------------------------------------------------------------------
30
<PAGE>
- --------------------------------------------------------------------------------
Rental expense under these leases was approximately $113,000, $96,000 and
$97,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
10. DEPOSITS
The following is a summary of deposits and stated interest rates (in thou-
sands):
<TABLE>
<CAPTION>
STATED RATE DECEMBER 31,
-------------- -----------------
1996 1995
-------- --------
<S> <C> <C> <C>
Balance by interest rate:
Passbook, club and other accounts.......... 3.00% $ 66,486 $ 71,723
-------- --------
Money market and NOW accounts.............. 0.00%-- 3.00% 44,661 39,447
-------- --------
Certificate accounts....................... 3.00%-- 5.50% 113,356 118,738
5.51%-- 6.00% 121,968 60,210
6.01%-- 6.50% 98,368 60,417
6.51%-- 7.50% 30,860 30,479
7.51%-- 8.50% 3,630 5,260
8.51%-- 9.50% 4,346 4,561
9.51%--10.50% 266 576
-------- --------
372,794 280,241
-------- --------
$483,941 $391,411
======== ========
</TABLE>
Non-interest bearing demand deposits were approximately $3,994,000 and
$3,455,000 at December 31, 1996 and 1995, respectively.
The Association maintains insurance on deposits through the Savings Associ-
ation Insurance Fund ("SAIF"), which is under the supervision of the Fed-
eral Deposit Insurance Corporation ("FDIC").
The following is a summary of certificate accounts by contractual maturity
at December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
CONTRACTUAL MATURITY
--------------------
<S> <C>
1997 $231,118
1998 76,067
1999 28,384
2000 9,665
2001 9,865
2002 3,239
2003 and thereafter 14,456
--------
$372,794
========
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination
of $100,000 was $36,307,000 and $25,045,000 at December 31, 1996 and 1995,
respectively. Deposits in excess of $100,000 are not insured by the SAIF.
11. BORROWINGS
At December 31, 1996 the Company had $70,000,000 in borrowings from the
FHLB. These borrowings have a contractual maturity of five years and carry
an interest rate based on the 3-month London Interbank Offered Rate ("LIBOR
rate") adjusted quarterly. The interest rate on these borrowings was 4.92%
at December 31, 1996. The borrowings are secured by the assets of the Com-
pany.
- --------------------------------------------------------------------------------
31
<PAGE>
FIRST BELL BANCORP, INC. 1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
12. REGULATORY CAPITAL REQUIREMENTS AND RESTRICTIONS
The Association is subject to various regulatory capital requirements ad-
ministered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory--and possibly additional dis-
cretionary--actions by regulators that, if undertaken, could have a direct
material effect on the Association's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective ac-
tion, the Association must meet specific capital guidelines that involve
quantitive measures of the Association's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practic-
es. The Association's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Association to maintain minimum amounts and ratios (set forth
in the table below) of Total and Tier I Capital to risk-weighted assets and
of Tangible and Tier I Capital to total assets. Management believes, as of
December 31, 1996, that the Association meets all capital adequacy require-
ments to which it is subject.
The most recent notification from the Office of Thrift Supervision catego-
rized the Association as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized the As-
sociation must maintain minimum Total Capital to risk-weighted assets, Tier
I Capital to risk-weighted assets and Tier I Capital to total assets ratios
as set forth in the table. There are no conditions or events since that no-
tification that management believes have changed the institution's catego-
ry.
The Association had the following amounts of capital and capital ratios at
December 31, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
UNDER
PROMPT
FOR CAPITAL CORRECTIVE
ADEQUACY ACTION
ACTUAL PURPOSES PROVISIONS
------------- ------------- -------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital (to risk-
weighted assets)............. $80,102 27.51% $23,298 8.00% $29,123 10.00%
Tier I Capital (to risk-
weighted assets)............. 79,451 27.28% N/A N/A 17,474 6.00%
Tier I Capital (to total
assets)...................... 79,451 12.16% 19,599 3.00% 32,816 5.00%
Tangible Capital.............. 79,451 12.16% 9,800 1.50% N/A N/A
As of December 31, 1995:
Total Capital (to risk-
weighted assets)............. 73,392 34.43% 17,749 8.00% 22,185 10.00%
Tier I Capital (to risk-
weighted assets)............. 75,817 34.17% N/A N/A 13,311 6.00%
Tier I Capital (to total
assets)...................... 75,817 15.65% 14,538 3.00% 24,230 5.00%
Tangible Capital.............. 75,817 15.65% 7,269 1.50% N/A N/A
</TABLE>
Tangible Capital and Tier I Capital (to total assets) capital ratios are
computed as a percentage of total assets. Total Capital and Tier I Capital
(to risk-weighted assets) ratios are computed as a percentage of risk-
weighted assets. Risk-weighted assets were $291,226,000 at December 31,
1996.
The Association may not declare or pay cash dividends on or repurchase any
of its shares of common stock if the effect thereof would cause equity to
be reduced below applicable regulatory capital maintenance requirements, or
if such declaration and payment would otherwise violate regulatory require-
ments. At December 31, 1996 the maximum dividend the Association may de-
clare and pay to First Bell is approximately $35,566,000.
- --------------------------------------------------------------------------------
32
<PAGE>
- --------------------------------------------------------------------------------
13. INTEREST EXPENSE
The following is a summary of interest expense on deposits (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Passbook, club and other accounts.................... $ 2,314 $ 2,371 $ 3,406
Money market and NOW accounts........................ 1,040 1,069 1,087
Certificate accounts................................. 18,505 14,992 10,238
------- ------- -------
$21,859 $18,432 $14,731
======= ======= =======
</TABLE>
14. INCOME TAXES
Deferred income taxes reflect the net effects of temporary differences be-
tween the carrying amounts of assets and liabilities for financial report-
ing purposes and the bases used for income tax purposes. The tax effects of
significant items comprising the net deferred tax liability are as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995
------- -------
<S> <C> <C>
Deferred Tax Assets:
Deferred loan origination fees............................ $ -- $ 493
Other..................................................... 158 126
------- -------
Total deferred tax assets................................ 158 619
------- -------
Deferred Tax Liabilities:
Deferred loan origination fees............................ (57) --
Allowance for loan losses................................. (915) (1,038)
Depreciation on premises and equipment.................... (248) (254)
Other..................................................... (182) --
------- -------
Total deferred tax liabilities........................... (1,402) (1,292)
------- -------
Net deferred tax liability............................... $(1,244) $ (673)
======= =======
</TABLE>
The provision for income taxes consists of the following components (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Current:
Federal............................................. $ 3,189 $ 2,966 $ 1,820
State............................................... 725 726 517
Deferred expense..................................... 571 653 663
------- ------- -------
Total provision for income taxes................... $ 4,485 $ 4,345 $ 3,000
======= ======= =======
</TABLE>
The following table presents the principal components of deferred income
tax expense (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1996 1995 1994
----- ---- ----
<S> <C> <C> <C>
Allowance for loan losses.................................. $(123) $221 $208
Deferred loan origination fees............................. 550 458 542
Depreciation differences................................... (6) 8 (57)
Other--net................................................. 150 (34) (30)
----- ---- ----
$ 571 $653 $663
===== ==== ====
</TABLE>
- --------------------------------------------------------------------------------
33
<PAGE>
FIRST BELL BANCORP, INC. 1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
The reconciliation between the federal statutory tax rate and the Company's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory tax rate.......................................... 34.0% 34.0% 34.0%
State income taxes.......................................... 4.0 4.3 4.3
Other--net.................................................. (0.3) 0.2 (0.9)
---- ---- ----
Effective tax rate........................................ 37.7% 38.5% 37.4%
==== ==== ====
</TABLE>
In accordance with SFAS No. 109, the Company has provided for deferred in-
come taxes for the differences between the bad debt deduction for tax and
financial statement purposes incurred after December 31, 1987. Deferred
taxes have not been recognized with respect to pre-1988 tax basis bad debt
reserves. In the event that the Company were to recapture these reserves
into income, it would recognize tax expense of approximately $1.7 million.
As a result of legislation enacted in 1996, however, this liability will
not be recaptured if the Company were to change its depository institution
charter.
15. EMPLOYEE BENEFIT PLANS
Defined Benefit Pension Plan--The Company has a defined benefit pension
plan for substantially all employees. The benefits of the defined benefit
plan are generally based on the years of service and the employee's compen-
sation during the last five years of employment.
Net periodic pension cost for the defined benefit plan includes the follow-
ing components (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Service cost................................................ $ 82 $ 50 $ 60
Interest cost............................................... 68 60 57
Actual return on plan assets................................ (61) (58) (64)
Net amortization and deferral............................... (9) (16) (5)
---- ---- ----
Net periodic pension cost................................. $880 $336 $ 48
==== ==== ====
</TABLE>
The following table reconciles the funded status of the plan to the amount
recorded in the accompanying consolidated balance sheets (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1995
------ ------
<S> <C> <C>
Projected benefit obligation................................. $1,041 $1,048
Plan assets at fair value, primarily insurance contracts
and cash.................................................... 1,073 972
------ ------
Plan assets in excess of (less than) projected benefit
obligation.................................................. 32 (76)
Unrecognized net loss........................................ 165 299
Unrecognized prior service cost.............................. (127) (134)
Unrecognized net assets...................................... (57) (63)
------ ------
Net pension assets......................................... $ 13 $ 26
====== ======
Actuarial present value of benefit obligation:
Vested benefit obligation.................................. $ 814 $ 774
Nonvested benefit obligation............................... 41 39
------ ------
Accumulated benefit obligation............................... $ 855 $ 813
====== ======
</TABLE>
- --------------------------------------------------------------------------------
34
<PAGE>
- --------------------------------------------------------------------------------
The following rate assumptions were used in the plan accounting:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Discount rate............................................... 7.25% 6.25% 8.00%
Rate of compensation increases.............................. 6.00% 6.00% 6.00%
Expected long-term rate of return of plan assets............ 7.50% 7.50% 8.00%
</TABLE>
Deferred Supplemental Compensation Plan--During 1992, the Board of Direc-
tors approved a supplemental deferred compensation plan for the President
of the Association. The plan provides that the President will receive de-
ferred compensation in an amount up to $60,000 per year based upon the re-
turn on assets of the Company for the prior year. The compensation will be
paid to the President upon his retirement. For the years ended December 31,
1996, 1995 and 1994, deferred compensation expenses under this plan were
$60,000 each year.
401(k) Plan--During 1993, the Association instituted a defined contribution
401(k) plan to provide benefits for substantially all employees. The plan
provides for, but does not require, employees to make tax deferred payroll
savings contributions. The Association is required to make a matching con-
tribution based on the level of employee contribution. The total expense
recorded under this plan for the years ended December 31, 1996, 1995 and
1994 was approximately $6,400, $4,000 and $10,000, respectively.
Employee Stock Ownership Plan--Effective January 1, 1995, the Association
established the Bell Federal Savings and Loan Association of Bellevue Em-
ployee Stock Ownership Plan ("ESOP") which covers substantially all employ-
ees. On June 29, 1995, the ESOP purchased 687,700 shares of Company common
stock as part of the initial public offering. The shares were purchased
with the proceeds of a loan from the Company which will be repaid through
the operations of the Association. Shares are allocated to employees, as
principal and interest payments are made to the Company.
Compensation expense related to the ESOP for 1996 and 1995 totaled $405,000
and $311,000, respectively, based on the average fair value of shares com-
mitted to be released. The loan and related interest expense on the loan
are eliminated in these consolidated financial statements. The fair value
of unallocated ESOP shares at December 31, 1996 was approximately
$8,342,000. Shares held by the ESOP were as follows:
<TABLE>
<S> <C>
Shares purchased by the ESOP--June 28, 1995........................... 687,700
Shares released for allocation in 1995................................ 24,122
-------
Unallocated shares--December 31, 1995................................. 663,578
Shares released for allocation in 1996................................ 33,956
-------
Unallocated shares December 31, 1996.................................. 629,622
=======
</TABLE>
Stock Option Plan--The Company has a fixed option plan that was approved by
Shareholders on April 29, 1996. Options under this plan have been granted
to certain officers and directors of the Company. The plan also permits op-
tions to be granted to employees at the Company's discretion. Under the
plan, the total number of shares of common stock that may be granted is
859,625. The Company has adopted the disclosure-only provision of SFAS No.
123 and accordingly, no compensation cost has been recognized for the stock
option plan. Had compensation cost for the Company's stock option plan been
determined based on the fair value at the grant date for awards in 1996
consistent with the provisions of SFAS No. 123, the Company's net earnings
and earnings per share would have been reduced to the pro forma amounts in-
dicated below:
<TABLE>
<S> <C>
Net income--as reported............................................... $7,403
Net income--pro forma................................................. $7,067
Primary and fully diluted--earnings per share--as reported............ $ 1.00
Primary and fully diluted--earnings per share--pro forma.............. $ 0.95
</TABLE>
- --------------------------------------------------------------------------------
35
<PAGE>
FIRST BELL BANCORP, INC. 1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
The fair value of each option grant is estimated on the date of grant using
the Black Sholes option pricing model with the following weighted average
assumptions used for grants in 1996: dividend yield of approximately 3%;
expected volatility of approximately 27%; risk-free interest rate of ap-
proximately 6.4%; and expected lives of ten years.
The following summarizes the activity in the Stock Option Plan in 1996:
<TABLE>
<S> <C>
Options outstanding, beginning of year............................... --
Options exercised.................................................... --
Options granted...................................................... 361,037
-------
Options outstanding, end of year..................................... 361,037
=======
Option price, end of year............................................ $13.375
Options available for grant, end of year............................. 498,588
Weighted-average fair value of options granted during the year....... $ 4.70
</TABLE>
These options have an exercise price of $13.375 and a remaining contractual
life of ten years. None of these options were exercisable as of December
31, 1996. Approximately one-fifth of the stock option shares may be exer-
cised after the end of each year, and no option will be exercisable after
ten years from the date of grant. Terminated employees forfeit any non-
vested options.
Master Stock Compensation Plan--The Association has a Master Stock Compen-
sation Plan ("MRP") that was approved by Shareholders on April 29, 1996.
Awards under this plan have been granted to certain officers, directors and
management personnel of the Association. Under the MRP, a committee of the
Board of Directors of the Association grants shares of common stock to em-
ployees and directors. Shares purchased in 1996 and reserved for the MRP
totaled 343,850, of this amount, 180,260 shares were awarded in 1996.
Shares vest under the current awards at 20% per year, commencing one year
from the date of grant subject to the attainment of certain performance
goals. The cost of unearned shares related to these awards, included as a
separate component of shareholders' equity, aggregated $4,792,000 at Decem-
ber 31, 1996. Compensation cost is recorded over the five year period as
shares are earned based on the average fair market value of stock during
the fiscal year. The expense for the year ended December 31, 1996 was
$511,000. Terminated employees forfeit any non-vested awards.
16. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Association originates loan commit-
ments. Loan commitments generally have fixed expiration dates or other ter-
mination clauses and may require payment of a fee. The Association evalu-
ates each customer's credit worthiness in a case-by-case basis. The amount
of collateral deemed necessary by the Association is based on management's
credit evaluation and the Association's underwriting guidelines for the
particular loan. The total commitments outstanding at December 31, 1996 and
1995 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
----------------- -----------------
NOTIONAL NOTIONAL NOTIONAL NOTIONAL
AMOUNT RATE AMOUNT RATE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
15 year fixed rate mortgages.............. $ 825 7.25% $ 1,981 7.00%
30 year fixed rate mortgages.............. 5,342 7.50% 5,131 7.38%
Construction mortgages.................... 11,120 7.46% 11,182 7.54%
------- -------
$17,287 $18,294
======= =======
</TABLE>
Additionally, the Company is also subject to certain asserted and unas-
serted potential claims encountered in the normal course of business. In
the opinion of management, neither the resolution of these claims nor the
funding of credit commitments will have a material effect on the Associa-
tion's financial position or results of operations.
- --------------------------------------------------------------------------------
36
<PAGE>
- --------------------------------------------------------------------------------
Credit related financial instruments have off-balance sheet credit risk be-
cause only origination fees (if any) are recognized in the balance sheet
(as "other liabilities") for these instruments until the commitments are
fulfilled or expire. The credit risk amounts are equal to the notional
amounts of the contracts, assuming that all counterparties fail completely
to meet their obligations and the collateral or other security is of no
value.
17. FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair values of the Company's financial instruments are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1996 1995
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Assets:
Cash and noninterest-bearing deposits.. $ 2,534 $ 2,534 $ 1,997 $ 1,997
Interest-bearing deposits............. 23,872 23,872 21,725 21,725
Federal Funds sold.................... 72,875 72,875 52,025 52,025
Investment securities................. 14,964 15,429 19,953 20,968
Conventional loans.................... 529,866 518,842 414,610 418,716
Federal Home Loan Bank stock.......... 3,999 3,999 3,009 3,009
Liabilities:
Passbook, club, money market, NOW and
other accounts....................... $111,147 $111,147 $111,170 $111,170
Certificate accounts.................. 372,794 377,536 280,241 292,554
Borrowings............................ 70,000 70,000 -- --
</TABLE>
a. Cash and Noninterest-bearing Deposits, Interest-bearing Deposits and
Federal Funds Sold--For cash and noninterest-bearing deposits, interest-
bearing deposits and Federal funds sold, the fair value is estimated as
the carrying amount.
b. Investment Securities--Fair values for investment securities are based
on quoted market prices or dealer quotes. If a quoted market price is
not available, fair value is estimated using quoted market prices for
similar securities.
c. Conventional Loans--For conventional mortgages, fair value is estimated
by discounting estimated future cash flows using the current rates at
which similar loans would be made to borrowers with similar credit rat-
ings and for the same remaining maturities.
d. Passbook, Club, Money Market, NOW and Other Accounts--The fair value of
these accounts is the amount payable on demand, or the carrying amount
at the reporting date.
e. Certificate Accounts--The fair value of fixed-maturity certificates of
deposit is estimated by discounting future cash flows using the rates
currently offered for deposits of similar remaining maturities.
f. Borrowings--The fair value of borrowings that have an adjustable rate
which reprices quarterly is estimated as the carrying amount.
g. Off-balance Sheet Commitments to Extend Credit--The fair value of off-
balance sheet commitments to extend credit is estimated to equal the
outstanding commitment amount. Management does not believe it is mean-
ingful to provide an estimate of fair value that differs from the out-
standing commitment amount as a result of the uncertainties involved in
attempting to assess the likelihood and timing of the commitment being
drawn upon, coupled with the lack of an established market and a wide
diversity of fee structures.
- --------------------------------------------------------------------------------
37
<PAGE>
FIRST BELL BANCORP, INC. 1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
18. FDIC SPECIAL ASSESSMENT
On September 30, 1996, the President signed into law the Deposit Insurance
Funds Act of 1996 (the "Funds Act") which, among other things, imposes a
special one-time assessment on SAIF member institutions, including the As-
sociation, to recapitalize the SAIF. As required by the Funds Act, the FDIC
imposed a special assessment of 65.7 basis points on SAIF assessable depos-
its held as of March 31, 1995, payable November 27, 1996. The Association
recorded a pre-tax charge of $2.5 million as a result of the FDIC special
assessment.
The Funds Act also spreads the obligation for payment of the Financing Cor-
poration ("FICO") bonds across all SAIF and Bank Insurance Fund ("BIF")
members. Beginning on January 1, 1997, BIF deposits will be assessed for
FICO payments at a rate of 20% of the rate assessed on SAIF deposits. Based
on current estimates by the FDIC, BIF deposits will be assessed a FICO pay-
ment of 1.3 basis points, while SAIF deposits will pay an estimated 6.5 ba-
sis points on the FICO bonds. Full pro rata sharing of the FICO payments
between BIF and SAIF members will occur on the earlier of January 1, 2000
or the date the BIF and SAIF are merged. The Funds Act specifies that the
BIF and SAIF will be merged on January 1, 1999 provided no savings associa-
tions remain as of that time.
As a result of the Funds Act, the FDIC recently proposed to lower SAIF as-
sessments to a range of 0 to 27 basis points effective January 1, 1997, a
range comparable to that of BIF members. However, SAIF members will con-
tinue to make the higher FICO payments described above. Management cannot
predict the level of FDIC insurance assessments on an on-going basis,
whether the savings association charter will be eliminated, or whether the
BIF and SAIF will eventually be merged.
19. NEW ACCOUNTING PRONOUNCEMENT NOT YET ADOPTED
Accounting for Transfers and Servicing of Financial Assets and Extinguish-
ments of Liabilities--In June, 1996 FASB issued SFAS No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of Lia-
bilities." First Bell is required to adopt this new method of accounting in
fiscal 1997, (earlier or retroactive application of this standard is not
permitted).
SFAS No. 125 significantly affects accounting for and disclosures about
many depository institution transactions (sale of partial interest in fi-
nancial assets, assets subject to prepayment risk, etc.). Conclusion about
the appropriate accounting for these transactions are based on control and
depend increasingly on elements of underlying legal agreements. Management
anticipates that the effect on the financial statements of the adoption of
this standard will not be material.
- --------------------------------------------------------------------------------
38
<PAGE>
- --------------------------------------------------------------------------------
20. PARENT COMPANY
The following are condensed financial statements for First Bell as of and
for the year or period ended December 31, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
BALANCE SHEETS
DECEMBER 31,
------------------
1996 1995
-------- --------
<S> <C> <C>
ASSETS
CASH AND INTEREST-BEARING DEPOSITS....................... $ 9 $ 16
FEDERAL FUNDS SOLD....................................... 2,875 36,025
INVESTMENT IN BELL FEDERAL............................... 79,451 75,817
LOAN RECEIVABLE--ESOP.................................... 4,569 6,636
OTHER ASSETS............................................. 625 92
-------- --------
Total assets........................................... $ 87,529 $118,586
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
ACCRUED INCOME TAXES..................................... $ 58 $ 104
OTHER LIABILITIES........................................ 1,038 --
-------- --------
Total liabilities...................................... 1,096 104
-------- --------
STOCKHOLDERS' EQUITY:
Preferred stock ($.01 per value, 2,000,000 shares
authorized; no shares issued)........................... -- --
Common stock ($.01 par value; 20,000,000 shares
authorized; 8,596,250 issued
and 7,758,150 and 8,956,250 outstanding)............... 86 86
Additional paid-in capital.............................. 61,063 83,524
Unearned ESOP shares.................................... (4,454) (6,636)
Unearned MRP shares..................................... (4,792) --
Treasury stock, at cost................................. (11,684) --
Retained earnings--substantially restricted............. 46,214 41,508
-------- --------
Total stockholders' equity............................. 86,433 118,482
-------- --------
Total liabilities and stockholders' equity............ $ 87,529 $118,586
======== ========
</TABLE>
- --------------------------------------------------------------------------------
39
<PAGE>
FIRST BELL BANCORP, INC. 1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
YEAR SIX MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
INTEREST INCOME:
Interest-bearing deposits......................... $ 89 $ --
Federal funds sold................................ 1,391 1,045
Interest on ESOP loan receivable.................. 551 310
------ ------
Total interest income........................... 2,031 1,355
------ ------
GENERAL AND ADMINISTRATIVE EXPENSES................ 231 --
------ ------
INCOME BEFORE PROVISION FOR INCOME TAXES........... 1,800 1,355
------ ------
PROVISION FOR INCOME TAXES:
Current:
Federal.......................................... 601 425
State............................................ 41 104
------ ------
Total provision for income taxes................ 642 529
------ ------
INCOME BEFORE EQUITY IN UNDISTRIBUTED EARNINGS OF
SUBSIDIARY........................................ 1,158 826
Equity in undistributed earnings of Bell Federal.. 6,245 3,293
------ ------
NET INCOME......................................... $7,403 $4,119
====== ======
</TABLE>
- --------------------------------------------------------------------------------
40
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
YEAR SIX MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................... $ 7,403 $ 4,119
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of Bell
Federal....................................... (6,245) (3,293)
Dividends payable.............................. (713) --
Increase or decrease in assets and liabilities:
Accrued income taxes.......................... (46) 104
Other assets.................................. (533) (22)
Other liabilities............................. 1,038 --
-------- --------
Net cash provided by operating activities.... 904 908
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales (purchase) Federal Funds................... 33,150 (36,025)
ESOP loan receivable............................. -- (6,877)
Principal paydowns on ESOP loan receivable....... 2,067 241
Investment in Bell Federal....................... 3,016 (34,894)
-------- --------
Net cash provided by (used in) investing
activities.................................. 38,233 (77,555)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid................................... (1,984) --
Return of capital................................ (20,684) --
Purchase of treasury stock....................... (11,684) --
Purchase of MRP shares........................... (4,792) --
Net proceeds from sale of stock.................. -- 76,663
-------- --------
Net cash provided by (used in) financing
activities.................................. (39,144) 76,663
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS...................................... (7) 16
CASH, BEGINNING OF YEAR........................... 16 --
-------- --------
CASH, END OF YEAR................................. $ 9 $ 16
======== ========
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Income taxes.................................... $ 688 $ 425
Non-cash transactions--
Increase in additional paid-in-capital--ESOP
share allocation............................... 203 70
Accumulated equity in Bell Federal at time of
conversion (see Note 2)........................ -- 40,923
</TABLE>
- --------------------------------------------------------------------------------
41
<PAGE>
FIRST BELL BANCORP, INC. 1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
21.QUARTERLY EARNINGS SUMMARY (UNAUDITED)
Quarterly earnings for the years ended December 31, 1996 and 1995 are as
follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1996
-----------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
INTEREST AND DIVIDEND INCOME....... $9,598 $10,219 $10,439 $10,751
INTEREST EXPENSE................... 4,932 5,180 5,624 6,314
------ ------- ------- -------
NET INTEREST INCOME............... 4,666 5,039 4,815 4,437
PROVISION FOR LOAN LOSSES.......... 30 30 30 --
------ ------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES........ 4,636 5,009 4,785 4,437
OTHER INCOME....................... 204 209 652 133
OTHER EXPENSES (1)................. 1,438 1,378 3,919 1,442
------ ------- ------- -------
INCOME BEFORE PROVISION FOR
INCOME TAXES...................... 3,402 3,840 1,518 3,128
PROVISION FOR INCOME TAXES......... 1,291 1,545 419 1,230
------ ------- ------- -------
NET INCOME......................... $2,111 $ 2,295 $ 1,099 $ 1,898
====== ======= ======= =======
PRIMARY AND FULLY DILUTED
EARNINGS PER SHARE................ $ 0.27 $ 0.31 $ 0.15 $ 0.27
====== ======= ======= =======
WEIGHTED AVERAGE SHARES
OUTSTANDING........................ 7,763 7,514 7,234 7,156
====== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
1995
-----------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
INTEREST AND DIVIDEND INCOME....... $7,433 $7,974 $9,004 $9,420
INTEREST EXPENSE................... 4,214 4,691 4,656 4,871
------ ------ ------ ------
NET INTEREST INCOME............... 3,219 3,283 4,348 4,549
PROVISION FOR LOAN LOSSES.......... -- -- -- --
------ ------ ------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES........ 3,219 3,283 4,348 4,549
OTHER INCOME....................... 175 185 200 264
OTHER EXPENSES..................... 1,130 1,145 1,336 1,334
------ ------ ------ ------
INCOME BEFORE PROVISION FOR
INCOME TAXES...................... 2,264 2,323 3,212 3,479
PROVISION FOR INCOME TAXES......... 878 895 1,237 1,335
------ ------ ------ ------
NET INCOME......................... $1,386 $1,428 $1,975 $2,144
====== ====== ====== ======
PRIMARY AND FULLY DILUTED
EARNINGS PER SHARE................ $ -- $ -- $ 0.25 $ 0.27
====== ====== ====== ======
WEIGHTED AVERAGE SHARES
OUTSTANDING....................... -- -- 7,934 7,934
====== ====== ====== ======
</TABLE>
- -------
(1) The quarter ended September 30, 1996 includes a one-time pre-tax charge of
$2.5 million for recapitalizing the SAIF.
- --------------------------------------------------------------------------------
42
<PAGE>
- --------------------------------------------------------------------------------
22.SUBSEQUENT EVENTS
In January 1997, the Company purchased adjustable rate mortgage-backed se-
curities totaling $86.9 million. All of these securities are backed by the
Federal National Mortgage Association, Government National Mortgage Associ-
ation or Federal Home Loan Mortgage Corporation and are collateralized by
30 year adjustable rate mortgages. These securities have been designated as
mortgage-backed securities available-or-sale on the Company's balance
sheet.
The purchases were funded by the $70.0 million in FHLB borrowings that were
obtained in December 1996 and an additional $30.0 million in FHLB
borrowings that were obtained in January 1997. The January borrowings are
for a term of five years and interest is calculated based on the 1-month
LIBOR Rate, adjusted monthly. As a result of the additional borrowings, the
Association was required to purchase an additional $1.0 million in FHLB
stock in January 1997.
In February 1997, the Company received regulatory approval regarding a plan
to repurchase up to 5% or 387,907 shares of its Common Stock. Under the re-
purchase plan, which was adopted by the Company's Board of Directors, the
Company will repurchase the shares of stock through registered broker-deal-
ers in the open market.
* * * * * *
- --------------------------------------------------------------------------------
43
<PAGE>
FIRST BELL BANCORP, INC. 1996 ANNUAL REPORT
First Bell Bancorp, Inc.
- --------------------------------------------------------------------------------
Executive Management
Albert H. Eckert, II Robert C. Baierl
President and Secretary
Chief Executive Officer
Jeffrey M. Hinds Robert Murcko
Executive Vice President Assistant Secretary
and Chief Financial Officer
David F. Figgins William S. McMinn
Vice President Treasurer
Directors
Albert H. Eckert, II William S. McMinn
President and Chief Executive Officer President
First Bell Bancorp, Inc. and Aon Risk Services of
Bell Federal Savings and Loan Pennsylvania, Inc.
Association of Bellevue
David F. Figgins Jeffrey M. Hinds
Vice President and General Manager Executive Vice President and
Marshall Contractors, Inc. Chief Financial Officer
First Bell Bancorp, Inc. and
Bell Federal Savings and Loan
Association of Bellevue
Thomas J. Jackson, Jr. Theodore R. Dixon
Attorney-at-Law President
Houston Harbaugh Dixon Agency
Norman B. Ward, Jr. Jack W. Schweiger
Retired Vice President and Partner President
Parker Hunter,Inc. Schweiger Homes
Robert C. Baierl Peter E. Reinert
President Wright Senior Counsel
Office Furniture, Inc. General Electric Appliances
- --------------------------------------------------------------------------------
44
<PAGE>
Bell Federal Savings and Loan Association of Bellevue
- --------------------------------------------------------------------------------
Executive Management
Albert H. Eckert, II Margaret L. Gerber
President and Assistant Vice President
Chief Executive Officer
Jeffrey M. Hinds Thomas J. Jackson, Jr.
Executive Vice President and Secretary
Chief Financial Officer
William D. Adams Robert Murcko
Vice President Assistant Secretary
James R. Badzgon William S. McMinn
Assistant Vice President Treasurer
Directors
Albert H. Eckert, II William S. McMinn
President and Chief Executive Officer President
First Bell Bancorp, Inc. and Aon Risk Services of
Bell Federal Savings and Loan Pennsylvania, Inc.
Association of Bellevue
David F. Figgins Jeffrey M. Hinds
Vice President and General Manager Executive Vice President and
Marshall Contractors, Inc. Chief Financial Officer
First Bell Bancorp, Inc. and
Bell Federal Savings and Loan
Association of Bellevue
Thomas J. Jackson, Jr. Theodore R. Dixon
Attorney-at-Law President
Houston Harbaugh Dixon Agency
Norman B. Ward, Jr. Jack W. Schweiger
Retired Vice President and Partner President
Parker Hunter, Inc. Schweiger Homes
Robert C. Baierl
President
Wright Office Furniture, Inc.
- --------------------------------------------------------------------------------
45
<PAGE>
FIRST BELL BANCORP, INC. 1996 ANNUAL REPORT
Shareholder Information
- --------------------------------------------------------------------------------
Market Summary of Stock
First Bell Bancorp, Inc.'s common stock trades on The Nasdaq National Market.
The following summary sets forth the range of prices for common stock over the
periods noted. The common stock of the Company began trading on June 29, 1995.
As of March 3, 1997, there were approximately 4,400 stockholders of record and
7,718,150 common shares outstanding.
<TABLE>
<CAPTION>
1996
----------------------------------------------------------------
HIGH LOW DIVIDENDS
------ ------- ---------
<S> <C> <C> <C>
1st Quarter 14 1/4 13 1/8 $0.05
2nd Quarter 14 1/4 13 5/16 $0.05
3rd Quarter 15 1/8 13 3/8 $0.10
4th Quarter 17 3/8 13 1/4 $0.17
<CAPTION>
1995
----------------------------------------------------------------
HIGH LOW DIVIDENDS
------ ------- ---------
<S> <C> <C> <C>
1st Quarter -- -- --
2nd Quarter 12 1/2 11 3/4 --
3rd Quarter 13 1/2 11 3/4 --
4th Quarter 13 3/4 12 3/4 --
</TABLE>
Dividend Policy
The management and Board of Directors of the Company continually review the
Company's dividend policy. The Company intends to continue its policy of paying
quarterly dividends; however, the payment will depend upon a number of factors,
including capital requirements, regulatory limitations, the Company's financial
condition, results of operations and the Association's ability to pay dividends
to the Company. At present, the Company has no significant source of income
other than dividends from the Association and to a lesser extent interest on
short-term investments. Consequently, the Company depends upon dividends from
the Association to accumulate earnings for payment of cash dividends to its
shareholders. See Note 12 to the Consolidated Financial Statements for a dis-
cussion of restrictions on the Association's ability to pay dividends.
Nasdaq Listing
Quotes on the common stock can be found on The Nasdaq stock market under the
symbol "FBBC".
Dividend Reinvestment
First Bell Bancorp, Inc.'s registered shareholders may reinvest their divi-
dends in additional shares of the Company's common stock and, if desired, pur-
chase additional shares through a voluntary cash investment of $50.00 to $3,000
per quarter. Participants in the plan pay no broker fees. Purchases for the
plan are generally made on the third Friday of January, April, July and Octo-
ber. For more information on this service, call the Dividend Reinvestment De-
partment of Registrar and Transfer Company at 1-800-368-5948.
- --------------------------------------------------------------------------------
46
<PAGE>
- --------------------------------------------------------------------------------
Annual Meeting
The 1997 Annual Meeting of the Stockholders of First Bell Bancorp, Inc. will
be held at 3:00 P.M. on Monday, April 28, 1997, at 629 Lincoln Avenue, Belle-
vue, Pennsylvania 15202.
Annual Report on Form 10-K and Exhibits
A copy of the Annual Report on Form 10-K (excluding exhibits) of the Company
for the year-ended December 31, 1996, as filed with the Securities and Exchange
Commission, will be furnished free of charge, upon written request to stock-
holders who have not previously received a copy from the Company.
Written requests may be directed to:
Shareholder Relations
First Bell Bancorp, Inc.
c/o Bell Federal Savings & Loan
Association of Bellevue
532 Lincoln Avenue
Pittsburgh, Pennsylvania 15202
The Company will furnish any exhibit to its Annual Report on Form 10-K upon
payment of a reasonable fee.
<TABLE>
<S> <C> <C>
Transfer Agent and Registrar Executive Offices Deloitte & Touche LLP
Registrar and Transfer Company First Bell Bancorp, Inc. Independent Auditors
10 Commerce Drive Suite 1704 2500 One PPG Place
Cranford, NJ 07016 300 Delaware Avenue Pittsburgh, Pennsylvania 15222
Wilmington, Delaware 19801
(302) 427-7883
</TABLE>
- --------------------------------------------------------------------------------
47
<PAGE>
FIRST BELL BANCORP, INC. 1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
Office Locations
Bellevue Office Wood Street Office
532 Lincoln Avenue Sixth & Wood Street
Bellevue, Pennsylvania 15202 Suite 100
Pittsburgh, Pennsylvania 15222
Wexford Office Mt. Lebanon Office
10533 Perry Highway 300 Cochran Road
Wexford, Pennsylvania 15090 Pittsburgh, Pennsylvania 15228
McKnight Road Office Craig Street Office
7709 McKnight Road 201 North Craig Street
Pittsburgh, Pennsylvania 15237 Pittsburgh, Pennsylvania 15213
Sewickley Office
414 Beaver Street
Sewickley, Pennsylvania 15143
- --------------------------------------------------------------------------------
48
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,534
<INT-BEARING-DEPOSITS> 23,872
<FED-FUNDS-SOLD> 72,875
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 14,964
<INVESTMENTS-MARKET> 15,429
<LOANS> 531,480
<ALLOWANCE> 665
<TOTAL-ASSETS> 656,183
<DEPOSITS> 483,941
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,255
<LONG-TERM> 70,000
0
0
<COMMON> 86
<OTHER-SE> 86,347
<TOTAL-LIABILITIES-AND-EQUITY> 656,183
<INTEREST-LOAN> 36,798
<INTEREST-INVEST> 3,970
<INTEREST-OTHER> 239
<INTEREST-TOTAL> 41,007
<INTEREST-DEPOSIT> 21,859
<INTEREST-EXPENSE> 191
<INTEREST-INCOME-NET> 22,050
<LOAN-LOSSES> 90
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 8,177
<INCOME-PRETAX> 11,888
<INCOME-PRE-EXTRAORDINARY> 11,888
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,402
<EPS-PRIMARY> 1.00
<EPS-DILUTED> 1.00
<YIELD-ACTUAL> 3.38
<LOANS-NON> 400
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 575
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 665
<ALLOWANCE-DOMESTIC> 665
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
