<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, 1997
Commission File No.: 0-25172
FIRST BELL BANCORP, INC.
(exact name of registrant as specified in its charter)
DELAWARE 25-1752651
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
Suite 1704, 300 Delaware Avenue, Wilmington, Delaware 19801
(Address of principal executive offices)
Registrant's telephone number, including area code: (302) 427-7883
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of class)
The registrant (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No .
--------- ---------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, i.e., persons other than directors and executive officers of the
registrant is $117,867,206 and is based upon the last sales price as quoted on
The Nasdaq Stock Market for March 2, 1998.
As of March 2, 1998, the Registrant had 6,523,920 shares outstanding
(excluding treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended December
31, 1997 is incorporated by reference into Part II of this Form 10-K.
Portions of the Proxy Statement for the 1998 Annual Meeting of Stockholders
is incorporated by reference into Part III of this Form 10-K.
<PAGE>
INDEX
PART I PAGE
----
Item 1. Business........................................... 1
Item 2. Properties......................................... 33
Item 3. Legal Proceedings.................................. 33
Item 4. Submission of Matters to a Vote of Security Holders 33
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................ 34
Item 6. Selected Financial Data............................ 34
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 34
Item 7A. Quantitive and Qualitative Disclosure about
Market Risk........................................ 34
Item 8. Financial Statements and Supplementary Data........ 34
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............. 34
PART III
Item 10. Directors and Executive Officers of the Registrant. 35
Item 11. Executive Compensation............................. 35
Item 12. Security Ownership of Certain Beneficial Owners
and Management..................................... 35
Item 13. Certain Relationships and Related Transactions..... 35
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K........................................ 36
SIGNATURES..................................................... 38
<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, 1997, the Company had consolidated total assets
of $675.7 million and total equity of $73.0 million. The Company was
incorporated under Delaware law and is a savings and loan holding company
subject to regulation by the Office of Thrift Supervision ("OTS"), the Federal
Deposit Insurance Corporation ("FDIC") and the Securities and Exchange
Commission ("SEC"). Currently, the Company does not transact any material
business other than through its subsidiary, the Association. All references to
the Company include the Association unless otherwise indicated, except that
references to the Company prior to June 29, 1995 are to the Association.
Bell Federal Savings and Loan Association of Bellevue was originally
founded in 1891 as the Commercial Building and Loan Association, a state
chartered building and loan association. In 1941, the Association converted to
a federally chartered mutual savings and loan association and changed its name
to First Federal Savings and Loan Association of Bellevue. The Association
again changed its name in 1971 to Bell Federal Savings and Loan Association of
Bellevue. The Association's deposits are insured up to applicable limits by the
Savings Association Insurance Fund ("SAIF"). The Association's business is
primarily conducted through six branch offices located throughout the suburban
Pittsburgh, Pennsylvania area and its principal office in the borough of
Bellevue. The Company's principal executive office is located at Suite 1704,
300 Delaware Avenue, Wilmington, Delaware 19801 and its executive office
telephone number is (302) 427-7883.
The principal business of the Company is to operate a traditional customer
oriented savings and loan association. The Company attracts retail deposits
from the general public and invests those funds primarily in fixed-rate, owner-
occupied, single family conventional mortgage loans and, to a much lesser
extent, residential construction loans, multi-family loans, and consumer loans.
The Company's revenues are derived principally from interest on conventional
mortgage loans, and, to a much lesser extent, interest and dividends on
investment securities and short-term investments, and other fees and service
charges. The Company's primary source of funds is deposits and borrowings from
the Federal Home Loan Bank ("FHLB").
The Association is subject to extensive regulation, supervision and
examination by the OTS, its primary regulator, and the FDIC, which insures its
deposits. The Association is a member of the FHLB.
<PAGE>
Private Securities Litigation Reform Act Safe Harbor Statement
In addition to historical information, this 10-K includes certain forward
looking statements based on current management expectations. Examples of this
forward looking information can be found in, but are not limited to, the
allowance for losses discussion and certain sections of the 1997 Annual Report
incorporated herein. The Company's actual results could differ materially from
those management expectations. Factors that could cause future results to vary
from current management expectations include, but are not limited to, general
economic conditions, legislative and regulatory changes, monetary and fiscal
policies of the federal government, changes in tax policies, rates and
regulations of federal, state and local tax authorities, changes in interest
rates, deposit flows, the cost of funds, demand for loan products, demand for
financial services, competition, changes in the quality or composition of the
Company's loan and investment portfolios, changes in accounting principles,
policies or guidelines, and other economic, competitive, governmental and
technological factors affecting the Company's operations, markets, products,
services and prices.
Market Area and Competition
The Association has been, and continues to be, a community-oriented
savings institution offering a variety of financial services to meet the needs
of the communities it serves. Its primary market area is in the areas
surrounding its offices, while its lending activities extend throughout
Allegheny County and parts of Beaver, Butler, Washington and Westmoreland
Counties, in Pennsylvania. In addition to its principal office in Bellevue, the
Association operates six other retail offices, all of which are located in
Allegheny County.
The communities in Allegheny County are composed mostly of stable,
residential neighborhoods of predominantly one-and two-family residences and
middle-to-upper-income families. Management believes that, to a large degree,
the economic vitality of these communities depends on the economic vitality of
the City of Pittsburgh.
The Greater Pittsburgh area has been in the process of restructuring over
the past decade. Once centered on heavy manufacturing, primarily steel, its
economic base is now more diverse, including technology, health and business
services. Several "Fortune 500" industrial firms are headquartered in the
Greater Pittsburgh area, including USX Corp. and Aluminum Company of America.
The largest employers in Pittsburgh, by the number of local employees, include
University of Pittsburgh Medical Center, USAirways, the University of Pittsburgh
and Mellon Bank Corp. Seven colleges and universities are located in the
Greater Pittsburgh area.
The Association serves its market area with a wide selection of
residential loans and other retail financial services. Management considers the
Association's reputation for customer service as its major competitive advantage
in attracting and retaining customers in its market area. The Association also
believes it benefits from its community orientation, as well as its established
deposit base and level of core deposits.
2
<PAGE>
Lending Activities
Loan and Mortgage-Backed Securities Portfolio Composition. The loan
portfolio consists primarily of conventional mortgage loans secured by one- to
four-family, owner-occupied residences, and, to a much lesser extent,
residential construction loans, multi-family loans and consumer loans. Mortgage
loans are originated to be held in the portfolio. At December 31, 1997, total
loans receivable were $596.0 million, of which $568.4 million, or 95.4%, were
conventional mortgage loans. Of the conventional mortgage loans outstanding at
that date, 97.0% were fixed-rate loans. At December 31, 1997, the loan portfolio
also included $25.6 million of residential construction loans; $860,000 of
multi-family loans; $268,000 of residential second mortgage loans; and $907,000
of other consumer loans. The Association also offers FHA/VA qualifying one-to
four-family residential mortgage loans.
The types of loans originated are regulated by federal law and regulations.
Interest rates charged on loans are affected principally by the demand for such
loans and the supply of money available for lending purposes. These factors
are, in turn, affected by general and economic conditions, monetary policies of
the federal government, legislative and tax policies and governmental budgetary
matters.
3
<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,
-------------------------------
1997 1996 1995
-------------------------------
(In thousands)
<S> <C> <C> <C>
Loans receivable at beginning of period...... $547,210 $432,863 $322,914
-------- -------- --------
Additions:
Originations of mortgages(1)(2)............ 129,043 168,915 112,264
Purchase of conventional mortgages......... -- -- 24,361
-------- -------- --------
676,253 601,778 136,625
-------- -------- --------
Reductions:
Transfer of mortgage loans to foreclosed
real estate............................... 104 229 287
Repayments................................. 50,157 54,339 26,389
Loan sales................................. 29,989 -- --
-------- -------- --------
Total reductions........................... 80,250 54,568 26,676
-------- -------- --------
Total loans receivable at end of period.... $596,003 $547,210 $432,863
======== ======== ========
Mortgage-backed securities at beginning
of period................................... $ -- $ -- $ 4,870
Purchases.................................. 92,528 -- --
Sales...................................... 46,676 -- 3,990
Repayments................................. 14,000 -- 878
Premium amortization....................... 197 -- 2
Unrealized gain or loss.................... 230 -- --
-------- -------- --------
Mortgage-backed securities at end of period.. $ 31,885 $ -- $ --
======== ======== ========
</TABLE>
_______________________________
(1) Includes conventional mortgages and residential construction loans.
(2) The Association originated no multi-family or second mortgage loans during
the periods shown.
4
<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,
------------------------------------------------------------------------------------------
1997 1996 1995 1994
--------------------- --------------------- ---------------------- ---------------------
Percent of Percent of Percent of Percent of
Amount Total Amount Total Amount Total Amount Total
-------- ---------- -------- ---------- -------- ---------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Conventional mortgages.............. $568,405 95.37% $524,867 95.92% $409,807 94.67% $304,760 94.38%
Residential construction loans...... 25,563 4.29 19,877 3.63 19,692 4.55 14,090 4.36
Multi-family loans.................. 860 0.14 1,220 0.22 2,075 0.48 2,646 0.82
Second mortgage loans............... 268 0.05 297 0.06 330 0.08 354 0.11
-------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans........... 595,096 99.85 546,261 99.83 431,904 99.78 321,850 99.67
Consumer loans:
Loans on deposit accounts........... 899 0.15 938 0.17 937 0.22 1,018 0.32
Home improvement loans.............. 8 .-- 11 .-- 22 .-- 46 0.01
-------- ------ -------- ------ -------- ------ -------- ------
Total consumer loans.............. 907 0.15 949 0.17 959 0.22 1,064 0.33
-------- ------ -------- ------ -------- ------ -------- ------
Total loans receivable................ 596,003 100.00% 547,210 100.00% 432,863 100.00% 322,914 100.00%
====== ====== ====== ======
Less:
Undisbursed portion of loans
in process........................ 12,072 11,120 11,182 8,834
Deferred net loan origination fees.. 3,822 4,610 5,537 5,510
Allowance for loan losses........... 715 665 575 575
-------- -------- -------- --------
Loans receivable, net............. $579,394 $530,815 $415,569 $307,995
======== ======== ======== ========
Mortgage-backed securities:
GNMA................................ $ 26,958 84.55% $ -- .--% $ -- .--% $ 702 14.42%
FHLMC............................... -- .-- -- .-- -- .-- 2,103 43.18
FNMA................................ 4,927 15.45 -- .-- -- .-- 2,065 42.40
Others.............................. -- .-- -- .-- -- .-- -- .--
-------- ------ -------- ------ -------- ----- -------- ------
Total mortgage-backed securities.. $ 31,885 100.00% $ -- .--% $ -- .--% $ 4,870 100.00%
======== ====== ======== ======= ======== ===== ======== ======
<CAPTION>
At December 31,
---------------------
1993
---------------------
Percent of
Amount Total
-------- ----------
(Dollars in thousands)
<S> <C> <C>
Real estate loans:
Conventional mortgages.............. $242,849 94.59%
Residential construction loans...... 9,052 3.53
Multi-family loans.................. 3,497 1.38
Second mortgage loans............... 340 0.13
-------- ------
Total real estate loans........... 255,738 99.63
Consumer loans:
Loans on deposit accounts........... 869 0.34
Home improvement loans.............. 79 0.03
-------- ------
Total consumer loans.............. 948 0.37
-------- ------
Total loans receivable................ 256,686 100.00%
======
Less:
Undisbursed portion of loans
in process........................ 4,251
Deferred net loan origination fees.. 4,393
Allowance for loan losses........... 598
--------
Loans receivable, net............. $247,444
========
Mortgage-backed securities:
GNMA................................ $ 868 13.14%
FHLMC............................... 3,070 46.48
FNMA................................ 2,616 39.61
Others.............................. 51 0.77
-------- ------
Total mortgage-backed securities.. $ 6,605 100.00%
======== ======
</TABLE>
5
<PAGE>
Loan Maturity Schedule. The following table sets forth certain information at
December 31, 1997 regarding the dollar amount of loans maturing in the portfolio
based on their original contractual terms to maturity. The table does not
include the effect of prepayments or scheduled principal amortization.
Prepayments and scheduled principal amortization on loans totalled $50.2
million, $54.3 million and $26.4 million for the years ended December 31, 1997,
1996 and 1995, respectively.
<TABLE>
<CAPTION>
At December 31, 1997
---------------------------------------------------------------------------------------------
More than More than More than More than More than
Three Three Six Months One Year Three Years Five Years
Months Months to to Twelve to Three to Five to Ten More than
or Less Six Months Months Years Years Years Ten Years Total
---------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning Assets:
Real estate loans:
One-to four-family adjustable-
rate loans................... $ -- $ -- $ -- $ -- $ 42 $ 151 $ 17,017 $ 17,210
One-to four-family fixed-rate 172 -- 14 93 1,860 29,743 519,313 551,195
loans........................
Residential construction loans.. -- -- -- -- -- -- 25,563 25,563
Multi-family.................... 55 -- 19 63 95 354 274 860
Second mortgage loans........... 268 -- -- -- -- -- -- 268
------- ---- ---- ----- ------- -------- --------- --------
Total real estate loans........ 495 -- 33 156 1,997 30,248 562,167 595,096
======= ==== ==== ===== ======= ======== ========= ========
Consumer loans...................... 899 -- 2 6 -- -- -- 907
------- ---- ---- ----- ------- -------- --------- --------
Total loans.................... $ 1,394 $ -- $ 35 $ 162 $ 1,997 $ 30,248 $ 562,167 $596,003
======= ==== ==== ===== ======= ======== ========= ========
</TABLE>
6
<PAGE>
The following table sets forth the dollar amount of all loans at December
31, 1997 which have fixed or adjustable interest rates, and which are due after
December 31, 1998.
<TABLE>
<CAPTION>
Due After December 31, 1998
Fixed Adjustable Total
--------- ---------- ---------
(In thousands)
<S> <C> <C> <C>
Real estate loans:
Conventional mortgages.... $551,009 $17,210 $568,219
Residential construction.. 23,628 1,935 25,563
Multi-family.............. 780 6 786
Consumer loans.............. 6 -- 6
-------- ------- --------
Total loans............ $575,423 $19,151 $594,574
======== ======= ========
</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,
1997, conventional mortgage loans totalled $568.4 million, or 95.4%, of total
loans at such date. Of the Association's conventional mortgage loans secured by
one-to four-family residences, $551.2 million, or 97.0%, were fixed-rate loans.
Originated mortgage loans are held in the loan portfolio and are secured by
properties located within the Association's primary market area. Historically,
the market interest rates of mortgage loans in the Pittsburgh area have been
below national averages. The mortgage loan portfolio has increased from $255.7
million at December 31, 1993 to $595.1 million at December 31, 1997.
The Association from time to time purchases one-to four-family mortgage
loans and loan participations. A number of these loans are secured by
properties located outside the Association's market area, such as other regions
of Pennsylvania, California, Illinois, Maryland, New York, Texas, Virginia,
Utah, North Carolina, Tennessee and Georgia. The Association did not purchase
any mortgage loans or participations in 1997. At December 31, 1997, the
Association had $24.0 million in purchased mortgage loans and loan
participations serviced by others, totalling 4.0% of the total loan portfolio at
that date, primarily secured by one-to four-family residences. The Association
intends to continue purchasing loans to supplement reduced loan demand as
needed. Loans purchased by the Association generally must meet the same
underwriting criteria as loans originated by the Association.
7
<PAGE>
During 1997, the Association sold $30.0 million in conventional mortgages.
Most of the loan portfolio is underwritten in conformity with Federal National
Mortgage Association ("FNMA") secondary market requirements. Although the
Association has been approved by the FNMA to sell loans in the secondary market,
there is no assurance that the Association will be able to originate loans for
sale in the secondary market or, that if originated, such loans will be sold in
the secondary market in the future. Should the Association decide to sell
mortgage loans in the future, the lower interest rates on such loans,
characteristic of the Pittsburgh market, may tend to diminish the demand for
such loans in the secondary market.
With the exception of Community Reinvestment Act ("CRA") loans, the
Association's maximum loan-to-value ratio on conventional mortgage loans is 80%.
As a result, a majority of borrowers are previous homeowners, whom the
Association believes to be relatively stable borrowers. The Association also
offers FHA/VA qualifying one-to four-family residential mortgage loans. One-to
four-family residential mortgage loans do not provide for negative amortization.
Mortgage loans in the portfolio generally include due-on-sale clauses, which
provide the Association with the contractual right to demand the loan
immediately due and payable in the event that the borrower transfers ownership
of the property that is subject to the mortgage. It is the Association's policy
to enforce due-on-sale clauses. The residential mortgage loans originated are
generally for terms to maturity from 15 to 30 years. At December 31, 1997, the
maximum one-to four-family loan amount is $500,000, unless otherwise approved by
the Board of Directors.
Presently, four (4) ARM loans are offered; a one-year, three-year, five-
year and 7/1 ARM loan. The one-year ARM loan has an interest rate that adjusts
annually based on a spread of 2.50 percentage points above the rate on one-year
United States Treasury securities. The one-year ARM loan is subject to a
limitation on interest rate increases and decreases of 2.0% per year, a lifetime
ceiling on interest rate increases of 6.0% above the origination rate, and a
floor rate equal to the origination interest rate. This mortgage can convert to
a fixed-rate loan at specified times during the first five years. The three-
year ARM loan has an interest rate that adjusts every three years based on a
spread of 2.75 percentage points above the rate on the three year United States
Treasury securities. The three-year ARM is subject to a limitation on interest
rate increases and decreases of 2% per change, a lifetime ceiling on the
interest rate of 6.0% above the origination rate and a floor rate equal to the
origination interest rate. The five-year ARM loan has an interest rate that
adjusts every five years based on a spread of 2.75 percentage points above the
rate on five-year United States Treasury securities. The five-year ARM loan is
subject to a limitation on interest rate increases and decreases of 3.0% per
change, a lifetime ceiling on the interest rate of 6.0% above the origination
rate, and a floor rate equal to the origination interest rate. The 7/1 ARM loan
has an interest rate that remains constant for the first seven years and then
the interest rate adjusts annually based on a spread of 2.50 percentage points
above the rate on one-year United States Treasury securities. After the initial
seven years, this ARM loan is subject to a limitation on interest rate increases
and decreases of 2.0% per year, a lifetime ceiling on interest rate increases of
6.0% above the origination rate, and a floor equal to the origination interest
rate. The mortgage can convert to a fixed-rate loan at the first change date.
8
<PAGE>
The volume and types of ARM loans originated are affected by such market
factors as the level of interest rates, competition, consumer preferences and
the availability of funds. In recent years, demand for ARM loans has been weak
due to the low interest rate environment and consumer preference for fixed rate
loans. In addition, management's strategy has been to emphasize fixed-rate
loans. In 1997, only $7.4 million of the $129.0 million, or 5.7%, of loans
originated were adjustable mortgages. Although ARM loans will continue to be
offered, there can be no assurance that in the future ARM loans will be
originated in sufficient volume to constitute a significant portion of the loan
portfolio.
In an effort to provide financing for low and moderate income home buyers,
additional single family residential mortgage loans are offered to moderate
income borrowers and residents of the CRA neighborhoods, with terms of up to 30
years. Such loans must be secured by a single family, owner-occupied unit.
These loans are originated using modified underwriting guidelines with reduced
down payments and expenses. Private mortgage insurance is normally required.
Because the Association typically charges a lower rate of interest, lower
mortgage origination fees and a discount on closing costs on its CRA loans, a
lower rate of return is expected on such loans, as compared to other residential
mortgage loans. For the years ended December 31, 1997, 1996 and 1995, the
Association originated 24, 24 and 71 loans under the CRA loan program,
respectively, totalling $1.2 million, $1.1 million and $2.9 million,
respectively.
Residential Construction Loans. The Association originates loans for the
construction of one-to four-family residential properties. Such loans are made
on contract directly to the home buyer. Residential construction loans are
subject to the same maximum loan amounts as conventional mortgage loans.
Residential construction loans are made for terms of up to one year, at which
time the loans convert to permanent conventional mortgage financing.
Residential construction loans are generally offered at the Association's
prevailing interest rate. An additional fee may be charged for construction
servicing. Advances are made to builders as phases of construction of the
property are completed. As of December 31, 1997, the Association's residential
construction loans totalled $25.6 million, or 4.3% of the total loan portfolio.
Of these construction loans, $12.1 million had been committed, but were
undisbursed as of that date.
Construction lending involves greater risks than other loans due the fact
that loan funds are advanced upon the security of the project under
construction, predicated on the future value of the property upon completion of
construction. Moreover, because of the uncertainties inherent in estimating
construction costs, delays resulting from labor problems, material shortages or
weather conditions and other unpredictable contingencies, it is relatively
difficult to evaluate accurately the total funds required to complete a project
and to establish the related loan-to-value ratio. Because of these factors, the
analysis of prospective construction loan projects requires an expertise that is
different in significant respects from that which is required for residential
mortgage lending.
9
<PAGE>
Multi-Family Loans. In prior years, the Association also originated multi-
family loans. As of December 31, 1997, the Association's total loan portfolio
contained 21 multi-family loans, totalling $860,000, or 0.1%, of total loans.
Since 1991, the Association has not originated any multi-family mortgage loans.
In the future, the Association may originate a limited number of multi-family
loans on a case-by-case basis.
The multi-family loans in the Association's portfolio consist of both
fixed-rate and adjustable-rate loans which were originated at prevailing market
rates. The Association's policy has been to originate multi-family loans only
in its market area. In making multi-family loans, the Association considers
primarily the ability of net operating income generated by the real estate to
support the debt service, the financial resources and income level and
managerial expertise of the borrower, the marketability of the property, and the
Association's lending experience with the borrower.
Second Mortgage Loans. The Association has in the past originated second
mortgage loans on owner-occupied, one-to four-family residences where the
Association holds the first mortgage. These loans generally are originated as
adjustable-rate loans with terms of up to 10 years. The Association offers
second mortgage loans with maximum combined loan-to-value ratios of up to 80%.
At December 31, 1997, the Association had $268,000, or 0.1% of total loans, in
second mortgage loans.
Consumer Loans. The Association also offers secured consumer loans. At
December 31, 1997, the Association's consumer loans totalled $907,000, or 0.2%
of the Association's total loan portfolio. Of that amount, loans secured by
deposit accounts totalled $899,000, or 99.1%, and home improvement loans
totalled $8,000, or 0.9%, of total consumer loans.
Loan Servicing and Loan Fees. Servicing on all of the loans that have been
sold has been retained. Fees are received for these servicing activities, which
include collecting and remitting loan payments, inspecting the properties and
making certain insurance and tax payments on behalf of the borrowers. At
December 31, 1997, the Association was servicing $31.4 million of loans for
others. Loan servicing income was $37,000, $14,000 and $17,000 for the years
ended December 31, 1997, 1996 and 1995, respectively. The Association receives
income in the form of service charges and other fees on loans. For the years
ended December 31, 1997, 1996 and 1995, the Association earned $214,000,
$192,000 and $154,000, respectively, in service charges and other fees.
Mortgage-backed Securities. In 1997, the Association purchased $92.5
million adjustable mortgage-backed securities. These securities were classified
as available-for-sale. Subsequently, the Association sold $46.7 million of the
securities. At December 31, 1997, mortgage-backed securities totaled $31.9
million. The Association had no mortgage-backed securities during 1996. During
1995, the Association reclassified all of its mortgage-backed securities as
available-for-sale and subsequently sold them at a gain of $68,000. The sale
was the result of the Financial Accounting Standard Board giving a one time
exclusion to companies under the
10
<PAGE>
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Debt and Equity Securities." This exclusion allowed companies to
reclassify their portfolio into the three different categories: trading,
available-for-sale, or held-to-maturity without affecting the remaining
portfolio. The Association may invest in mortgage-backed securities in the
future to offset any significant decrease in demand for one- to four-family
loans.
Loan Approval Procedures and Authority. Loan approval authority has been
granted by the Board of Directors to the Association's Loan Committee. All
mortgage loans must be approved by the Loan Committee. As of December 31, 1997,
any loan application over $500,000 must be approved by the Board of Directors.
Upon receipt of a completed loan application from a prospective borrower,
the Association generally orders a credit report, verifies employment, income
and other information, and, if necessary, obtains additional financial or credit
related information. An appraisal of the real estate used for collateral is
also obtained. All appraisals are performed by licensed or certified third
party appraisers. The Board of Directors annually approves the independent
appraisers used by the Association and reviews the Association's appraisal
policy. When the information is obtained and an appraisal is completed, loans
are presented for approval to the Association's Loan Committee. The Loan
Committee must approve all one-to four-family mortgage loans originated by the
Association.
The Association's policy is to require either title insurance or an
attorney's opinion of title, and hazard insurance on all real estate loans.
Borrowers are required to advance funds together with each payment of principal
and interest to a mortgage escrow account from which the Association makes
disbursements for items such as real estate taxes, hazard insurance premiums and
private mortgage insurance premiums, if required.
Asset Quality
Loan Collection. When a borrower fails to make a required payment on a
loan, the Association takes a number of steps to induce the borrower to cure the
delinquency and restore the loan to a current status. The borrower is sent a
written notice of non-payment when the loan is 15 days past due. In the event
payment is not then received, additional letters and phone calls generally are
made. If the loan is still not brought current and it becomes necessary to take
legal action, which typically occurs after a loan is delinquent 120 days or
more, the Association may commence foreclosure proceedings against the real
property that secures the loan. Decisions as to when to commence foreclosure
actions are made on a case by case basis. If a foreclosure action is instituted
and the loan is not brought current, paid in full, or refinanced within 30 days
of delivery of the notice of default and intent to foreclose, the real property
securing the loan is generally sold at foreclosure or by the Association as soon
thereafter as practicable.
11
<PAGE>
On purchased mortgage loans or loan participations, monthly reports are
received from loan servicers in order to monitor the loan portfolio. Based upon
servicing agreements with the servicers of the loans, the Association relies
upon the servicer to contact delinquent borrowers, collect delinquent amounts
and to initiate foreclosure proceedings, when necessary, all in accordance with
applicable laws, regulations and the terms of the servicing agreements between
the Association and its servicing agents.
12
<PAGE>
Delinquent Loans. At December 31, 1997, 1996 and 1995, delinquencies in
the loan portfolio were as follows:
<TABLE>
<CAPTION>
At December 31, 1997 At December 31, 1996
-------------------------------------------------------------------------------------------------
60 - 89 Days 90 Days or More 60 - 89 Days 90 Days or More
---------------------- ----------------------- -----------------------------------------------
Principal Number Principal Principal Principal
Number of Balance of of Balance of Number Balance of Number of Balance of
Loans Loans Loans Loans of Loans Loans Loans Loans
--------- ----------- ----------- ---------- --------- ----------- ---------- -----------
(Dollars in thousands) (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Conventional mortgage loans.. 8 $ 436 13 $ 634 4 $ 258 8 $ 400
Multi-family loans........... -- -- -- -- -- -- -- --
Consumer loans............... -- -- -- -- -- -- -- --
--------- ----- --------- ----- --------- ----------- ---------- ----------
Total loans............. 8 $ 436 13 $ 634 4 $ 258 8 $ 400
========= ===== ========= ===== ========= =========== ========== ==========
Delinquent to total loans.... 0.07% 0.11% 0.05% 0.08%
===== ===== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1995
--------------------------------------------------------------------
60 - 89 Days 90 Days or More
---------------------------- ----------------------------
Principal Principal
Number of Balance of Number of Balance of
Loans Loans Loans Loans
----------- ----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Conventional mortgage loans.. 2 $ 54 7 $ 333
Multi-family loans........... -- -- -- --
Consumer loans............... -- -- -- --
----- ------- ---- ------
Total loans............. 2 $ 54 7 $ 333
===== ======= ==== ======
Delinquent loans to total loans 0.01% 0.08%
======= ======
</TABLE>
13
<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 no investments in real estate or in substance foreclosure at
December 31, 1997. During the years ended December 31, 1997, 1996 and 1995, the
amounts of interest income that would have been recorded on non-accrual loans,
had they been current, totalled $29,000, $24,000 and $25,000, respectively.
Interest income recorded on non-accrual loans was $36,000, $22,000 and $16,000
for each of the years ended December 31, 1997, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------
1997 1996 1995 1994 1993
---------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual delinquent mortgage loans........ $ 634 $ 400 $ 333 $ 726 $ 621
Non-accrual delinquent other loans........... -- -- -- 15 63
----- ----- ----- ----- -----
Total non-performing loans................. 634 400 333 741 684
Real estate owned............................ -- 229 178 30 --
----- ----- ----- ----- -----
Total non-performing assets............... $ 634 $ 629 $ 511 $ 771 $ 684
===== ===== ===== ===== =====
Total non-performing loans to total loans.... 0.11% 0.08% 0.08% 0.23% 0.27%
Total non-performing assets to total assets.. 0.09% 0.10% 0.10% 0.19% 0.18%
</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.
At December 31, 1997, classified assets totalled $634,000, or 0.09% of
total assets, and consisted of thirteen conventional mortgage loans classified
as "Substandard".
14
<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, 1997. Although
management believes it uses the best information available to make
determinations with respect to the allowance for loan losses, future adjustments
may be necessary if economic and other conditions differ substantially from the
economic and other conditions in the assumptions used in making the initial
determinations, such as a material increase in the balance of the loan
portfolio.
In addition, the OTS and FDIC, as an integral part of their examination
process, periodically review the allowance for loan losses and real estate owned
and investments in real estate valuations. Such agencies may require the
recognition of additions to the allowance or additional write-downs based on
their judgments about information available to them at the time of their
examination. The OTS, in conjunction with the other federal banking agencies,
adopted an interagency policy statement on the allowance for loan and lease
losses. The policy statement provides guidance for financial institutions on
both the responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation guidelines. Generally, the policy
statement recommends that institutions have effective systems and controls to
identify, monitor and address asset quality problems; that management analyze
all significant factors that affect the collectibility of the portfolio in a
reasonable manner; and that management establish acceptable allowance evaluation
processes that meet the objectives set forth in the policy statement. As a
result of the declines in local and regional real estate market values and the
significant losses experienced by many financial institutions, there has been a
greater level of scrutiny by regulatory authorities of the loan portfolios of
financial institutions undertaken as part of the examination of institutions by
the OTS and the FDIC. While management believes that it has established an
adequate allowance for loan losses, there can be no assurance that regulators,
in reviewing the loan portfolio, will not request a material increase at that
time in the allowance for loan losses, thereby negatively affecting the
financial condition and earnings at such time.
15
<PAGE>
The following table sets forth the allowance for loan losses at the dates
indicated.
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
Allowance for loan losses:
Balance at beginning of period........... $ 665 $ 575 $ 575 $ 598 $ 602
Charge-offs:
Conventional mortgages............... -- -- -- (23) (53)
Residential construction............. -- -- -- -- --
Multi-family......................... -- -- -- -- (44)
Consumer............................. -- -- -- -- --
----- ----- ----- ------ ------
Total charge-offs.................. -- -- -- (23) (97)
Total recoveries......................... 5 -- -- 4 --
Provision for (recovery of) loan
losses............................... 45 90 -- (4) 93
----- ----- ----- ------ ------
Balance at end of period(1).............. $ 715 $ 665 $ 575 $ 575 $ 598
===== ===== ===== ====== ======
Ratio of net charge-offs during the
period to average loans
outstanding during the period........ --% --% .--% 0.01% 0.04%
Ratio of allowance for loan
losses to total loans at the end of
the period........................... 0.12% 0.12% 0.13% 0.18% 0.23%
Ratio of allowance for loan
losses to non-performing assets
at the end of the period............. 1.13x 1.06x 1.13x 74.58% 87.43%
</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,
16
<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, 1997, $61.4 million, or 9.1%, of the
Association's total assets were invested in liquid assets.
The Company's Investment Committee, which is appointed by the Chief
Executive Officer, formulates the investment policy of the Company. The
Company's Investment Committee reports all purchases and sales of investments to
the Board of Directors. The policy of the Association is to invest funds among
various categories of investments and maturities to meet the day-to-day,
cyclical and long-term changes in assets and liabilities. In establishing its
investment strategies, the Company considers its cash position, the condition of
its loans, the stability of deposits, its capital position, its interest rate
risk and other factors.
Investment Securities. OTS guidelines regarding investment portfolio
policy and accounting require insured institutions to categorize securities and
certain other assets as held for "investment," "sale," or "trading." The
Association's investment policy provides for "held for investment" and
"available for sale" portfolios. Although the Association's investment policy
allows that some investments and loans will qualify to be held-to-maturity, the
policy enables for the sale of investments in certain specific instances, such
as when the quality of an asset deteriorates, or when regulatory changes require
that an asset be disposed. At December 31, 1997, the Association had total
investments of $31.0 million, of which $15.9 million was classified as
available-for-sale and $15.0 million was classified as held to maturity. The
$15.9 million investment classified as available-for-sale consisted of
collateralized mortgage obligations ("CMO's"). The $15.0 million investment
classified as held to maturity consisted of $10.0 million in U.S. government
securities, which have maximum terms to maturity of up to seven years, and $5.0
million in FHLB stock.
17
<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,
-------------------------------------------------------------
1997 1996 1995
----------------- ------------------- --------------------
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............. $ 9,969 $10,485 $14,960 $15,384 $19,949 $20,927
Collateralized mortgage obligations.. 15,902 15,902 -- -- -- --
Other investments.................... 4 68 4 45 4 41
FHLB Stock........................... 5,148 5,148 3,999 3,999 3,009 3,009
------- ------- ------- ------- ------- -------
Total investments.................. $31,023 $31,603 $18,963 $19,428 $22,962 $23,977
======= ======= ======= ======= ======= =======
</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, 1997.
<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... $ -- --% $4,993 6.97% $4,976 7.35% $9,969 $10,485 7.16%
</TABLE>
18
<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 41.8%, from $349.0 million at December 31, 1993 to
$495.1 million at December 31, 1997. The flow of deposits is influenced
significantly by general economic conditions, changes in money market and
prevailing interest rates and competition.
The following table presents the deposit activity for the periods
indicated.
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1997 1996 1995
---------- -------- --------
(In thousands)
<S> <C> <C> <C>
Deposits.......................................... $720,943 $805,469 $730,809
Withdrawals....................................... 725,033 725,862 714,030
-------- -------- --------
Net increase (decrease) before interest credited.. (4,090) 79,607 16,779
Interest credited................................. 15,204 12,923 10,951
-------- -------- --------
Net increase in deposits.......................... $ 11,114 $ 92,530 $ 27,730
======== ======== ========
</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, 1997.
<TABLE>
<CAPTION>
Amount
---------------
(In thousands)
<S> <C>
Maturity Period:
Three months or less........... $ 9,348
Over three through six months.. 5,391
Over six through 12 months..... 11,971
Over 12 months................. 11,118
-------
Total....................... $37,828
=======
</TABLE>
19
<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,
----------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------ -------------------------------- ---------------------------------
Weighted Weighted Weighted
Average Average Average
Average Nominal Average Nominal Average Nominal
Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------- -------- -------- -------- -------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Money market and NOW
deposits.................. $ 46,798 $ 1,092 2.33% $ 42,088 $ 1,040 2.47% $ 40,388 $ 1,069 2.65%
Savings deposits............ 78,400 2,288 2.92 81,715 2,314 2.83 85,020 2,371 2.79
Certificates of deposit..... 388,660 23,306 6.00 323,199 $18,504 5.73 256,350 14,992 5.85
Borrowings.................. 103,250 5,643 5.47 5,833 191 3.27 -- -- --
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities...........
$617,108 $32,329 5.24% $452,825 $22,409 4.87% $381,758 $18,432 4.83%
======== ======= ======== ======= ======== =======
</TABLE>
20
<PAGE>
The following table presents the amount of certificate accounts outstanding
based upon original contractual periods to maturity, at December 31, 1997, and
based upon contracted rates, at December 31, 1996 and 1995.
<TABLE>
<CAPTION>
Period to Maturity from December 31, 1997 At December 31,
-----------------------------------------------------------------------------------------
Three Four
Less One to Two to to to Five to Total
Than One Two Three Four Five Ten December
Year Years Years Years Years Years 31, 1997 1996 1995
-----------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Certificate Accounts:
3.00% to 5.50%....... $41,292 $ 22,091 $ 3,853 $ 3,674 $ 2 $ 4,020 $ 74,932 $113,357 $118,737
5.501% to 6.00%...... 29,919 85,835 9,673 22,649 253 8,556 156,885 121,968 60,213
6.001% to 6.50%...... -- 51,708 16,178 26,234 213 21,158 115,491 98,368 60,420
6.501% to 7.50%...... -- -- -- 11,429 148 14,623 26,200 30,860 30,460
7.501% to 8.50%...... -- -- -- -- -- 2,855 2,855 3,630 5,259
8.501% to 9.50%...... -- -- -- -- -- 3,559 3,559 4,345 4,579
9.501% to 10.50%..... -- -- -- -- -- 282 282 266 573
------- -------- ------- ------- ---- ------- -------- -------- --------
$71,211 $159,634 $29,704 $63,986 $616 $55,053 $380,204 $372,794 $280,241
======= ======== ======= ======= ==== ======= ======== ======== ========
</TABLE>
Borrowings
Borrowings are used in conjunction with deposits in funding the operating
and investment activity of the Association. At December 31, 1997, the
Association had borrowings of $90.0 million. Of these borrowings, $70.0 million
had a contractual maturity of five years at a rate of 5.46%. The remaining
$20.0 million in borrowings had an overnight rate of 6.50%. The borrowings are
secured by the assets of the Association.
Subsidiary Activities
The Association does not maintain any subsidiaries.
REGULATION AND SUPERVISION
General
The Company, as a savings and loan holding company, is required to file
certain reports with, and otherwise comply with the rules and regulations of the
OTS under the Home Owners' Loan Act, as amended (the "HOLA"). In addition, the
activities of savings institutions, such as the Association, are governed by the
HOLA and the Federal Deposit Insurance Act ("FDI Act").
21
<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. No multiple savings and loan holding company may acquire more
than 5% of the voting stock of a company engaged in impermissible activities.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution or holding company thereof,
without prior written approval of the OTS or acquiring or retaining control of a
depository institution that is not insured by the FDIC. In evaluating
applications by holding companies to acquire savings institutions, the OTS must
consider the financial and managerial resources and future prospects of the
company and
22
<PAGE>
institution involved, the effect of the acquisition on the risk to the insurance
funds, the convenience and needs of the community and competitive factors.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies and (ii) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions. The
states vary in the extent to which they permit interstate savings and loan
holding company acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, HOLA does prescribe such restrictions on subsidiary
savings institutions as described below. The Association must notify the OTS 30
days before declaring any dividend to the Company. In addition, the financial
impact of a holding company on its subsidiary institution is a matter that is
evaluated by the OTS and the agency has authority to order cessation of
activities or divestiture of subsidiaries deemed to pose a threat to the safety
and soundness of the institution.
Federal Savings Institution Regulation
Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 3% Tier I capital (to total assets) ratio and an 8% total capital (to
risk-weighted assets) ratio. In addition, the prompt corrective action
standards discussed below also establish, in effect, a minimum 2% tangible
capital standard, a 4% leverage Tier I capital ratio (3% for institutions
receiving the highest rating on the CAMELS financial institution rating system),
and, together with the total capital standard itself, a 4% Tier I risk-based
capital standard. Core capital is defined as common stockholders' equity
(including retained earnings), certain noncumulative perpetual preferred stock
and related surplus, and minority interests in equity accounts of consolidated
subsidiaries less intangibles other than certain purchased mortgage servicing
rights and credit card relationships. The OTS regulations also require that, in
meeting the tangible, leverage (core) and total risk-based capital standards,
institutions must generally deduct investments in and loans to subsidiaries
engaged in activities not permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier I (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of 4% and 8%, respectively.
In determining the amount of risk-weighted assets, all assets, including certain
off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%,
as assigned by the OTS capital regulation based on the risks OTS believes are
inherent in the type of asset. The components of Tier I (core) capital are
equivalent to those discussed earlier. The components of supplementary capital
currently include cumulative preferred stock, long-term perpetual preferred
stock, mandatory convertible securities, subordinated debt and intermediate
preferred stock and the allowance for loan and lease losses limited to a maximum
of 1.25% of risk-weighted assets. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.
23
<PAGE>
The OTS regulatory capital requirements also incorporate an interest rate
risk component. Savings institutions with "above normal" interest rate risk
exposure are subject to a deduction from total capital for purposes of
calculating their risk-based capital requirements. A savings institution's
interest rate risk is measured by the decline in the net portfolio value of its
assets (i.e., the difference between incoming and outgoing discounted cash flows
from assets, liabilities and off-balance sheet contracts) that would result from
a hypothetical 200 basis point increase or decrease in market interest rates
divided by the estimated economic value of the institution's assets. In
calculating its total capital under the risk-based capital rule, a savings
institution whose measured interest rate risk exposure exceeds 2% must deduct an
amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
institution's assets. The Director of the OTS may waive or defer a savings
institution's interest rate risk component on a case-by-case basis. A savings
institution with assets of less than $300 million and risk-based capital ratios
in excess of 12% is not subject to the interest rate risk component, unless the
OTS determines otherwise. For the present time, the OTS has deferred
implementation of the interest rate risk component. At December 31, 1997, the
Association met each of its capital requirements and it is anticipated that the
Association will not be subject to the interest rate risk component.
The following table presents the Association's capital position at December
31, 1997 relative to fully phased-in regulatory requirements.
<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, 1997
Total Capital (to risk-weighted assets)... $72,523 23.39% $24,810 8.00% $31,012 10.00%
Tier I Capital (to risk-weighted assets).. 71,808 23.15% N/A N/A 18,607 6.00%
Tier I Capital (to total assets).......... 71,808 10.59% 20,341 3.00% 33,902 5.00%
Tangible Capital.......................... 71,808 10.59% 10,171 1.50% N/A N/A
</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 account holders would be entitled to
receive distributions of any assets remaining after payment of all creditors'
claims, but before any distributions are made to the Association's stockholders,
equal to their proportionate interests at that time in the liquidation account.
Prompt Corrective Regulatory Action. Under the OTS prompt corrective
action regulations, the OTS is required to take certain supervisory actions
against undercapitalized institutions, the severity of which depends upon the
institution's degree of undercapitalization. Generally, a savings institution
is considered "well capitalized" if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of Tier I capital to risk-weighted assets is
at least 6%,
24
<PAGE>
its ratio of Tier I to total assets is at least 5%, and it is not subject to any
order or directive by the OTS to meet a specific capital level. A savings
institution generally is considered "adequately capitalized" if its ratio of
total capital to risk-weighted assets is at least 8%, its ratio of Tier I (core)
capital to risk-weighted assets is at least 4%, and its ratio of Tier 1 capital
to total assets is at least 4% (3% if the institution receives the highest
CAMELS rating). A savings institution that has a ratio of total capital to
risk-weighted assets of less than 8%, a ratio of Tier I capital to risk-weighted
assets of less than 4% or a ratio of Tier 1 capital to total assets of less than
4% (3% or less for institutions with the highest examination rating) is
considered to be "undercapitalized." A savings institution that has a total
capital ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage
ratio that is less than 3% is considered to be "significantly undercapitalized"
and a savings institution that has a tangible capital to assets ratio less than
2% is deemed to be "critically undercapitalized." Subject to a narrow
exception, the banking regulator is required to appoint a receiver or
conservator for an institution that is "critically undercapitalized." The
regulation also provides that a capital restoration plan must be filed with the
OTS within 45 days of the date a savings institution receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Compliance with the plan must be guaranteed by any parent
holding company. In addition, numerous mandatory supervisory actions become
immediately applicable to an undercapitalized institution, including, but not
limited to, increased monitoring by regulators and restrictions on growth,
capital distributions and expansion. The OTS could also take any one of a
number of discretionary supervisory actions, including the issuance of a capital
directive and the replacement of senior executive officers and directors.
Insurance of Deposit Accounts. Deposits of the Association are presently
insured by the SAIF. On September 30, 1996, the President signed into law the
Deposit Insurance Funds Act of 1996 (the "Funds Act") which, among other things,
imposed a special one-time assessment on SAIF member institutions, including the
Association, to recapitalize the SAIF. The SAIF was undercapitalized due
primarily to a statutory requirement that SAIF members make payments on bonds
issued in the last 1980's by the Financing Corporation ("FICO") to recapitalize
the predecessor to the SAIF. As required by the Funds Act, the FDIC imposed a
special assessment of 65.7 basis points on SAIF assessable deposits held as of
March 31, 1995, payable November 27, 1996 (the "SAIF Special Assessment"). The
SAIF Special Assessment was recognized by the Association as an expense in the
quarter ended September 30, 1996 and was generally tax deductible. The SAIF
Special Assessment recorded by the Association amounted to $2.5 million on a
pre-tax basis and $1.5 million on an after-tax basis.
The Funds Act also spread the obligations for payment of the FICO bonds
across all SAIF and Bank Insurance Fund ("BIF") members. The BIF is the fund
which primarily insures commercial bank deposits. Beginning on January 1, 1997,
BIF deposits were assessed for a FICO payment of approximately 1.3 basis points,
while SAIF deposits pay approximately 6.4 basis points. Full pro rate sharing
of the FICO payments between BIF and SAIF members will occur on the earlier of
January 1, 2000 or the date the BIF and SAIF are merged. The Funds Act
specifies that the BIF and SAIF will be merged on January 1, 1999, provided no
savings associations remain as of that time.
25
<PAGE>
As a result of the Funds Act, the FDIC voted to effectively lower SAIF
assessments to 0 to 27 basis points as of January 1, 1997, a range comparable to
that of BIF members. SAIF members will also continue to make the FICO payments
described above. Management cannot predict the level of FDIC insurance
assessments on an on-going basis, whether the savings association charter will
be eliminated or whether the BIF and SAIF will eventually be merged.
The Association's assessment rate for fiscal 1997 was 6.5 basis points and
the premium paid for this period was $261,000. A significant increase in SAIF
insurance premiums would likely have an adverse effect on the operating expenses
and results of operations of the Association.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Association does not know of any practice, condition
or violation that might lead to termination of deposit insurance.
Thrift Rechartering Legislation. The Funds Act provides that the BIF and
SAIF will merge on January 1, 1999 if there are no more savings associations as
of that date. Various proposals to eliminate the federal thrift charter, create
a uniform financial institutions charter and abolish the OTS were introduced in
Congress. Some bills would require federal savings institutions to convert to a
national bank or some type of state charter by a specified date, or they would
automatically become national banks. Under some proposals, converted federal
thrifts would generally be required to conform their activities to those
permitted for the charter selected and divestiture of nonconforming assets would
be required over a two year period, subject to two possible one year extensions.
State chartered thrifts would become subject to the same federal regulation as
applies to state commercial banks. A more recent bill passed by the House
Banking Committee would allow federal savings institutions to continue to
exercise activities being conducted when they convert to a bank regardless of
whether a national bank could engage in the activity. Holding companies for
savings institutions would become subject to the same regulation as holding
companies that control commercial banks, with some limited grandfathering,
including savings and loan holding company activities. The grandfathering would
be lost under certain circumstances such as a change in control of the Company.
The Company is unable to predict whether such legislation would be enacted or
the extent to which the legislation would restrict or disrupt its operations.
Loans to One Borrower. Under the HOLA, savings institutions are generally
subject to the limits on loans to one borrower applicable to national banks.
Generally, savings institutions may not make a loan or extend credit to a single
or related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if such loan is secured by readily-marketable collateral, which is
defined to include certain financial instruments and bullion. At December 31,
1997, the Association's limit on loans to one borrower was $5.8 million. At
December 31, 1997, the Association's largest aggregate outstanding balance of
loans to one borrower was $439,000.
26
<PAGE>
QTL Test. The HOLA requires savings institutions to meet a QTL test.
Under the QTL test, a savings and loan association is required to maintain at
least 65% of its "portfolio assets" (total assets less: (i) specified liquid
assets up to 20% of total assets; (ii) intangibles, including goodwill; and
(iii) the value of property used to conduct business) in certain "qualified
thrift investments" (primarily residential mortgages and related investments,
including certain mortgage-backed securities) in at least 9 months out of each
12 month period.
A savings institution that fails the QTL test is subject to certain
operating restrictions and may be required to convert to a bank charter. As of
December 31, 1997, the Association maintained 99.9% of its portfolio assets in
qualified thrift investments and, therefore, met the QTL test.
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution that exceeds
all fully phased-in capital requirements before and after a proposed capital
distribution ("Tier 1 Association") and has not been advised by the OTS that it
is in need of more than normal supervision, could, after prior notice but
without obtaining approval of the OTS, make capital distributions during a
calendar year equal to the greater of (i) 100% of its net earnings to date
during the calendar year plus the amount that would reduce by one-half its
"surplus capital ratio" (the excess capital over its fully phased-in capital
requirements) at the beginning of the calendar year or (ii) 75% of its net
income for the previous four quarters. Any additional capital distributions
would require prior regulatory approval. In the event the Association's capital
fell below its regulatory requirements or the OTS notified it that it was in
need of more than normal supervision, the Association's ability to make capital
distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice. In December 1994, the OTS proposed
amendments to its capital distribution regulation that would generally authorize
the payment of capital distributions without OTS approval provided that the
payment does not cause the institution to be undercapitalized within the meaning
of the prompt corrective action regulation. However, institutions in a holding
company structure would still have a prior notice requirement. At December 31,
1997, the Association was a Tier 1 Association.
Liquidity. The Association is required to maintain an average daily
balance of specified liquid assets equal to a monthly average of not less than a
specified percentage of its net withdrawable deposit accounts plus short-term
borrowings. This liquidity requirement was 5% for fiscal 1997, but is subject
to change from time to time by the OTS to any amount within the range of 4% to
10% depending upon economic conditions and the savings flows of member
institutions. During 1997, OTS regulations also required each savings
institution to maintain an average daily balance of short-term liquid assets of
at least 1% of the total of its net withdrawable deposit accounts and borrowings
payable in one year or less. Monetary penalties may be imposed for failure to
meet these liquidity requirements. The OTS has recently lowered
27
<PAGE>
the liquidity requirement from 5% to 4% and eliminated the 1% short term liquid
asset requirement. The Association's liquidity ratio for December 31, 1997 was
19.1%, which exceeded the applicable requirements. The Association has never
been subject to monetary penalties for failure to meet its liquidity
requirements.
Assessments. Savings institutions are required to pay assessments to the
OTS to fund the agency's operations. The general assessments, paid on a semi-
annual basis, are computed upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the Association's latest
quarterly thrift financial report. The assessments paid by the Association for
the fiscal year ended December 31, 1997 totalled $139,000.
Branching. OTS regulations permit nationwide branching by federally
chartered savings institutions to the extent allowed by federal statute. This
permits federal savings institutions to establish interstate networks and to
geographically diversify their loan portfolios and lines of business. The OTS
authority preempts any state law purporting to regulate branching by federal
savings institutions.
Transactions with Related Parties. The Association's authority to engage
in transactions with related parties or "affiliates" (e.g.., any company that
controls or is under common control with an institution, including the Company
and its non-savings institution subsidiaries) is limited by Sections 23A and 23B
of the Federal Reserve Act ("FRA"). Section 23A limits the aggregate amount of
covered transactions with any individual affiliate to 10% of the capital and
surplus of the savings institution. The aggregate amount of covered
transactions with all affiliates is limited to 20% of the savings institution's
capital and surplus. Certain transactions with affiliates are required to be
secured by collateral in an amount and of a type described in Section 23A and
the purchase of low quality assets from affiliates is generally prohibited.
Section 23B generally provides that certain transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the institution as those prevailing at the time for comparable
transactions with non-affiliated companies. In addition, savings institutions
are prohibited from lending to any affiliate that is engaged in activities that
are not permissible for savings & loan holding companies and no savings
institution may purchase the securities of any affiliate other than a
subsidiary.
The Association's authority to extend credit to executive officers,
directors and 10% shareholders ("insiders"), as well as entities such persons
control, is governed by Sections 22(g) and 22(h) of the FRA and Regulation O
thereunder. Among other things, such loans are required to be made on terms
substantially the same as those offered to unaffiliated individuals and to not
involve more than the normal risk of repayment. Recent legislation created an
exception for loans made pursuant to a benefit or compensation program that is
widely available to all employees of the institution and does not give
preference to insiders over other employees. Regulation O also places
individual and aggregate limits on the amount of loans the Association may make
to insiders based, in part, on the Association's capital position and requires
certain board approval procedures to be followed.
28
<PAGE>
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring actions
against the institution and all institution-affiliated parties, including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors to institution of receivership, conservatorship or termination of
deposit insurance. Civil penalties cover a wide range of violations and can
amount to $25,000 per day, or even $1 million per day in especially egregious
cases. Under the FDI Act, the FDIC has the authority to recommend to the
Director of the OTS enforcement action to be taken with respect to a particular
savings institution. If action is not taken by the Director, the FDIC has
authority to take such action under certain circumstances. Federal law also
establishes criminal penalties for certain violations.
Standards for Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") and a final rule to implement safety and soundness standards
required under the FDI Act. The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes impaired. The
standards set forth in the Guidelines address internal controls and information
systems; internal audit system; credit underwriting; loan documentation;
interest rate risk exposure; asset growth; asset quality, earnings and
compensation, fees and benefits. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
Guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard, as required by the FDI
Act. The final rule establishes deadlines for the submission and review of such
safety and soundness compliance plans when such plans are required.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally required for most of 1997 that reserves be maintained
against aggregate transaction accounts as follows: for accounts aggregating
$49.3 million or less (subject to adjustment by the Federal Reserve Board) the
reserve requirement was $1.48 million plus 10% (subject to adjustment by the
Federal Reserve Board between 8% and 14%) against that portion of total
transaction accounts in excess of $49.3 million. The first $4.4 million of
otherwise reservable balances (subject to adjustments by the
29
<PAGE>
Federal Reserve Board) were exempted from the reserve requirements. The
Association maintained compliance with the foregoing requirements. For 1998,
the Federal Reserve Board has decreased from $49.3 million to $47.8 million the
amount of transaction accounts subject to the 3% reserve requirement and to
increase the amount of exempt reservable balances from $4.4 million to $4.7
million. The balances maintained to meet the reserve requirements imposed by the
Federal Reserve Board may be used to satisfy liquidity requirements imposed by
the OTS.
30
<PAGE>
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company and the Association report their income on a
consolidated basis and the accrual method of accounting, and are subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Association's reserve for bad debts
discussed below. The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to the Association or the Company. The Association has not been
audited by the IRS during the last five years. For its 1997 taxable year, the
Company is subject to a maximum federal income tax rate of 35%.
Bad Debt Reserves. For fiscal years beginning prior to December 31, 1995,
thrift institutions which qualified under certain definitional tests and other
conditions of the Internal Revenue Code of 1986 (the "Code") were permitted to
use certain favorable provisions to calculate their deductions from taxable
income for annual additions to their bad debt reserve. A reserve could be
established for bad debts on qualifying real property loans (generally secured
by interests in real property improved or to be improved) under (i) the
Percentage of Taxable Income Method (the "PTI Method") or (ii) the Experience
Method. The reserve for non-qualifying loans was computed using the Experience
Method.
The Small Business Job Protection Act of 1996 (the "1996 Act"), which was
enacted on August 20, 1996, requires savings institutions to recapture (i.e.,
take into income) certain portions of their accumulated bad debt reserves. The
1996 Act repeals the reserve method of accounting for bad debts effective for
tax years beginning after 1995. Thrift institutions that would be treated as
small banks are allowed to utilize the Experience Method applicable to such
institutions, while thrift institutions that are treated as large banks (those
generally exceeding $500 million in assets) are required to use only the
specific charge-off method. Thus, the PTI method of accounting for bad debts is
no longer available for any financial institution.
A thrift institution required to change its method of computing reserves
for bad debts will treat such change as a change in method of accounting,
initiated by the taxpayer, and having been made with the consent of the IRS.
Any Section 481(a) adjustment required to be taken into income with respect to
such change generally will be taken into income ratably over a six-taxable
period beginning after 1995, subject to the residential loan requirement.
Under the residential loan requirement provision, the recapture required by
the 1996 Act will be suspended for each of two successive taxable years,
beginning with the Association's current taxable year, in which the Association
originates a minimum of certain residential loans based upon the average of the
principal amounts of such loans made by the Association during its six taxable
years preceding its current taxable year.
31
<PAGE>
Under the 1996 Act, for its current and future taxable years, the
Association is not permitted to make additions to its tax bad debt reserves. In
addition, the Association is required to recapture (i.e., take into income) over
a six year period the excess of the balance of its tax bad debt reserves as of
December 31, 1995 over the balance of such reserves as of December 31, 1987. As
a result of such recapture, the Association will incur an additional tax
liability of approximately $1.2 million.
Distributions. Under the 1996 Act, if the Association makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Association's unrecaptured tax bad debt reserves (including
the balance of its reserves as of December 31, 1987) to the extent thereof, and
then from the Association's supplemental reserve for losses on loans, to the
extent thereof, and an amount based on the amount distributed (but not in excess
of the amount of such reserves) will be included in the Association's income.
Non-dividend distributions include distributions in excess of the Association's
current and accumulated earnings and profits, as calculated for federal income
tax purposes, distributions in redemption of stock, and distributions in partial
or complete liquidation. Dividends paid out of the Association's current or
accumulated earnings and profits will not be so included in the Association's
income.
The amount of additional taxable income triggered by a non-dividend is an
amount that, when reduced by the tax attributable to the income, is equal to the
amount of the distribution. Thus, if the Association makes a non-dividend
distribution to the Company, approximately one and one-half times the amount of
such distribution (but not in excess of the amount of such reserves) would be
includable in income for federal income tax purposes, assuming a 35% federal
corporate income tax rate. The Association does not intend to pay dividends that
would result in a recapture of any portion of its bad debt reserves.
Corporate Alternative Minimum Tax. The Internal Revenue Code (the "Code")
imposes a tax on alternative minimum taxable income ("AMTI") at a rate of 20%.
The excess of the tax bad debt reserve deduction using the percentage of taxable
income method over the deduction that would have been allowable under the
Experience Method is treated as a preference item for purposes of computing the
AMTI. Only 90% of AMTI can be offset by net operating loss carryovers. AMTI is
increased by an amount equal to 75% of the amount by which the Association's
adjusted current earnings exceeds its AMTI (determined without regard to this
preference and prior to reduction for net operating losses).
SAIF Recapitalization Assessment. The Funds Act levied a 65.7-cent fee on
every $100 of thrift deposits held on March 31, 1995. For financial statement
purposes, this assessment was reported as an expense for the quarter ended
September 30, 1996. The Funds Act includes a provision which states that the
amount of any special assessment paid to capitalize SAIF under this legislation
is deductible under section 162 of the Code in the year of payment.
32
<PAGE>
Dividends Received Deduction and Other Matters. The Company may exclude
from its income 100% of dividends received from the Association as a member of
the same affiliated group of corporations. The corporate dividends received
deduction is generally 70% in the case of dividends received from unaffiliated
corporations with which the Company and the Association will not file a
consolidated tax return, except that if the Company owns more than 20% of the
stock of a corporation distributing a dividend, 80% of any dividends received
may be deducted.
State and Local Taxation
The Association is subject to the Mutual Thrift Institutions Tax of the
Commonwealth of Pennsylvania based on the Association's financial net income
determined in accordance with generally accepted accounting principles with
certain adjustments. The tax rate under the Mutual Thrift Institutions Tax is
11.5%. Interest on state and federal obligations is excluded from net income.
An allocable portion of net interest expense incurred to carry the obligations
is disallowed as a deduction. Three year carryforwards of losses are allowed.
The Company is subject to the Capital Stock Tax of the Commonwealth of
Pennsylvania and the Franchise Tax of the state of Delaware.
Personnel
As of December 31, 1997, the Association had 52 full-time employees and 7
part-time employees. The employees are not represented by a collective
bargaining unit, and the Association considers its relationship with its
employees to be good.
Item 2. Properties
The Company conducts its business by maintaining an office at 300 Delaware
Avenue, Suite 1704, Wilmington, Delaware 19801. The Association conducts its
business through its main office located at 532 Lincoln Avenue, Pittsburgh,
Pennsylvania 15202 and six full-service branch offices, all of which are located
in Allegheny County. Four of the Association's branch offices are leased. Loan
originations are processed at the administrative office. The Association
believes that its current facilities are adequate to meet the present and
immediately foreseeable needs of the Association and the Company.
Item 3. Legal Proceedings
Neither the Company nor its subsidiary are involved in any pending legal
proceedings other than routine legal proceedings occurring in the ordinary
course of business, which in the aggregate involve amounts which are believed by
management to be immaterial to the financial condition and results of the
operations of the Association.
Item 4. Submission of Matters to a Vote of Security Holders
See the proxy for submission of matters to a vote of security holders.
33
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Information relating to the market for Registrant's common equity and
related stockholder matters appears under "Shareholder Information" on page 50
in the Registrant's 1997 Annual Report to Stockholders and is incorporated
herein by reference. Information relating to the dividend restrictions for
Registrant's common stock appears under Note 12 to the "Notes to Consolidated
Financial Statements Years Ended December 31, 1997, 1996 and 1995" on page 35 in
the Registrant's 1997 Annual Report to stockholders and is incorporated herein
by reference.
Item 6. Selected Financial Data
The above-captioned information appears under "Selected Financial and Other
Data of the Company" in the Registrant's 1997 Annual Report to Stockholders on
pages 2 and 3 is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The above-captioned information appears under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Registrant's
1997 Annual Report to Stockholders on pages 8 through 20 and is incorporated
herein by reference.
Item 7.a. Quantitative and Qualitative Disclosure About Market Risks.
The above-captioned information appears under the headings "Interest Rate
Sensitivity Analysis" and "Net Portfolio Value" in the registrant's 1997 Annual
Report to Stockholders on pages 10 through 12 and is incorporated herein by
reference.
Item 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements of First Bell Bancorp, Inc. and its
subsidiary, together with the report thereon by Deloitte & Touche LLP appears in
the Registrant's 1997 Annual Report to Stockholders on pages 21 through 47 and
are incorporated herein by reference.
Item 9. Change in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
34
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The information relating to Directors and Executive Officers of the
Registrant is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 27, 1998,
at pages 5 and 6.
Item 11. Executive Compensation
The information relating to directors' compensation and executives'
compensation is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 27, 1998,
at pages 8 through 16 (excluding the Compensation Committee Report and Stock
Performance Graph).
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information relating to security ownership of certain beneficial owners
and management is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 27, 1998,
at pages 3, 5 and 6.
Item 13. Certain Relationships and Related Transactions
The information relating to certain relationships and related transactions
is incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held on April 27, 1998, at page 16.
35
<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 1997 Annual Report to
Stockholders.
PAGE
Independent Auditors Report................................. 21
Consolidated Balance Sheets for the
December 31, 1997 and 1996................................ 24
Consolidated Statements of Income for the
Years Ended December 31, 1997, 1996 and 1995.............. 25
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1997, 1996 and 1995...... 26
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1997, 1996 and 1995.............. 27
Notes to Consolidated Financial Statements for the
Years Ended December 31, 1997, 1996 and 1995.............. 28-47
The remaining information appearing in the 1997 Annual Report to Stockholders
is not deemed to be filed as part of this report, except as expressly provided
herein.
(2) All schedules are omitted because they are not required or applicable, or
the required information is shown in the consolidated financial statements
or the notes thereto.
(3) Exhibits
(a) The following exhibits are filed as part of this report.
3.1 Certificate of Incorporation of First Bell Bancorp, Inc.*
3.2 Bylaws of First Bell Bancorp, Inc.*
4.0 Stock Certificate of First Bell Bancorp, Inc.*
10.1 First Bell Bancorp, Inc. 1995 Master Stock Option Plan**
10.2 Bell Federal Savings and Loan Association of Bellevue Master Stock
Compensation Plan**
10.5 Form of Bell Federal Savings and Loan Association of Bellevue
Supplemental Executive Retirement Plan*
36
<PAGE>
10.6 Employment Agreement between First Bell Bancorp, Inc. and certain
executive officers, including Messrs. Eckert and Hinds*
10.7 Employment Agreement between Bell Federal Savings and Loan
Association of Bellevue and certain executive officers, including
Messrs. Eckert and Hinds*
11.0 Computation of earnings per share (filed herewith)
13.0 Portions of the 1997 Annual Report to Stockholders (filed
herewith)
23.0 Consent of Independent Accountant (filed herewith)
27.0 Financial Data Schedule (filed herewith)
99.0 Proxy Statement for 1998 Annual Meeting of Stockholders to be held
on April 27, 1988 and previously filed on March 20, 1998 is herein
incorporated by reference.
(b) Reports on Form 8-K
None.
__________________________________
* Incorporated herein by reference into this document from the
Exhibits to the Form S-1, Registration Statement, originally filed
on November 9, 1994, as amended and declared effective on May 9,
1995, Registration No. 33-86160.
** Incorporated herein by reference into this document from the
Exhibits (Appendices) to the Proxy Statement for the Annual Meeting
of Stockholders held on April 29, 1996, filed on March 22, 1996.
37
<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 and --------
Jeffrey M. Hinds Director
/s/ David F. Figgins March 17, 1997
- ----------------------------- Vice President and --------
David F. Figgins Director
/s/ Thomas J. Jackson, Jr. Director March 17, 1997
- ---------------------------- --------
Thomas J. Jackson, Jr.
/s/ Robert C. Baierl Secretary and Director March 17, 1997
- ----------------------------- --------
Robert C. Baierl
/s/ William S. McMinn Vice President and March 17, 1997
- -------------------------- Director --------
William S. McMinn
38
<PAGE>
/s/ Peter E. Reinert Director March 17, 1997
- ----------------------------- --------
Peter E. Reinert
/s/ Jack W. Schweiger Director March 17, 1997
- --------------------------- --------
Jack W. Schweiger
/s/ Theodore R. Dixon Director March 17, 1997
- --------------------------- --------
Theodore R. Dixon
39
<PAGE>
Exhibit 11
FIRST BELL BANCORP, INC.
COMPUTATION OF EARNINGS PER SHARE
DECEMBER 31, 1997
<TABLE>
<CAPTION>
TWELVE TWELVE
MONTHS MONTHS
ENDED ENDED
12/31/97 12/31/97
---------- ----------
BASIC FULLY DILUTED
<S> <C> <C>
Net income applicable to common stock $7,574,787 $7,574,787
EARNINGS PER SHARE
Weighted average shares outstanding 6,168,862 6,168,862
Add: Option common stock equivalents - 144,660
Less: MRP shares 307,798 307,798
Add: Granted MRP shares - 129,428
---------- ----------
5,861,064 6,135,152
Earnings per share $ 1.29 $ 1.23
========== ==========
</TABLE>
<PAGE>
FIRST BELL BANCORP, INC. 1997 ANNUAL REPORT
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
General
First Bell Bancorp, Inc. (the "Company") is a Delaware corporation organized
by the Board of Directors of Bell Federal Savings and Loan Association of
Bellevue ("the Association") for the purpose of acquiring all of the capital
stock of the Association issued in the Association's conversion from a feder-
ally chartered mutual savings association to a federally chartered stock sav-
ings association (the "Conversion"). The Conversion was completed on June 29,
1995. The only significant assets of the Company are the capital stock of the
Association and the Company's loan to the Association's Employee Stock Owner-
ship Plan ("ESOP"). Currently, the Company does not transact any material busi-
ness other than through its subsidiary, the Association. All references to the
Company include the Association unless otherwise indicated, except that refer-
ences to the Company prior to June 29, 1995, are to the Association.
Private Securities Litigation Reform Act Safe Harbor Statement
In addition to historical information, this Annual Report includes certain
forward looking statements based on current management expectations. Examples
of this forward looking information can be found in, but are not limited to,
the "President's Letter to Shareholders"; "The Challenges of Growth: Goals and
Directions"; "Management's Discussion and Analysis of Financial Condition and
Results of Operations", "Asset Quality", and, "Interest Rate Sensitivity Analy-
sis"; and in the "Notes to Consolidated Financial Statements Years Ended Decem-
ber 31, 1997, 1996 and 1995", "Note 5--Investment Securities Available for
Sale", "Note 6--Mortgage-Backed Securities Available-For-Sale", "Note 17--Com-
mitments and Contingencies" and "Note 18--Fair Values of Financial Instru-
ments". The Company's actual results could differ materially from those manage-
ment expectations. Factors that could cause future results to vary from current
management expectations include, but are not limited to, general economic con-
ditions, legislative and regulatory changes, monetary and fiscal policies of
the federal government, changes in tax policies, rates and regulations of fed-
eral, state and local tax authorities, changes in interest rates, deposit
flows, the cost of funds, demand for loan products, demand for financial serv-
ices, competition, changes in the quality or composition of the Company's loan
and investment portfolios, changes in accounting principles, policies or guide-
lines, and other economic, competitive, governmental and technological factors
affecting the Company's operations, markets, products, services and prices.
Further description of the risks and uncertainties to the business are included
in detail in Item 1, "Business" of the Company's 1997 Form 10-K.
Management Strategy
The Company operates a traditional savings and loan institution and seeks to
achieve profitability while maintaining a strong capital and liquidity posi-
tion. As a community oriented savings and loan, the Company's primary invest-
ment is in one- to four-family residential mortgage loans. The Company's pri-
mary sources of funds are from retail deposit accounts and borrowings. The
Company's results of operations are dependent primarily on net interest income,
which is the difference between the income earned on its loan, mortgage-backed
securities and investment securities portfolios, and its cost of funds, con-
sisting primarily of the interest paid on its deposits and to a lesser extent,
borrowings from the Federal Home Loan Bank ("FHLB"). The Company's results of
operations are affected by its provision for loan losses and non-interest ex-
penses. The Company's results of operations are also significantly affected by
general economic and competitive conditions, particularly changes in market in-
terest rates, government policies and actions of regulatory authorities. Future
changes in applicable law, regulations or government policies may materially
impact the Company.
Conventional Residential Mortgage Lending
The Company has emphasized, and plans to continue to emphasize, originating
conventional one- to four-family residential mortgage loans for its portfolio
in its primary market area, the greater Pittsburgh metropolitan area. The Com-
pany originates primarily 15 and 30 year, fixed-rate mortgage loans. At Decem-
ber 31, 1997, conventional mortgage loans totalled $568.4 million, or 95.4% of
the total loan portfolio. At that date, $551.2 million, or 97.0% of the
Company's total conventional loan portfolio consisted of fixed-rate mortgage
loans. To a lesser extent, the Company also originates residential construction
loans on one- to four-family properties. Such loans totalled $25.6 million, or
4.3% of total loans at December 31, 1997.
- --------------------------------------------------------------------------------
8
<PAGE>
- --------------------------------------------------------------------------------
For the years ended December 31, 1997, 1996 and 1995, the Company originated
$132.0 million, $168.9 million and $112.3 million, respectively, of conven-
tional mortgage and residential construction loans. In 1997, the Company sold
$30.0 million of fixed rate conventional mortgage loans to better manage the
Company's interest rate risk. In 1995, the Company purchased $24.4 million in
owner occupied single family conventional mortgage loans from outside the
Company's local market area. Originations and purchases have generally exceeded
prepayments and loan sales, resulting in an increase in the Company's total
loan portfolio from $432.9 million at December 31, 1995 to $596.0 million at
December 31, 1997.
Deposit Growth as a Source of Funding
Deposit growth has been the integral source of funds and the means of growth
for the Company. In this regard, management has emphasized providing an in-
creased level of service to its customers in its local market areas in order to
retain the deposit relationships with such customers. At times, the Company has
increased its deposit base by pricing its deposit products higher than other
financial institutions in the greater Pittsburgh market area. The deposit base
has increased steadily from $391.4 million at December 31, 1995 to $495.1 mil-
lion at December 31, 1997. Considerable emphasis is placed on core deposit re-
lationships, consisting of passbook accounts, club accounts and statement sav-
ings accounts, which tend to be more stable and lower cost than other types of
higher yielding deposits. However, the majority of the growth in deposit ac-
counts has come from certificates of deposit. Certificates of deposit are of-
fered with terms ranging from three months to 10 years. Certificates of deposit
are priced at competitive rates. The growth of deposit accounts is monitored to
match operating requirements.
Asset Quality
As a result of the Company's long-term policy of originating loans secured by
one- to four-family, owner-occupied, primary residences that meet the Company's
underwriting standards, management believes the Company has maintained high as-
set quality. The Company originates mortgage loans almost entirely within its
primary market area. Of the conventional mortgage and residential construction
loan portfolio at December 31, 1997, 95.8% were secured by properties located
within the Company's primary market area. At December 31, 1997 non-performing
assets (defined as loans delinquent 90 days or more and real estate owned) rep-
resented 0.09% of total assets. The Company has established a general loss al-
lowance to provide for losses in its portfolio. The provision for loan losses
increased by $45,000 for the year ended December 31, 1997 due to the 9.2% in-
crease in the balance of conventional mortgage loans from December 31, 1996 to
December 31, 1997. The provision for loan losses is $715,000 or 112.8% of total
non-performing assets at December 31, 1997. The higher allowance ratio is due
to management's assessment of prospective national and local economic condi-
tions, the regulatory environment and inherent risks in the portfolio, not to
specific problem loans existing in the portfolio. Management believes that the
current level of reserves is adequate. However, the balance of reserves neces-
sary can be greatly influenced by regulatory changes and economic conditions.
Therefore, the level of future reserves and the related effect on net income
cannot be assured.
Low Operating Expenses
The Company's non-interest expenses principally consist of compensation and
employee benefits, federal deposit insurance premiums, occupancy and equipment
expenses and other general and administrative expenses. The ratio of other ex-
penses to average assets was 0.72%, 1.44% and 1.05% for the years ended Decem-
ber 31, 1997, 1996 and 1995, respectively. The 1996 ratio was higher due to a
one time charge of $2.5 million to replenish the Savings Association Insurance
Fund ("SAIF"), the insurance fund which insures customer deposits. The ratio of
other expenses to average assets would have been 1.00% without this assessment.
Low operating costs are maintained by managing and monitoring overhead costs,
primarily through controlling the growth in personnel. At December 31, 1997,
the Company's seven offices and $675.7 million in assets were operated by a to-
tal of 52 full-time employees and seven part-time employees, resulting in an
average of $12.2 million in assets per employee. Expense ratios are controlled
through an efficient and effective product delivery system and the Associa-
tion's specialization in mortgage lending.
- --------------------------------------------------------------------------------
9
<PAGE>
FIRST BELL BANCORP, INC. 1997 ANNUAL REPORT
- --------------------------------------------------------------------------------
Maintaining High Liquidity
The Association is required to maintain an average daily balance of liquid as-
sets as a percentage of net withdrawable deposit accounts plus short-term
borrowings as defined by Office of Thrift Supervision ("OTS") regulations. At
December 31, 1997, the liquidity requirement stipulated that the Association
must maintain an average liquidity ratio of 4%. The average liquidity ratio was
19.1% at December 31, 1997. The average short liquidity ratio requirement is
eliminated as of December 31, 1997. For years prior to 1997 the minimum re-
quired average liquidity and average short-term liquidity ratios were 5.0% and
1.0%, respectively. Each of the Association's average liquidity ratios were
10.3% and 14.9% at December 31, 1996 and 1995, respectively. The high level of
liquidity reflects management's strategy to partially offset the interest rate
risk associated with the predominantly fixed-rate mortgage loan portfolio and
fluctuates depending on the operational needs of the Association.
The Company's most liquid assets are cash and short-term investments. The
level of the liquid assets are dependent on the operating, financing, lending
and investing activities during any given period. At December 31, 1997, 1996
and 1995, assets qualifying for liquidity including cash and short-term invest-
ments, totalled $61.4 million, $109.6 million and $91.0 million, respectively.
Interest Rate Sensitivity Analysis
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest rate sensitive" and by moni-
toring an institution's interest rate sensitivity "gap." An asset or liability
is said to be interest rate sensitive within a specific time period if it will
mature or reprice within that same time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-earning assets
anticipated, based upon certain assumptions, to mature or reprice within a spe-
cific time period and the amount of interest-bearing liabilities anticipated,
based upon certain assumptions, to mature or reprice within that same time pe-
riod. A gap is considered positive when the amount of interest rate sensitive
assets exceeds the amount of interest rate sensitive liabilities. A gap is con-
sidered negative when the amount of interest rate sensitive liabilities exceeds
the amount of interest rate sensitive assets. Accordingly, in a rising interest
rate environment, an institution with a positive gap would be in a better posi-
tion to invest in higher yielding assets, which would result in the yield on
its assets increasing at a pace closer to the cost of its interest-bearing lia-
bilities, than would be the case if it has a negative gap. During a period of
falling interest rates, an institution with a positive gap would tend to have
its assets repricing at a faster rate than one with a negative gap, which would
tend to restrain the growth of its net interest income.
The following table sets forth the amount of interest-earning assets and in-
terest-bearing liabilities outstanding at December 31, 1997 which are antici-
pated to reprice or mature in each of the future time periods shown. The
amounts of assets and liabilities shown which reprice or mature during a par-
ticular period were determined in accordance with the earlier of term to (i)
repricing or (ii) the contractual terms of the asset or liability adjusted for
historical prepayment rates. The prepayment rates utilized are based on the
historical prepayment rates experienced by the Company, which management be-
lieves to be reasonable. While a conventional gap measure may be useful, it is
limited in its ability to predict trends in future earnings. It makes no pre-
sumptions about changes in prepayment tendencies, deposit or loan maturity
preferences or repricing time lags that may occur in response to a change in
the interest rate environment.
- --------------------------------------------------------------------------------
10
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
-----------------------------------------------------------------------------------------------
MORE MORE THAN MORE MORE MORE
THREE THAN THREE SIX MONTHS THAN ONE THAN THREE THAN FIVE MORE
MONTHS MONTHS TO TO TWELVE YEAR TO YEARS TO YEARS TO THAN
OR LESS SIX MONTHS MONTHS THREE YEARS FIVE YEARS TEN YEARS TEN YEARS TOTAL
--------- ---------- ---------- ----------- ---------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
INTEREST EARNING ASSETS:
Real Estate Loans:
ARM Loans............. $ 2,714 $ 391 $ 1,996 $ 7,667 $ 4,258 $ 184 $ -- $ 17,210
Fixed Rates Loans..... 8,372 8,200 16,411 61,756 56,123 152,123 243,673 546,658
Residential
Construction Loans... -- -- -- -- -- -- 13,491 13,491
Multi-Family.......... 55 -- 19 63 95 354 274 860
Second Mortgage Loans. 268 -- -- -- -- -- -- 268
Consumer Loans......... 899 -- 2 6 -- -- -- 907
Mortgage-backed
securities............ 4,002 9,222 18,661 -- -- -- -- 31,885
Investment securities.. 39,395 -- -- 4,993 -- 4,976 4 49,368
FHLB Stock............. -- -- -- -- -- -- 5,148 5,148
--------- --------- --------- --------- --------- --------- -------- --------
Total Interest Earning
Assets................. 55,705 17,813 37,089 74,485 60,476 157,637 262,590 665,795
INTEREST BEARING
LIABILITIES:
Passbook, Club and
Other Accounts........ 2,366 2,366 4,731 15,136 11,194 16,837 14,957 67,587
Money Market and NOW
Accounts.............. 2,466 2,466 4,933 13,556 8,331 9,887 5,625 47,264
Certificate Accounts... 92,377 60,714 122,760 68,290 19,627 16,436 -- 380,204
Borrowings............. 90,000 -- -- -- -- -- -- 90,000
Advances by Borrowers
for Taxes
and Insurance......... 12,226 -- -- -- -- -- -- 12,226
--------- --------- --------- --------- --------- --------- -------- --------
Total Interest Bearing
Liabilities............ 199,435 65,546 132,424 96,982 39,152 43,160 20,582 597,281
--------- --------- --------- --------- --------- --------- -------- --------
Interest Sensitivity
Gap.................... $(143,730) $ (47,733) $ (95,335) $ (22,497) $ 21,324 $ 114,477 $242,008 $ 68,514
========= ========= ========= ========= ========= ========= ======== ========
Cumulative Interest
Sensitivity Gap........ $(143,730) $(191,463) $(286,798) $(309,295) $(287,971) $(173,494) $ 68,514 $ 68,514
========= ========= ========= ========= ========= ========= ======== ========
Cumulative Interest
Sensitivity Gap
as a Percentage of
Total Assets........... (21.27%) (28.34%) (42.45%) (45.77%) (42.62%) (25.68%) 10.14% 10.14%
Cumulative Net Interest
Earning Assets
as a Percentage of
Cumulative Interest
Bearing Liabilities.... 27.93% 27.75% 27.83% 37.44% 46.03% 69.92% 111.47% 111.47%
</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. 1997 ANNUAL REPORT
- --------------------------------------------------------------------------------
As of December 31, 1997, the Association's NPV, as measured by the OTS, was
$86.6 million or 12.5% of the market value of assets. Following a 200 basis
point increase in interest rates, which provides a larger decline than a 200
point decrease, the Association's "post-shock" NPV was $48.0 million, or 7.4%
of the market value of assets. The change in the NPV ratio or the Association's
Sensitivity Measure was (45.0)%. Under OTS capital requirements which have not
yet been fully implemented, the decline in the NPV ratio at December 31, 1997
would reflect an above average interest rate risk. If the regulations are fi-
nalized as proposed, the Company would remain in compliance with the fully
phased in capital requirements. Management reviews the quarterly OTS measure-
ments and compares them to evaluations produced through internally generated
simulation models. These measures are used in conjunction with NPV measures to
identify excessive interest rate risk.
Capital Resources
The Company's sources of funds are deposits, borrowings and principal and in-
terest payments on loans, and, to a lesser extent, mortgage-backed securities.
While maturities and scheduled amortization of loans and mortgage-backed secu-
rities are predictable sources of funds, deposit flows and mortgage prepayments
are strongly influenced by changes in general interest rates, economic condi-
tions and competition.
The primary investment activity of the Company is the origination of mortgage
loans. During the years ended December 31, 1997, 1996 and 1995, the origination
of mortgage loans, including residential construction loans in the amounts of
$129.0 million, $168.9 million and $112.3 million, respectively. No other loans
were originated during those periods. However, $30.0 million of conventional
mortgage loans were sold in 1997. During 1997, $92.5 million in mortgage-backed
securities were bought. Of these securities purchased, $46.7 million were sub-
sequently sold. The company had no mortgage-backed securities at December 31,
1996 and 1995. The lending activities are funded primarily by deposits, princi-
pal repayments on loans and mortgage-backed securities and operations. Other
investments primarily include securities of the United States Government ("U.S.
Government securities") and securities of various federal agencies.
At December 31, 1997, loan commitments were $17.9 million. The Association an-
ticipates that it will have sufficient funds available to meet its current loan
origination commitments. Certificates of deposit which are scheduled to mature
in one year or less from December 31, 1997 totalled $275.9 million. Management
believes that a significant portion of such deposits will remain with the Asso-
ciation. As a member of the FHLB, the Association has the ability to borrow
from the FHLB, if necessary. As of December 31, 1997, the Association had $90.0
million in outstanding borrowings and $422.1 million in additional borrowing
capacity from the FHLB.
Impact of Inflation and Changing Prices
The Financial Statements and Notes thereto presented herein have been prepared
in accordance with Generally Accepted Accounting Principles ("GAAP"), which re-
quire the measurement of financial position and operating results in terms of
historical dollars without considering the changes in the relative purchasing
power of money over time due to inflation. The impact of inflation is reflected
in the increased cost of the Company's operations. Unlike industrial companies,
nearly all of the assets and liabilities are monetary in nature. As a result,
interest rates have a greater impact on the Company's performance than do the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or to the same extent as the price of goods and services.
- --------------------------------------------------------------------------------
12
<PAGE>
- --------------------------------------------------------------------------------
Rate/Volume Analysis
The following table presents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing liabili-
ties have affected the Company's interest income and interest expense during
the periods indicated. Information is provided in each category with respect to
(i) changes attributable to changes in volume (changes in volume multiplied by
prior rate), (ii) changes attributable to changes in rate (changes in rate mul-
tiplied by prior volume) and (iii) the changes attributable to the combined im-
pact of volume and rate. The change in interest due to both rate and volume in
the rate/volume analysis table have been allocated to changes due to rate and
volume in proportion to the absolute amounts of the changes in each.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1997 VS. 1996 1996 VS. 1995
INCREASE (DECREASE) IN INCREASE (DECREASE) IN
NET INTEREST INCOME DUE TO NET INTEREST INCOME DUE TO
--------------------------------- -------------------------------
TOTAL TOTAL
INCREASE INCREASE
VOLUME RATE (DECREASE) VOLUME RATE (DECREASE
-------- --------- ------------ --------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Interest-earning assets:
Investment securities. $ 1,669 $ 204 $ 1,873 $ (2,053) $ (29) $ (2,082)
Conventional loans.... 5,511 (841) 4,670 9,807 (626) 9,181
Other loans........... (3) (1) (4) (6) (4) (10)
Mortgage-backed
securities........... 3,147 -- 3,148 (311) -- (311)
Federal funds sold.... (1,473) 5 (1,468) 566 (168) 398
-------- --------- --------- --------- ------- ---------
Total interest-
earning assets..... 8,851 (633) 8,219 8,022 (826) 7,176
-------- --------- --------- --------- ------- ---------
Interest-bearing
liabilities:
Passbook, club and
other accounts....... (94) 68 (26) (92) 35 (57)
Money Market and NOW
accounts............. 116 (64) 52 45 (74) (29)
Certificate accounts.. 3,748 1,054 4,802 3,909 (397) 3,512
Borrowings............ 3,190 2,262 5,452 191 -- 191
-------- --------- --------- --------- ------- ---------
Total interest-
bearing
liabilities........ 6,960 3,320 10,280 3,862 (245) 3,617
-------- --------- --------- --------- ------- ---------
Net change in net
interest income........ $ 1,891 $ (3,953) $ (2,062) $ 4,140 $ (581) $ (3,559)
======== ========= ========= ========= ======= =========
</TABLE>
- --------------------------------------------------------------------------------
13
<PAGE>
FIRST BELL BANCORP, INC. 1997 ANNUAL REPORT
- --------------------------------------------------------------------------------
Average Balances, Interest and Average Yields
The following table sets forth certain information relating to the Company's
balance sheet at December 31, 1997, and average balance sheets and statements
of income for the years ended December 31, 1997, 1996 and 1995, and reflect the
average yield on assets and average cost of liabilities for the periods indi-
cated. Such yields and costs are derived by dividing income or expense by the
average monthly balance of assets or liabilities, respectively, for the periods
shown. Average balances are derived from month-end balances. The yields and
costs include fees which are considered adjustments to yields.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1997
------------------------ ----------------------------
AVERAGE AVERAGE
BALANCE YIELD/COST BALANCE INTEREST YIELD/COST
------------ ----------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest-earning Assets:
Investment securities
(1).................. $ 52,966 6.41% $ 64,294 $ 4,117 6.40%
Conventional loans
(2)(6)............... 578,487 7.27 560,448 41,397 7.39
Other loans........... 907 6.85 910 67 7.36
Mortgage-backed
securities........... 31,885 6.50 55,003 3,148 5.72
Federal funds sold.... 1,550 5.61 8,777 497 5.66
------------ -------- -------
Total interest-
earning assets..... 665,795 7.16 689,432 49,226 7.14
Non-interest earning
assets............. 9,889 10,514
------------ --------
TOTAL ASSETS...... $ 675,684 $699,946
============ ========
Interest-bearing
Liabilities:
Passbook, club and
other accounts (5)... $ 79,812 2.89% $ 78,400 $ 2,288 2.92%
Money market and NOW
accounts............. 47,264 2.47 46,798 1,092 2.33
Certificate accounts.. 380,204 5.98 388,660 23,306 6.00
Borrowings............ 90,000 5.69 103,250 5,643 5.47
------------ -------- -------
Total interest-
bearing
liabilities........ 597,280 5.25 617,108 32,329 5.24
Non-interest-bearing
liabilities........ 5,421 8,963
------------ --------
TOTAL LIABILITIES. 602,701 626,071
Stockholders' equity.. 72,983 73,875
------------ --------
Total liabilities and
stockholders' equity. $ 675,684 $699,946
============ ========
Net interest income/net
interest rate spread
(3).................... 1.91% $16,897 1.90%
=======
Net yield on average
interest-earning assets
(4).................... 2.45%
Ratio of average
interest-earning assets
to average interest-
bearing liabilities.... 1.11 1.12
</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 $406, $990, and $508
for the years ended December 31, 1997, 1996 and 1995, respectively.
- --------------------------------------------------------------------------------
14
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1996 1995
---------------------------- ----------------------------
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).................. $ 36,869 $ 2,244 6.09% $ 70,180 $ 4,326 6.16%
Conventional loans
(2)(6)............... 487,322 36,727 7.54 359,376 27,546 7.66
Other loans........... 944 71 7.52 1,025 81 7.90
Mortgage-backed
securities........... -- -- -- 3,713 311 8.38
Federal funds sold.... 35,075 1,965 5.60 25,769 1,567 6.08
-------- ------- -------- -------
Total interest-
earning assets..... 560,210 41,007 7.32 460,063 33,831 7.35
Non-interest-earning
assets............. 9,437 9,078
-------- --------
TOTAL ASSETS...... $569,647 $469,141
======== ========
Interest-bearing
Liabilities:
Passbook, club and
other accounts (5)... $ 81,715 $ 2,314 2.83% $ 85,020 $ 2,371 2.79%
Money market and NOW
accounts............. 42,088 1,040 2.47 40,388 1,069 2.65
Certificate accounts.. 323,199 18,504 5.73 256,350 14,992 5.85
Borrowings............ 5,833 191 3.27 -- --
-------- ------- -------- -------
Total interest-
bearing
liabilities........ 452,835 22,049 4.87 381,758 18,432 4.83
Non-interest-bearing
liabilities........ 7,082 4,633
-------- --------
TOTAL LIABILITIES. 459,917 386,391
Stockholders' equity.. 109,730 82,750
-------- --------
Total liabilities and
stockholders' equity. $569,647 $469,141
======== ========
Net interest income/net
interest rate spread
(3).................... $18,958 2.45% $15,399 2.52%
======= =======
Net yield on average
interest-earning assets
(4).................... 3.38% 3.35%
Ratio of average
interest-earning assets
to average interest-
bearing liabilities.... 1.24 1.21
</TABLE>
- --------------------------------------------------------------------------------
15
<PAGE>
FIRST BELL BANCORP, INC. 1997 ANNUAL REPORT
- --------------------------------------------------------------------------------
Comparison of Financial Condition at December 31, 1997
and December 31, 1996
The following table sets forth information concerning the composition of the
Company's assets, liabilities and stockholders' equity at December 31, 1997 and
1996.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------
1997 1996
----------------- -----------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents.................. $ 24,523 3.63% $ 26,406 4.02%
Mortgage-backed securities................. 31,885 4.72 -- --
Federal funds sold......................... 1,550 0.23 72,875 11.11
Investment securities...................... 31,023 4.59 14,964 2.28
Conventional loans, net.................... 578,487 85.62 529,866 80.75
Other loans................................ 907 .13 949 .14
FHLB stock................................. 5,148 .76 3,999 .61
Other assets............................... 2,161 .32 7,124 1.09
-------- ------ -------- ------
TOTAL ASSETS............................. $675,684 100.00% $656,183 100.00%
======== ====== ======== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits................................... $495,055 73.27% $483,941 73.75%
Borrowings................................. 90,000 13.32 70,000 10.67
Other liabilities.......................... 17,646 2.61 15,809 2.41
Stockholders' equity....................... 72,983 10.80 86,433 13.17
-------- ------ -------- ------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY.................................. $675,684 100.00% $656,183 100.00%
======== ====== ======== ======
</TABLE>
Assets
Total assets increased to $675.7 million at December 31, 1997, from $656.2
million at December 31, 1996. The $19.5 million or 3.0% increase was primarily
the result of increases in conventional mortgage loans, mortgage-backed securi-
ties and investment securities offset by a decrease in federal funds sold. Con-
ventional mortgage loans increased by $48.6 million or 9.2% to $578.5 million
at December 31, 1997 from $529.9 million at December 31, 1996. The increase was
the result of originating $129.0 million in conventional mortgage loans offset
by principle repayment of $50.2 million and the sale of $30.0 million in con-
ventional mortgage loans during 1997. The balance of mortgage-backed securities
at December 31, 1997 was $31.9 million. There were no mortgage-backed securi-
ties at December 31, 1996. The increase was the result of the purchase of $92.5
million in mortgage-backed securities reduced by the sale of $46.7 million and
the principle repayments of $14.0 million. Investment securities increased
$10.9 million or 72.9% to $25.9 million at December 31, 1997 from $15.0 million
at December 31, 1996. The increase was the result of the purchase of $25.9 mil-
lion of Collateralized Mortgage Obligations ("CMO's") offset by one CMO of
$10.0 million being called and the maturity of a $5.0 million treasury note.
The increases in conventional mortgage loans, mortgage-backed securities and
investment securities were funded by the reduction in federal funds sold of
$71.3 million or 97.9% to $1.6 million at December 31, 1997 from $72.9 million
at December 31, 1996. Funding for the increases was also received through the
increases in deposits and borrowings.
- --------------------------------------------------------------------------------
16
<PAGE>
- -------------------------------------------------------------------------------
Liabilities
Total liabilities increased by $33.0 million or 5.8% to $602.7 million at De-
cember 31, 1997 from $569.7 million at December 31, 1996. The increase was
primarily the result of increases in borrowings, deposits and advances by bor-
rowers for taxes and insurance. Borrowings increased $20.0 million or 28.6% to
$90.0 million at December 31, 1997 from $70.0 million at December 31, 1996.
The increase was used to fund the investment and operating activities of the
Company. Deposits at December 31, 1997 were $495.0 million compared to $483.9
million at December 31, 1996. The $11.1 million or 2.3% increase was primarily
the result of certificate accounts increasing by $7.4 million, or 2.0% to
$380.2 million at December 31, 1997 from $372.8 million at December 31, 1996.
Advances by borrowers for taxes and insurance increased by $1.4 million or
13.0% to $12.2 million at December 31, 1997 from $10.8 million at December 31,
1996. This increase was the result of the increase in the balance of conven-
tional mortgage loans.
Capital
Total stockholders equity declined by $13.5 million, or 15.6% to $73.0 mil-
lion at December 31, 1997, from $86.4 million at December 31, 1996. The de-
crease was the result of the repurchase of 1.2 million shares of the Company's
common stock for $20.4 million and dividends declared of $1.8 million. The av-
erage price per share for the 1.2 million shares, which were placed in Trea-
sury, was $16.34. Offsetting these decreases was net income of $7.6 million
for the year ended December 31, 1997.
Comparison of Operating Results for the Years Ended December 31, 1997
and December 31, 1996
Net income for the year ended December 31, 1997 increased by $172,000 or 2.3%
to $7.6 million from $7.4 million for the year ended December 31, 1996. The
increase was primarily the result of a decrease in other expenses of $3.1 mil-
lion offset by a decrease in net interest income of $2.1 million and an in-
crease in income taxes of $561,000.
Interest Income
Interest income increased by $8.2 million or 20.0% to $49.2 million for the
year ended December 31, 1997 from $41.0 for the comparable 1996 period. The
increase was the result of increases in interest income earned on conventional
mortgage loans, mortgage-backed securities, investment securities and inter-
est-bearing deposits offset by a decline on interest earned on federal funds
sold. Interest earned on conventional mortgage loans increased by $4.7 mil-
lion, or 12.7% to $41.4 million for the year ended December 31, 1997 from
$36.7 million for the year ended December 31, 1996. The increase was the re-
sult of the average balance in conventional mortgage loans increasing by $73.1
million or 15.0% to $560.4 million for 1997 from $487.3 million for 1996. Off-
setting this increase was a 15 basis point decline on the average yield earned
on conventional mortgage loans to 7.39% for the year ended December 31, 1997
from 7.54% for the year ended December 31, 1996. Interest earned on mortgage-
backed securities for the year ended December 31, 1997 was $3.1 million. There
were no mortgage-backed securities in 1996. Interest earned on investment se-
curities increased $1.2 million or 99.8% to $2.4 million for the year ended
December 31, 1997 from $1.2 million for the comparable 1996 period. This in-
crease was the result of the average balance in investment securities increas-
ing by $17.7 million, or 101.1% to $35.2 million for 1997 from $17.5 million
for 1996. Interest on interest bearing deposits increased by $552,000 or 69.8%
to $1.3 million for the year ended December 31, 1997 from $791,000 for the
year ended December 31, 1996. This was the result of the average balance of
interest bearing deposits increasing by $7.9 million or 51.1% to $23.5 million
during 1997 from $15.6 million during 1996 and an 18 basis points increase in
the average yield earned. Interest earned on federal funds sold declined by
$1.5 million or 74.7% to $497,000 for the year ended December 31, 1997 from
$2.0 million for the year ended December 31, 1996. This was the result of the
average balance decreasing to $8.8 million during 1997 from $35.1 million dur-
ing 1996.
- -------------------------------------------------------------------------------
17
<PAGE>
FIRST BELL BANCORP, INC. 1997 ANNUAL REPORT
- --------------------------------------------------------------------------------
Interest Expense
Interest expense for the year ended December 31, 1997 increased by $10.3 mil-
lion or 46.6% to $32.3 million from $22.0 million for the comparable 1996 peri-
od. This increase was the result of increases in interest expense on deposits
and borrowings. Interest expense on deposits increased by $4.8 million, or
22.1% to $26.7 million for the year ended December 31, 1997 from $21.9 million
for the year ended December 31, 1996. The increase was the result of the aver-
age balance on certificate accounts increasing by $65.5 million, or 20.3% to
$388.7 million during 1997 from 5.7%. Interest expense on FHLB borrowings for
the year ended December 31, 1997 was $5.6 million compared to $191,000 for the
year ended December 31, 1996. The increase was the result of the Company under-
taking a leverage program beginning in December 1996.
Net Interest Income
Net interest income decreased by $2.1 million or 10.9% to $16.9 million for
the year ended December 31, 1997 compared to $19.0 million. The decrease was
the result of the average interest-bearing liabilities increasing by $164.3
million or 36.3% to $617.1 million during 1997 compared to $452.8 million for
1996. Offsetting the increase in average interest-bearing liabilities was an
increase in interest earning assets of $129.2 million, or 23.1% to $689.4 mil-
lion during 1997 from $560.2 million during 1996. In addition, the net interest
income/net interest rate spread declined by 55 basis points to 1.90% for 1997
from 2.45% for 1996 as the result of a flat yield curve.
Provision for Loan Loss
An additional $45,000 was recorded to the provision for loan losses in 1997
compared to $90,000 in 1996. The additional amount was recorded due to a $48.6
million increase in conventional mortgage loans. At December 31, 1997, the al-
lowance for loan losses to non-performing assets was 112.8% compared to 105.7%
at December 31, 1996.
In determining the provision for loan losses, management assesses the risk in-
herent in its loan portfolio including, but not limited to, an evaluation of
the concentration of loans secured by properties located in the Pittsburgh ar-
ea, the trends in national and local economies, trends in the real estate mar-
ket and in the Company's loan portfolio and the level of non-performing loans
and assets. The Company's history of loan losses has been minimal, which man-
agement believes is a reflection of the Company's underwriting standards. There
were no charge-offs for the year ended December 31, 1997. Management believes
the current level of loan loss reserve is adequate to cover losses inherent in
the portfolio as of such date. However, there can be no assurance that the Com-
pany will not sustain losses in future periods.
Other Income
Other income declined by $369,000 or 30.8% to $829,000 for the year ended De-
cember 31, 1997 from $1.2 million for the year ended December 31, 1996. The de-
crease was the result of loan fees and service charges decreasing by $119,000
or 18.5% to $525,000 for the year ended December 31, 1997 from $644,000 for the
comparable 1996 period due to a decrease in the amortization of deferred loan
fees. In addition, in 1996 there was a gain of $536,000 on the sale of the
building in which our Wood Street branch was located. A gain of $250,000 from
the sale of loans and investments was also recorded in 1997.
Other Expenses
General and administrative expenses decreased to $5.1 million for the year
ended December 31, 1997 from $8.2 million for the year ended December 31, 1996.
The $3.1 million or 38.1% decrease was the result of federal insurance premiums
declining by $3.2 million, or 92.4% to $261,000 for the year ended December 31,
1997 from $3.4 million for the comparable 1996 period. This decrease was the
result of the one time assessment of $2.5 million before taxes to replenish the
Savings Association Insurance Fund expensed in 1996. In addition, the premium
for deposit insurance was reduced to 6.5 basis points per $100 of deposits from
23 basis points starting January 1, 1997.
- --------------------------------------------------------------------------------
18
<PAGE>
- --------------------------------------------------------------------------------
Income Taxes
Income taxes increased by $561,000 or 12.5% to $5.0 million for the year ended
December 31, 1997 from $4.5 million for the year ended December 31, 1996. This
was the result of net income before taxes increasing by $733,000 or 6.2% to
$12.6 million for the year ended December 31, 1997 from $11.9 million for the
comparable 1996 period. The annualized effective income tax rate for the peri-
ods ended December 31, 1997 and 1996 were 40.0% and 38.5%, respectively.
New Accounting Pronouncements
For a discussion of New Accounting Prouncements and their effect on the Compa-
ny, see Note 3 and Note 20 to the Consolidated Financial Statements.
Comparison of Operating Results for the Years Ended December 31, 1996
and December 31, 1995
General
Net income for the year ended December 31, 1996 increased by $470,000 or 6.8%
to $7.4 million from $6.9 million for the year ended December 31, 1995. This
increase was the result of net interest income increasing by $3.6 million, off-
set by an increase in federal insurance premiums of $2.6 million and an in-
crease of $553,000 in compensation, payroll taxes, and fringe benefits.
Interest Income
Interest income increased by $7.2 million, or 21.2% to $41.0 million for the
year ended December 31, 1996 from $33.8 million for the year ended December 31,
1995. This increase was primarily due to interest on conventional mortgage
loans increasing $9.2 million or 33.3% to $36.7 million for the year ended De-
cember 31, 1996 from $27.5 million for the year ended December 31, 1995. The
increased interest on conventional mortgage loans was the result of the average
balance of conventional mortgage loans increasing by $127.9 million or 35.6% to
$487.3 million for the year ended December 31, 1996 from $359.4 million for the
comparable 1995 period. In addition, interest on federal funds sold increased
by $398,000 or 25.4% to $2.0 million for the year ended December 31, 1996 from
$1.6 million for the year ended December 31, 1995. Again this increase was pri-
marily the result of the average balance of federal funds sold increasing to
$35.1 million during 1996 from $25.8 million during 1995. Offsetting these in-
creases was a decrease of interest in interest-bearing deposits and other in-
vestment securities. Interest on interest-bearing deposits decreased by $1.4
million, or 63.3% to $791,000 for the year ended December 31, 1996 from $2.2
million for the year ended December 31, 1995. This decrease was the result of
the average balance of interest-bearing deposits falling to $15.6 million for
1996 from $37.9 million during 1995. Interest earned on other investments was
$1.2 million for the year ended December 31, 1996 compared to $2.0 million for
the same 1995 period. The $761,000 decrease was the result of the average bal-
ance in other investment securities decreasing by $11.9 million, or 40.6% to
$17.5 million during 1996 from $29.4 million during 1995.
Interest Expense
Interest expense increased $3.6 million or 19.6% during 1996 rising to $22.0
million in 1996 from $18.4 million in 1995. This increase was primarily due to
an increase in interest paid on certificate accounts of $3.5 million. This was
the result of the average balance on certificate accounts increasing by $66.9
million or 26.1% to $323.2 million during 1996 from $256.3 million during 1995.
Also, interest on borrowing was $191,000 in 1996. There were no borrowings in
1995.
- --------------------------------------------------------------------------------
19
<PAGE>
FIRST BELL BANCORP, INC. 1997 ANNUAL REPORT
- -------------------------------------------------------------------------------
Net Interest Income
Net interest income represents the difference between income on interest
bearing assets and expense on interest-bearing liabilities. Net interest in-
come depends upon the volume of interest-earning assets and interest-bearing
liabilities and the interest rate earned or paid on them. Net interest income
increased $3.6 million or 23.1% to $19.0 million for the year ended December
31, 1996 from $15.4 million for the year ended December 31, 1995. The increase
in net interest income was primarily due to the average interest-earning as-
sets increasing by $100.0 million or 21.8% increasing to $560.0 million during
1996 from $460.0 million in 1995. Offsetting this was the increase in average
interest-bearing liabilities and a slight decrease in net interest rate
spread. Average interest-bearing liabilities increase in 1996 to $452.8 mil-
lion from $381.8 million in 1995. The net interest rate spread decreased by
seven basis points falling to 2.45% in 1996 from 2.52% in 1995.
Provision for Loan Losses
An additional $90,000 was recorded to the provision for loan losses during
1996 as compared to none in 1995. This additional amount was recorded as the
result of the $115.3 million increase in conventional mortgage loans. At De-
cember 31, 1996 the allowance for loan losses to non-performing assets was
105.7% as compared to 112.5% at December 31, 1995.
Other Income
Other income for the year ended December 31, 1996 was $1.2 million compared
to $824,000 for the year ended December 31, 1995. The $374,000 increase was
due to a gain of $536,000 on the sale of the building in which our Wood Street
office was located. The Company's downtown Pittsburgh branch was moved to a
new location in the same area during 1996. Offsetting this gain was a decline
in service fees and charges of $89,000 and no gain on the sale of mortgage-
backed securities. There was a $68,000 gain on mortgage-backed securities in
1995.
Other Expenses
Total other expenses increased $3.2 million to $8.1 million for the year
ended December 31, 1996 from $4.9 million for the year ended December 31,
1995. The increase was primarily due to the increases in federal insurance
premiums and compensation, payroll taxes and fringe benefits. Federal insur-
ance premiums increased to $3.4 million in 1996 from $848,000 in 1995. The
$2.6 million increase was the result of the one time assessment of $2.5 mil-
lion to replenish the Savings Association Insurance Fund. On September 30,
1996, the President signed into law the Deposit Insurance Funds Act of 1996
(the "Funds Act") which, among other things, imposed a special one-time as-
sessment on SAIF member institutions, including the Association to recapital-
ize the SAIF. As required by the Funds Act, the Federal Deposit Insurance Cor-
poration ("FDIC") imposed a special assessment of 65.7 basis points on SAIF
assessable deposits held as of March 31, 1995. Compensation, payroll taxes and
fringe benefits increased by $553,000 or 24.1% to $2.8 million for the year
ended December 31, 1996 compared to $2.3 million for the year ended December
31, 1995. The increase was the result of the implementation of the MRP during
1996.
Income Taxes
Income taxes increased by $140,000 to $4.5 million for the year ended Decem-
ber 31, 1996 from $4.3 million for the year ended December 31, 1995. This was
the result of income before the provision for income taxes increasing to $11.9
million for the year ended December 31, 1996 as compared to $11.3 million for
the comparable 1995 period. The annualized effective income tax rate for the
periods ended December 31, 1996 and 1995 were 37.7% and 38.5%, respectively.
- -------------------------------------------------------------------------------
20
<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, 1997 and 1996, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of First Bell Bancorp's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of mate-
rial misstatement. An audit includes examining, on a test basis, evidence sup-
porting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement pre-
sentation. We believe that our audits provide a reasonable basis for our opin-
ion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of First Bell Bancorp, Inc. and sub-
sidiary as of December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Pittsburgh, Pennsylvania
January 23, 1998 (February 24, 1998
as to Note 23)
- --------------------------------------------------------------------------------
21
<PAGE>
FIRST BELL BANCORP, INC. 1997 ANNUAL REPORT
Management's Report on the Internal Control Structure and
Compliance with Laws and Regulations
- -------------------------------------------------------------------------------
January 23, 1998
To the Stockholders:
FINANCIAL STATEMENTS
The management of First Bell Bancorp, Inc. ("the Company") is responsible for
the preparation, integrity, and fair presentation of its published financial
statements and all other information presented in this annual report. The fi-
nancial statements have been prepared in accordance with generally accepted
accounting principles and, as such, include amounts based on informed
judgements and estimates made by management.
INTERNAL CONTROL
Management is responsible for establishing and maintaining an effective in-
ternal control structure over financial reporting, including safeguarding of
assets, presented in conformity with both generally accepted accounting prin-
ciples and the Office of Thrift Supervision ("OTS") instructions for Thrift
Financial Reports ("TFR Instructions"). The structure contains monitoring
mechanisms, and actions are taken to correct deficiencies identified.
There are inherent limitations in the effectiveness of any structure of in-
ternal control, including the possibility of human error and the circumvention
or overriding of controls. Accordingly, even an effective internal control
structure can provide only reasonable assurance with respect to financial
statement preparation. Further, because of changes in conditions, the effec-
tiveness of an internal control structure may vary over time.
Management assessed the institution's internal control structure over finan-
cial reporting, including safeguarding of assets, presented in conformity with
both generally accepted accounting principles and TFR instructions as of De-
cember 31, 1997. This assessment was based on criteria for effective internal
control over financial reporting, including safeguarding of assets, described
in Internal Control--Integrated Framework issued by the committee of Sponsor-
ing Organizations of the Treadway Commission. Based on this assessment, man-
agement believes that the Company maintained an effective internal control
structure over financial reporting, including safeguarding of assets, pre-
sented in conformity with both generally accepted accounting principles and
TFR Instructions as of December 31, 1997.
The Audit Committee of the Board of Directors is comprised entirely of out-
side directors who are independent of the Company's management. The Audit Com-
mittee is responsible for recommending to the Board of Directors, the selec-
tion of independent auditors. It meets periodically with management, the
independent auditors, and the internal auditors to ensure that they are carry-
ing out their responsibilities. The Committee is also responsible for perform-
ing an oversight rule of reviewing and monitoring the financial, accounting
and auditing procedures of the Company in addition to reviewing the Company's
financial reports. The independent auditors and the internal auditors have
full and free access to the Audit Committee, with or without the presence of
management, to discuss the adequacy of the internal control structure for fi-
nancial reporting and any other matters which they believe should be brought
to the attention of the Committee.
- -------------------------------------------------------------------------------
22
<PAGE>
- --------------------------------------------------------------------------------
COMPLIANCE WITH LAWS AND REGULATIONS
Management is also responsible for ensuring compliance with the federal laws
and regulations concerning loans to insiders and the federal and state laws and
regulations concerning dividend restrictions, both of which are designated by
the FDIC as safety and soundness laws and regulations.
Management assessed its compliance with the designated safety and soundness
laws and regulations and has maintained records of its determinations and as-
sessments as required by the OTS. Based on this assessment, Management believes
that the Company has complied, in all material respects, with the designated
safety and soundness laws and regulations for the year ended December 31, 1997.
/s/ Albert H. Eckert, II /s/ Jeffrey M. Hinds
Albert H. Eckert, II Jeffrey M. Hinds
Chief Executive Officer Chief Financial Officer
- --------------------------------------------------------------------------------
23
<PAGE>
FIRST BELL BANCORP, INC. 1997 ANNUAL REPORT
Consolidated Balance Sheets
(In thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
ASSETS -------- --------
<S> <C> <C>
CASH AND CASH EQUIVALENTS:
Cash on hand............................................. $ 872 $ 980
Noninterest-bearing deposits............................. 1,708 1,554
Interest-bearing deposits................................ 21,943 23,872
-------- --------
Total cash and cash equivalents........................ 24,523 26,406
FEDERAL FUNDS SOLD......................................... 1,550 72,875
INVESTMENT SECURITIES HELD-TO-MATURITY--At cost
(fair value of $10,553 and $15,429 at December 31, 1997
and 1996, respectively)................................... 9,973 14,964
INVESTMENT SECURITIES AVAILABLE-FOR-SALE--At fair value
(cost of $15,928 at December 31, 1997).................... 15,902 --
MORTGAGE-BACKED SECURITIES AVAILABLE-FOR-SALE--At fair
value
(cost of $31,654 at December 31, 1997).................... 31,885 --
CONVENTIONAL LOANS--Net of allowance for loan losses of
$715 and $665 at
December 31, 1997 and 1996, respectively.................. 578,487 529,866
OTHER LOANS--Net........................................... 907 949
REAL ESTATE OWNED.......................................... -- 229
PREMISES AND EQUIPMENT--Net................................ 3,492 3,692
FEDERAL HOME LOAN BANK STOCK--At cost...................... 5,148 3,999
ACCRUED INTEREST RECEIVABLE................................ 3,202 2,758
OTHER ASSETS............................................... 615 445
-------- --------
Total assets........................................... $675,684 $656,183
======== ========
<CAPTION>
1997 1996
LIABILITIES AND STOCKHOLDERS' EQUITY -------- --------
<S> <C> <C>
DEPOSITS:
Passbook, club and other accounts........................ $ 67,587 $ 66,486
Money market and NOW accounts............................ 47,264 44,661
Certificate accounts..................................... 380,204 372,794
-------- --------
Total deposits......................................... 495,055 483,941
BORROWINGS................................................. 90,000 70,000
ADVANCES BY BORROWERS FOR TAXES AND INSURANCE.............. 12,226 10,822
ACCRUED INTEREST ON DEPOSITS............................... 535 503
ACCRUED INTEREST ON BORROWINGS............................. 332 191
ACCRUED INCOME TAXES....................................... 229 81
DEFERRED TAX LIABILITY..................................... 1,725 1,244
DIVIDENDS PAYABLE ON COMMON STOCK.......................... 575 713
OTHER LIABILITIES.......................................... 2,024 2,255
-------- --------
Total liabilities...................................... 602,701 569,750
-------- --------
STOCKHOLDERS' EQUITY:
Preferred stock ($.01 par value; 2,000,000 shares
authorized; no shares issued or outstanding)............ -- --
Common stock ($.01 par value; 20,000,000 shares
authorized;
8,596,250 shares issued and 6,510,625 and 7,758,150
outstanding)............................................ 86 86
Additional paid-in capital............................... 61,371 61,063
Unearned ESOP shares..................................... (4,217) (4,454)
Unearned MRP shares...................................... (4,290) (4,792)
Treasury stock, at cost.................................. (32,077) (11,684)
Unrealized gain on securities available-for-sale, net of
taxes................................................... 117 --
Retained earnings--substantially restricted.............. 51,993 46,214
-------- --------
Total stockholders' equity............................. 72,983 86,433
-------- --------
Total liabilities and stockholders' equity............. $675,684 $656,183
======== ========
</TABLE>
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
24
<PAGE>
Consolidated Statements of Income
(In thousands, except per share amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
INTEREST AND DIVIDEND INCOME:
Conventional loans................................... $41,397 $36,727 $27,546
Interest-bearing deposits............................ 1,343 791 2,156
Mortgage-backed securities........................... 3,148 -- 311
Federal funds sold................................... 497 1,965 1,567
Investment securities................................ 2,425 1,214 1,975
Other loans.......................................... 67 71 81
Federal Home Loan Bank stock......................... 349 239 195
------- ------- -------
Total interest and dividend income................. 49,226 41,007 33,831
------- ------- -------
INTEREST EXPENSE:
Deposits............................................. 26,686 21,859 18,432
Borrowings........................................... 5,643 191 --
------- ------- -------
Total interest expense............................. 32,329 22,050 18,432
------- ------- -------
NET INTEREST INCOME.................................... 16,897 18,957 15,399
PROVISION FOR LOAN LOSSES.............................. 45 90 --
------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES.... 16,852 18,867 15,399
------- ------- -------
OTHER INCOME:
Service fees and charges............................. 525 644 733
(Loss) gain on sales of mortgage-backed securities
available-for-sale.................................. (8) -- 68
Gain on sale of conventional loans................... 258 -- --
Gain on sale of premise.............................. -- 536 --
Other income......................................... 54 18 23
------- ------- -------
Total other income................................. 829 1,198 824
------- ------- -------
OTHER EXPENSES:
Compensation, payroll taxes and fringe benefits...... 2,953 2,844 2,291
Federal insurance premiums........................... 261 3,418 848
Office occupancy expense, excluding depreciation..... 415 459 478
Depreciation......................................... 296 244 240
Computer services.................................... 218 206 212
Other expenses....................................... 917 1,006 876
------- ------- -------
Total other expenses............................... 5,060 8,177 4,945
------- ------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES............... 12,621 11,888 11,278
------- ------- -------
PROVISION FOR INCOME TAXES:
Current:
Federal............................................. 3,665 3,189 2,966
State............................................... 976 725 726
Deferred expense..................................... 405 571 653
------- ------- -------
Total provision for income taxes................... 5,046 4,485 4,345
------- ------- -------
NET INCOME............................................. $ 7,575 $ 7,403 $ 6,933
======= ======= =======
BASIC EARNINGS PER SHARE (1)........................... $ 1.29 $ 1.05 $ 0.52
======= ======= =======
DILUTED EARNINGS PER SHARE (1)......................... $ 1.23 $ 1.02 $ 0.52
======= ======= =======
</TABLE>
- -------
(1) Amounts for the year ending December 31, 1995 represent earnings per share
for the period shares were outstanding from the date of the conversion of
capital stock form of ownership (see Note 2).
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
25
<PAGE>
FIRST BELL BANCORP, INC. 1997 ANNUAL REPORT
Consolidated Statements of Changes in Stockholders' Equity
(In thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL UNEARNED
---------------- ----------------- PAID-IN ESOP
SHARES PAR VALUE SHARES PAR VALUE CAPITAL SHARES
------ --------- ------ --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1994................... -- $-- -- $-- $ -- $ --
Net proceeds from
initial public
offering............. -- -- 8,596 86 83,454 (6,877)
Allocation of ESOP
shares............... -- -- -- -- 70 241
Net income............ -- -- -- -- -- --
--- --- ------ --- -------- -------
BALANCE, DECEMBER 31,
1995................... -- -- 8,596 86 83,524 (6,636)
Purchase of treasury
stock................ -- -- (838) -- -- --
Purchase of MRP
shares............... -- -- -- -- -- --
Allocation of ESOP
shares............... -- -- -- -- 203 202
Return of capital
($2.93 per share).... -- -- -- -- (22,664) 1,980
Dividends ($.37 per
share)............... -- -- -- -- -- --
Net income............ -- -- -- -- -- --
--- --- ------ --- -------- -------
BALANCE, DECEMBER 31,
1996................... -- -- 7,758 86 61,063 (4,454)
Purchase of treasury
stock................ -- -- (1,247) -- -- --
Allocation of MRP
shares............... -- -- -- -- 8 --
Allocation of ESOP
shares............... -- -- -- -- 300 237
Change in unrealized
gain in securities
available-for-sale,
net of taxes......... -- -- -- -- -- --
Dividends ($.40 per
share)............... -- -- -- -- -- --
Net income............ -- -- -- -- -- --
--- --- ------ --- -------- -------
BALANCE, DECEMBER 31,
1997................... -- $-- 6,511 $86 $ 61,371 $(4,217)
=== === ====== === ======== =======
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED
GAIN ON
UNEARNED SECURITIES
MRP TREASURY AVAILABLE-FOR-SALE, RETAINED
SHARES STOCK NET OF TAXES EARNINGS TOTAL
-------- -------- ------------------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1994................... $ -- $ -- $ -- $34,575 $ 34,575
Net proceeds from
initial public
offering............. -- -- -- -- 76,663
Allocation of ESOP
shares............... -- -- -- -- 311
Net income............ -- -- -- 6,933 6,933
------- -------- ---- ------- --------
BALANCE, DECEMBER 31,
1995................... -- -- -- 41,508 118,482
Purchase of treasury
stock................ -- (11,684) -- -- (11,684)
Purchase of MRP
shares............... (4,792) -- -- -- (4,792)
Allocation of ESOP
shares............... -- -- -- -- 405
Return of capital
($2.93 per share).... -- -- -- -- (20,684)
Dividends ($.37 per
share)............... -- -- -- (2,697) (2,697)
Net income............ -- -- -- 7,403 7,403
------- -------- ---- ------- --------
BALANCE, DECEMBER 31,
1996................... (4,792) (11,684) -- 46,214 86,433
Purchase of treasury
stock................ -- (20,393) -- -- (20,393)
Allocation of MRP
shares............... 502 -- -- -- 510
Allocation of ESOP
shares............... -- -- -- -- 537
Change in unrealized
gain in securities
available-for-sale,
net of taxes......... -- -- 117 -- 117
Dividends ($.40 per
share)............... -- -- -- (1,796) (1,796)
Net income............ -- -- -- 7,575 7,575
------- -------- ---- ------- --------
BALANCE, DECEMBER 31,
1997................... $(4,290) $(32,077) $117 $51,993 $ 72,983
======= ======== ==== ======= ========
</TABLE>
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
26
<PAGE>
Consolidated Statements of Cash Flows
(In thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................... $ 7,575 $ 7,403 $ 6,933
Adjustments to reconcile net income to net
cash
provided by operating activities:
Depreciation................................ 296 244 240
Deferred income taxes....................... 405 571 653
Amortization of premiums and accretion of
discounts.................................. 195 (11) (358)
Provision for loan loss..................... 45 90 --
Compensation expense--allocations of ESOP
and MRP shares............................. 1,055 930 311
Gain on sale of real estate owned........... (37) -- --
Gain on sale of conventional loans.......... (258) -- --
Loss (gain) on sale of mortgage-backed
securities available-for-sale.............. 8 -- (68)
Gain on sale of premise..................... -- (536) --
Net proceeds from sale of conventional
loans...................................... 29,662 -- --
Increase or decrease in assets and
liabilities:
Accrued interest receivable................ (444) (81) (615)
Accrued interest on deposits............... 32 165 149
Accrued interest on borrowings............. 141 191 --
Accrued income taxes....................... 148 58 135
Other assets............................... (170) (337) 502
Other liabilities.......................... (100) 1,073 (50)
Dividend payable........................... (138) (713) --
-------- --------- ---------
Net cash provided by operating activities.... 38,415 9,047 7,832
-------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities available-
for-sale.................................... (25,947) -- (4,878)
Purchase of mortgage-backed securities
available-for-sale.......................... (92,528) -- --
Net decrease (increase) in Federal Funds..... 71,325 (20,850) (52,025)
Maturity of investment securities held-to-
maturity.................................... 5,000 5,000 30,000
Maturity of investment securities available-
for-sale.................................... 10,000 -- --
Principal paydowns on mortgage-backed
securities available-for-sale............... 14,000 -- 878
Net proceeds from sale of mortgage-backed
securities available-for-sale............... 46,668 -- 4,058
Net increase in conventional loans........... (78,145) (115,575) (83,615)
Purchase of conventional loans............... -- -- (24,361)
Net decrease in other loans.................. 42 10 106
Purchase of Federal Home Loan Bank stock..... (1,149) (990) (600)
Net proceeds from sale of real estate owned.. 342 178 149
Net proceeds from sale of premises........... -- 915 --
Purchase of premises and equipment........... (96) (714) (35)
-------- --------- ---------
Net cash used in investing activities........ (50,488) (132,026) (130,323)
-------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits,
NOW accounts and savings accounts........... $ 3,704 $ (23) $ (23,734)
Net increase in certificate accounts......... 7,410 92,553 51,463
Advances by borrowers for taxes and
insurance................................... 1,404 2,277 1,617
Net increase in borrowings................... 20,000 70,000 --
Dividends paid............................... (1,935) (1,984) --
Net proceeds from sale of stock.............. -- -- 76,663
Return of capital............................ -- (20,684) --
Purchase of MRP stock........................ -- (4,792) --
Purchase of treasury stock................... (20,393) (11,684) --
-------- --------- ---------
Net cash provided by financing activities.... 10,190 125,663 106,009
-------- --------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS................................... (1,883) 2,684 (16,482)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR... 26,406 23,722 40,204
-------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR......... $ 24,523 $ 26,406 $ 23,722
======== ========= =========
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest on deposits and advances by
borrowers for taxes and insurance.......... $ 26,655 $ 21,693 $ 18,283
Interest on borrowings...................... 5,502 -- --
Income taxes................................ 4,606 3,870 3,557
Noncash transactions:
Transfers from conventional loans to real
estate acquired through foreclosure........ 104 229 287
Increase in additional paid-in capital--ESOP
and MRP allocations........................ 308 203 70
Transfers from conventional mortgage loans
to conventional mortgage loans, held-for-
sale....................................... 29,989 -- --
Unrealized appreciation on securities
available-for-sale......................... 192 -- --
</TABLE>
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
27
<PAGE>
FIRST BELL BANCORP, INC. 1997 ANNUAL REPORT
Notes to Consolidated Financial Statements
Years Ended December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
1.BASIS OF PRESENTATION
The consolidated financial statements include the accounts of First Bell
Bancorp, Inc. ("First Bell") and its wholly-owned subsidiary, Bell Federal
Savings and Loan Association of Bellevue (the "Association" or "Bell Feder-
al", collectively the "Company"). All significant intercompany transactions
have been eliminated in consolidation. The investment in Bell Federal on
First Bell's parent company financial statements is carried at the parent
company's equity in the underlying net assets.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and with general practices within
the banking industry. In preparing such financial statements, management is
required to make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the consolidated financial state-
ments and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
2.CONVERSION TO CAPITAL STOCK FORM OF OWNERSHIP
On July 18, 1994, the Board of Directors of Bell Federal Savings and Loan
Association of Bellevue adopted a plan of conversion, pursuant to which the
Association would convert from a federally chartered mutual savings and
loan association to a federally chartered capital stock savings and loan
association, with the concurrent formation of the holding company, First
Bell Bancorp, Inc.
On June 29, 1995, conversion from a mutual form of ownership to a stock
form was finalized. First Bell was capitalized through the initial sale of
8,596,250 shares of common stock to eligible account holders, an employee
benefit plan of the Association, supplemental eligible account holders,
other members of the Association, and the general public. First Bell then
used a portion of the proceeds from the sale to purchase all of the out-
standing shares of Bell Federal. This transaction was accounted for in a
manner similar to the pooling of interests method.
On December 16, 1996, the Company declared a one-time cash distribution of
$3.00 per share. The Company obtained a private letter ruling from the In-
ternal Revenue Service which allowed them to treat $2.93 per share of this
distribution as a return of capital. The return of capital was reflected as
a reduction to additional paid-in-capital and unearned ESOP shares in the
Company's financial statements. For the stockholders, the return of capital
is treated as a reduction in the cost basis of the shares and is not sub-
ject to income taxes until the shares are sold. The remaining $.07 per
share was treated as an ordinary dividend. The total distribution paid was
$23,274,450 on 7,758,150 shares of stock on December 31, 1996 to sharehold-
ers of record as of December 20, 1996.
3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Federal Home Loan Bank System--The Association is a member of the Fed-
eral Home Loan Bank ("FHLB") system. As a member, the Association is re-
quired to maintain a minimum investment in capital stock of the FHLB of
not less than 1% of the Association's outstanding conventional mortgage
loans or 0.3% of its total assets. Deficiencies, if any, in the required
investment at the end of any reporting period are purchased in the sub-
sequent reporting period. The Association receives dividends on its FHLB
stock.
b. Cash and Cash Equivalents--For the purpose of presenting the consoli-
dated statements of cash flows, cash on hand and interest and noninter-
est-bearing deposits with original maturities of less than 90 days are
considered cash equivalents.
The Association services mortgage loans for the Federal National Mort-
gage Association ("FNMA"). The Association is required to restrict cash
balances equal to the corresponding escrow funds. As of December 31,
1997 and 1996, restricted cash of approximately $634,000 and $165,000,
respectively, has been segregated on the books of the Association.
- --------------------------------------------------------------------------------
28
<PAGE>
- --------------------------------------------------------------------------------
The Association's reserve requirements imposed by the Federal Reserve
Bank averaged approximately $860,000 and $804,000 for the years ended
December 31, 1997 and 1996, respectively.
c. Investment and Mortgage-Backed Securities--First Bell follows Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Cer-
tain Debt and Equity Securities," for investment and mortgage-backed se-
curities. Investment and mortgage-backed securities that may be sold as
part of First Bell's asset/liability or liquidity management or in re-
sponse to or in anticipation of changes in interest rates and prepayment
risk or other factors are classified as available-for-sale and are car-
ried at fair market value. Unrealized gains and losses on such securi-
ties are reported net of related taxes as a separate component of stock-
holders' equity. Securities that the Company has the intent and ability
to hold to maturity are classified as held-to-maturity and are carried
at amortized cost. Realized gains and losses on sales of all securities
are reported in earnings and are computed using the specific identifica-
tion cost basis.
Premiums are amortized and discounts are accreted to maturity using the
level yield method. The Company does not maintain a trading account.
d. Conventional Loans--Interest on loans is credited to income as earned.
Interest earned that has not been collected is accrued. Interest accrued
on loans delinquent more than 90 days is offset by a reserve for
uncollected interest and is, therefore, not recognized as income. Origi-
nation fees and costs related to activities performed for a loan origi-
nation are deferred and recognized over the contractual life using the
level yield method in accordance with SFAS No. 91 "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring
Loans and Initial Direct Costs of Leases."
e. Servicing of Loans--The total amount of loans serviced for others was
$31,407,000, $4,173,000 and $4,739,000 at December 31, 1997, 1996 and
1995, respectively. During 1997, $29,989,000 of conventional mortgage
loans were sold to FNMA in which the servicing of such loans were main-
tained by the Association and a related servicing asset of $237,000 was
recorded. The servicing asset will be amortized over the expected life
of the servicing agreement.
f. Allowance for Loan Losses--The allowance for loan losses is determined
by management, taking into consideration the past loan loss experience,
known and inherent risks in the portfolio, adverse situations which may
affect the borrowers' ability to repay and estimated values of under-
lying collateral and current economic conditions in the Association's
lending area. While management uses the best information available to
estimate losses on loans, future additions to the allowance may be nec-
essary for changes in economic conditions beyond the Association's con-
trol.
g. Real Estate Owned--Real estate owned is initially recorded at the lower
of carrying value or fair value less estimated costs to sell. Subse-
quently, such real estate is carried at the lower of fair value less es-
timated costs to sell or its initial recorded value. Reductions in the
carrying value of real estate subsequent to acquisition are recorded
through a valuation allowance. Costs related to the development and im-
provement of the real estate are capitalized, whereas those costs relat-
ing to holding the real estate are charged to expense.
Recovery of the carrying value of real estate acquired in settlement of
loans is dependent to a great extent on economic, operating and other
conditions that may be beyond the Company's control.
h. Premises and Equipment--Premises, equipment and leasehold improvements
are stated at cost less accumulated depreciation and amortization. De-
preciation and amortization are computed on a straight-line basis over
the estimated useful lives (3-50 years) or leasehold period, if shorter,
of the related assets.
i. Deposits--Interest on deposits is accrued and charged to operating
expense monthly and is paid in accordance with the terms of the
respective accounts.
- --------------------------------------------------------------------------------
29
<PAGE>
FIRST BELL BANCORP, INC. 1997 ANNUAL REPORT
- --------------------------------------------------------------------------------
j. Income Taxes--The Company follows the provisions of SFAS No. 109, "Ac-
counting for Income Taxes." SFAS No. 109 requires the asset and liabil-
ity method of accounting for income taxes, under which deferred income
taxes are recognized for the tax consequences of "temporary differences"
by applying enacted statutory tax rates to differences between the fi-
nancial statement carrying amounts and the tax bases of existing assets
and liabilities. Under SFAS No. 109, the effect on deferred taxes of a
change in tax rates is recognized in income in the period that includes
the enactment date.
k. Earnings Per Share--The Financial Accounting Standards Board ("FASB")
recently issued SFAS No. 128, "Earnings Per Share," which became effec-
tive for financial statements for periods ending after December 15,
1997. SFAS No. 128 establishes standards for computing and presenting
earnings per share ("EPS"). It simplifies the standards for computing
EPS and makes them comparable to international EPS.
Basic EPS is computed by dividing net income available to common stock-
holders by the weighted average number of common shares outstanding for
the period. Diluted EPS is computed by dividing net income available to
common stockholders, adjusted for dilutive securities, by the weighted
average number of common shares outstanding, adjusted for dilutive secu-
rities.
For the years ended December 31, 1996 and 1995, EPS has been restated to
conform with the provisions of SFAS No. 128.
l. Treasury Stock--Treasury stock is recorded at cost.
m. Interest Rate Risk--A significant portion of the Company's assets con-
sist of long-term fixed-rate residential mortgage loans, while a signif-
icant portion of the Company's liabilities consist of deposits with con-
siderably shorter terms. As a result of these differences in the
maturities of assets and liabilities, any significant increase in inter-
est rates will have an adverse effect on the Company's results of opera-
tions. To manage this interest rate risk, the Company maintains high
levels of liquid assets to enable it to quickly respond to changes in
interest rates.
4.INVESTMENT SECURITIES HELD-TO-MATURITY
The following is a summary of investment securities held-to-maturity at De-
cember 31 (in thousands):
<TABLE>
<CAPTION>
1997
---------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Treasury bills....................... $ 9,969 $516 $-- $10,485
Other investments.................... 4 64 -- 68
------- ---- --- -------
$ 9,973 $580 $-- $10,553
======= ==== === =======
<CAPTION>
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>
- --------------------------------------------------------------------------------
30
<PAGE>
- -------------------------------------------------------------------------------
The carrying value and fair value of investment securities held-to-maturity
by contractual maturity as of December 31, 1997, are shown below (in
thousands):
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
--------- -------
<S> <C> <C>
Due after one year through five years..................... $4,993 $ 5,090
Due after five years through ten years.................... 4,980 5,463
------ -------
$9,973 $10,553
====== =======
</TABLE>
There were no sales of investment securities held-to-maturity during the
years ended December 31, 1997, 1996 and 1995.
5.INVESTMENT SECURITIES AVAILABLE-FOR-SALE
These investments consist of collateralized mortgage obligations. The fol-
lowing is a summary of investment securities available-for-sale at December
31, 1997 (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage
Corporation....................... $15,940 $-- $(38) $15,902
------- --- ---- -------
</TABLE>
There were no investment securities available-for-sale held by the Company
at December 31, 1996 and 1995. There were no sales of investment securities
available-for-sale during the year ended December 31, 1997.
The contractual maturity of these securities is in excess of 25 years. The
expected maturity will differ from the contractual maturity because borrow-
ers may have the right to prepay obligations with or without call or pre-
payment penalties.
6.MORTGAGE-BACKED SECURITIES AVAILABLE-FOR-SALE
The following is a summary of mortgage-backed securities available-for-sale
held at December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Federal National Mortgage
Association........................ $ 4,912 $ 15 $-- $ 4,927
Government National Mortgage
Association........................ 26,742 216 -- 26,958
------- ---- --- -------
$31,654 $231 $-- $31,885
======= ==== === =======
</TABLE>
Proceeds from sales of mortgage-backed securities available-for-sale were
$46,668,000 and $4,058,000 for the years ended December 31, 1997 and 1995,
respectively, resulting in gross gains of $94,000 and $68,000 for the years
ended December 31, 1997 and 1995, respectively, and gross losses of
$102,000 for the year ended December 31, 1997. There were no losses in-
curred for the year ended December 31, 1995. There were no sales of such
securities during 1996. There were no mortgage-backed securities held by
the Company at December 31, 1996 and 1995.
The contractual maturity of these securities is in excess of 25 years. The
expected maturity will differ from the contractual maturity because borrow-
ers may have the right to prepay obligations with or without call or pre-
payment penalties.
- -------------------------------------------------------------------------------
31
<PAGE>
FIRST BELL BANCORP, INC. 1997 ANNUAL REPORT
- -------------------------------------------------------------------------------
7.CONVENTIONAL LOANS
The following is a summary of conventional loans as of December 31, 1997
and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Conventional mortgages..................................... $568,405 $524,867
Residential construction loans............................. 25,563 19,877
Multi-family loans......................................... 860 1,220
Second mortgage loans...................................... 268 297
-------- --------
595,096 546,261
Less:
Deferred net loan origination fees......................... 3,822 4,610
Undisbursed portion of construction loans in process....... 12,072 11,120
Allowance for loan losses.................................. 715 665
-------- --------
$578,487 $529,866
======== ========
</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 $634,000 and $400,000 at December 31, 1997 and
1996, respectively. The Association does not accrue interest on loans past
due 90 days or more. Uncollected interest on total nonaccrual loans
amounted to $29,000, $24,000 and $25,000 for the years ended December 31,
1997, 1996 and 1995, respectively.
During 1997, the Company reclassed approximately $29,989,000 of conven-
tional mortgages classified as held to maturity to held-for-sale, and sub-
sequently sold all such conventional mortgages, resulting in a gain of ap-
proximately $258,000. The Company reclassed and sold such mortgages in
efforts to better manage the Company's interest rate risk.
8.ALLOWANCE FOR LOAN LOSSES
The following is an analysis of the changes in the allowance for loan
losses for the years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year.................................... $665 $575 $575
Provision for loan losses..................................... 45 90 --
Loans charged off............................................. -- --
Recovery of previous loan chargeoffs.......................... 5 -- --
---- ---- ----
Balance, end of year.......................................... $715 $665 $575
==== ==== ====
</TABLE>
- -------------------------------------------------------------------------------
32
<PAGE>
- --------------------------------------------------------------------------------
9.PREMISES AND EQUIPMENT
The following is a summary of premises and equipment as of December 31 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Land and land improvements.................................... $ 351 $ 351
Office buildings and leasehold improvements................... 3,815 3,755
Furniture, fixtures and equipment............................. 1,671 1,636
------ ------
5,837 5,742
Less accumulated depreciation and amortization................ 2,345 2,050
------ ------
$3,492 $3,692
====== ======
</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>
1998 $158
1999 164
2000 170
2001 178
2002 113
2003 and thereafter 343
</TABLE>
Rental expense under these leases was approximately $161,000, $113,000 and
$96,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
10.DEPOSITS
The following is a summary of deposits and stated interest rates as of De-
cember 31 (in thousands):
<TABLE>
<CAPTION>
STATED RATE 1997 1996
------------- -------- --------
<S> <C> <C> <C>
Balance by interest rate:
Passbook, club and other accounts......... 3.00%-- 4.45% $ 67,587 $ 66,486
-------- --------
Money market and NOW accounts............. 0.00%-- 3.21% 47,264 44,661
-------- --------
Certificate accounts...................... 3.00%-- 5.50% 74,933 113,356
5.51%-- 6.00% 156,885 121,968
6.01%-- 6.50% 115,491 98,368
6.51%-- 7.50% 26,200 30,860
7.51%-- 8.50% 2,855 3,630
8.51%-- 9.50% 3,559 4,346
9.51%--10.50% 281 266
-------- --------
380,204 372,794
-------- --------
$495,055 $483,941
======== ========
</TABLE>
- --------------------------------------------------------------------------------
33
<PAGE>
FIRST BELL BANCORP, INC. 1997 ANNUAL REPORT
- --------------------------------------------------------------------------------
Noninterest-bearing demand deposits were approximately $3,610,000 and
$3,994,000 at December 31, 1997 and 1996, respectively.
The Association maintains insurance on deposits through the Savings Associ-
ation Insurance Fund ("SAIF"), which is under the supervision of the Fed-
eral Deposit Insurance Corporation ("FDIC").
The following is a summary of certificate accounts by contractual maturity
at December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
CONTRACTUAL MATURITY
--------------------
<S> <C>
1998 $275,850
1999 42,701
2000 25,589
2001 10,544
2002 9,084
2003 1,382
2004 and thereafter 15,054
--------
$380,204
========
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination
of $100,000 was $37,828,000 and $36,307,000 at December 31, 1997 and 1996,
respectively. Deposits in excess of $100,000 are not insured by the SAIF.
11.BORROWINGS
At December 31, 1997, the Company had $90,000,000 in borrowings from the
FHLB. Of these borrowings, $70,000,000 currently bears interest based upon
the three-month London Interbank Offered Rate ("LIBOR"), currently 5.46%,
and matures on March 17, 2002. The remaining $20,000,000 matures on January
2, 1998 and bears interest at 6.50%. Such borrowings are secured by the as-
sets of the Company. At December 31, 1996, the Company had $70,000,000 in
borrowings from the FHLB. The borrowings bear interest based on the three-
month LIBOR adjusted quarterly, and are secured by the assets of the Compa-
ny.
12.REGULATORY CAPITAL REQUIREMENTS AND RESTRICTIONS
The Association is subject to various regulatory capital requirements ad-
ministered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory--and possibly additional dis-
cretionary--actions by regulators that, if undertaken, could have a direct
material effect on the Association's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective ac-
tion, the Association must meet specific capital guidelines that involve
quantitive measures of the Association's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practic-
es. The Association's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Association to maintain minimum amounts and ratios (set forth
in the table below) of Total and Tier I Capital to risk-weighted assets and
of Tangible and Tier I Capital to total assets. Management believes, as of
December 31, 1997, that the Association meets all capital adequacy require-
ments to which it is subject.
- --------------------------------------------------------------------------------
34
<PAGE>
- --------------------------------------------------------------------------------
The most recent notification from the Office of Thrift Supervision catego-
rized the Association as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized the As-
sociation must maintain minimum Total Capital to risk-weighted assets, Tier
I Capital to risk-weighted assets and Tier I Capital to total assets ratios
as set forth in the following table. There are no conditions or events
since that notification that management believes have changed the institu-
tion's category.
The Association had the following amounts of capital and capital ratios at
December 31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------- ----------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ---------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital (to
risk-weighted
assets).............. $72,523 23.39% $24,810 8.00% $31,012 10.00%
Tier I Capital (to
risk-weighted
assets).............. 71,808 23.15% N/A N/A 18,607 6.00%
Tier I Capital (to
total assets)........ 71,808 10.59% 20,341 3.00% 33,902 5.00%
Tangible Capital...... 71,808 10.59% 10,171 1.50% N/A N/A
As of December 31, 1996:
Total Capital (to
risk-weighted
assets).............. $80,102 27.51% $23,298 8.00% $29,123 10.00%
Tier I Capital (to
risk-weighted
assets).............. 79,451 27.28% N/A N/A 17,474 6.00%
Tier I Capital (to
total assets)........ 79,451 12.16% 19,599 3.00% 32,816 5.00%
Tangible Capital...... 79,451 12.16% 9,800 1.50% N/A N/A
</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 $310,121,000 and $291,266,000 at
December 31, 1997 and 1996, respectively.
The Association may not declare or pay cash dividends on or repurchase any
of its shares of common stock if the effect thereof would cause equity to
be reduced below applicable regulatory capital maintenance requirements, or
if such declaration and payment would otherwise violate regulatory require-
ments. At December 31, 1997, the maximum dividend the Association may de-
clare and pay to First Bell is approximately $36,011,000.
13.EARNINGS PER SHARE
Both basic and diluted earnings per share are calculated as of December 31
as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE PER
INCOME SHARES SHARE
1997 ------ -------- -----
<S> <C> <C> <C>
Income available to common stockholders................ $7,575 6,784
Unearned ESOP shares................................... -- (615)
Unearned MRP shares.................................... -- (308)
------ -----
Basic earnings per share............................... 7,575 5,861 $1.29
=====
Effect of dilutive securities:
MRP shares............................................ -- 129
Stock options......................................... -- 144
------ -----
Diluted earnings per share............................. $7,575 6,134 $1.23
====== ===== =====
</TABLE>
- --------------------------------------------------------------------------------
35
<PAGE>
FIRST BELL BANCORP, INC. 1997 ANNUAL REPORT
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE PER
INCOME SHARES SHARE
1996 ------ -------- -----
<S> <C> <C> <C>
Income available to common stockholders................ $7,403 8,051
Unearned ESOP shares................................... -- (649)
Unearned MRP shares.................................... -- (344)
------ -----
Basic earnings per share............................... 7,403 7,058 $1.05
=====
Effect of dilutive securities:
MRP shares............................................ -- 180
Stock options......................................... -- 14
------ -----
Diluted earnings per share............................. $7,403 7,252 $1.02
====== ===== =====
<CAPTION>
WEIGHTED
AVERAGE PER
INCOME SHARES SHARE
1995 ------ -------- -----
<S> <C> <C> <C>
Income available to common stockholders................ $4,119 8,596
Unearned ESOP shares................................... -- (662)
------ -----
Basic and diluted earnings per share................... $4,119 7,934 $0.52
====== ===== =====
</TABLE>
For 1995, earnings subsequent to the initial sale of common stock in the
amount of $4,119,000 was used to compute both basic and diluted earnings
per share.
14.INTEREST EXPENSE
The following is a summary of interest expense on deposits for the year
ended December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Passbook, club and other accounts................... $ 2,288 $ 2,314 $ 2,371
Money market and NOW accounts....................... 1,092 1,040 1,069
Certificate accounts................................ 23,306 18,505 14,992
------- ------- -------
$26,686 $21,859 $18,432
======= ======= =======
</TABLE>
15.INCOME TAXES
Deferred income taxes reflect the net effects of temporary differences be-
tween the carrying amounts of assets and liabilities for financial report-
ing purposes and the bases used for income tax purposes. The tax effects of
significant items comprising the net deferred tax liability at December 31
as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Deferred Tax Assets:
Deferred loan origination fees............................ $ -- $ --
Other..................................................... 171 158
------- -------
Total deferred tax assets................................ 171 158
------- -------
Deferred Tax Liabilities:
Deferred loan origination fees............................ (482) (57)
Allowance for loan losses................................. (903) (915)
Depreciation on premises and equipment.................... (252) (248)
Other..................................................... (259) (182)
------- -------
Total deferred tax liabilities........................... (1,896) (1,402)
------- -------
Net deferred tax liability............................... $(1,725) $(1,244)
======= =======
</TABLE>
- --------------------------------------------------------------------------------
36
<PAGE>
- --------------------------------------------------------------------------------
The provision for income taxes consists of the following components for the
year ended December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Current:
Federal................................................ $3,665 $3,189 $2,966
State.................................................. 976 725 726
Deferred expense........................................ 405 571 653
------ ------ ------
Total provision for income taxes...................... $5,046 $4,485 $4,345
====== ====== ======
</TABLE>
The following table presents the principal components of deferred income
tax expense as of December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ----- ----
<S> <C> <C> <C>
Allowance for loan losses................................. $(13) $(123) $221
Deferred loan origination fees............................ 425 550 458
Depreciation differences.................................. 4 (6) 8
Other--net................................................ (11) 150 (34)
---- ----- ----
$405 $ 571 $653
==== ===== ====
</TABLE>
The reconciliation between the federal statutory tax rate and the Company's
effective income tax rate for the year ended December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory tax rate......................................... 34.0% 34.0% 34.0%
State income taxes......................................... 5.2 4.0 4.3
Other--net................................................. 0.8 (0.3) 0.2
---- ---- ----
Effective tax rate....................................... 40.0% 37.7% 38.5%
==== ==== ====
</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.
16.EMPLOYEE BENEFIT PLANS
Defined Benefit Pension Plan--The Company has a defined benefit pension
plan for substantially all employees. The benefits of the defined benefit
plan are generally based on the years of service and the employee's compen-
sation during the last five years of employment.
Net periodic pension cost for the defined benefit plan includes the follow-
ing components for the year ended December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost............................................... $ 65 $ 82 $ 50
Interest cost.............................................. 75 68 60
Actual return on plan assets............................... (63) (61) (58)
Net amortization and deferral.............................. (16) (9) (16)
---- ---- ----
Net periodic pension cost................................ $ 61 $ 80 $ 36
==== ==== ====
</TABLE>
- --------------------------------------------------------------------------------
37
<PAGE>
FIRST BELL BANCORP, INC. 1997 ANNUAL REPORT
- --------------------------------------------------------------------------------
The following table reconciles the funded status of the plan to the amount
recorded in the accompanying consolidated balance sheets as of December 31
(in thousands):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Projected benefit obligation................................ $1,182 $1,041
Plan assets at fair value, primarily insurance contracts and
cash....................................................... 1,173 1,073
------ ------
Plan assets (less than) in excess of projected benefit
obligation................................................. (9) 32
Unrecognized net loss....................................... 213 165
Unrecognized prior service cost............................. (119) (127)
Unrecognized net asset...................................... (53) (57)
------ ------
Net pension asset......................................... $ 32 $ 13
====== ======
Actuarial present value of benefit obligation:
Vested benefit obligation................................. $ 951 $ 814
Nonvested benefit obligation.............................. 24 41
------ ------
Accumulated benefit obligation.............................. $ 975 $ 855
====== ======
</TABLE>
The following rate assumptions were used in the plan accounting as of De-
cember 31:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Discount rate.............................................. 7.00% 7.25% 6.25%
Rate of compensation increases............................. 6.00% 6.00% 6.00%
Expected long-term rate of return on plan assets........... 7.00% 7.50% 7.50%
</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,
1997, 1996 and 1995, deferred compensation expenses under this plan were
$60,000 each year.
401(k) Plan--The Association maintains a defined contribution 401(k) plan
to provide benefits for substantially all employees. The plan provides for,
but does not require, employees to make tax deferred payroll savings con-
tributions. The Association is required to make a matching contribution
based on the level of employee contribution. The total expense recorded un-
der this plan for the years ended December 31, 1997, 1996 and 1995 was ap-
proximately $9,200, $6,400 and $4,000, respectively.
Employee Stock Ownership Plan--Effective January 1, 1995, the Association
established the Bell Federal Savings and Loan Association of Bellevue Em-
ployee Stock Ownership Plan ("ESOP") which covers substantially all employ-
ees. On June 29, 1995, the ESOP purchased 687,700 shares of Company common
stock as part of the initial public offering. The shares were purchased
with the proceeds of a loan from the Company which will be repaid through
the operations of the Association. Shares are allocated to employees, as
principal and interest payments are made to the Company.
- --------------------------------------------------------------------------------
38
<PAGE>
- --------------------------------------------------------------------------------
Compensation expense related to the ESOP for 1997, 1996 and 1995 totaled
$537,000, $405,000 and $311,000, respectively, based on the average fair
value of shares committed to be released. The loan and related interest ex-
pense on the loan are eliminated in these consolidated financial state-
ments. The fair value of unallocated ESOP shares at December 31, 1997 was
approximately $11,326,000. Shares held by the ESOP were as follows as of
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Unallocated shares, beginning of year............. 629,622 663,578 --
Shares purchased by ESOP.......................... -- -- 687,700
Shares released for allocation.................... (33,533) (33,956) (24,122)
------- ------- -------
Unallocated shares, end of year................... 596,089 629,622 663,578
======= ======= =======
</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, "Accounting for Stock-Based Compensation," and accordingly, no compen-
sation cost has been recognized for the stock option plan. Had compensation
cost for the Company's stock option plan been determined based on the fair
value at the grant date for awards in 1997 and 1996 consistent with the
provisions of SFAS No. 123, the Company's net earnings and earnings per
share would have been reduced to the pro forma amounts indicated below as
of December 31 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
BASIC DILUTED
EARNINGS EARNINGS
NET PER PER
INCOME SHARE SHARE
1997 ------ -------- --------
<S> <C> <C> <C>
As reported......................................... $7,575 $1.29 $1.23
Pro forma........................................... 6,654 1.14 1.08
<CAPTION>
BASIC DILUTED
EARNINGS EARNINGS
NET PER PER
INCOME SHARE SHARE
1996 ------ -------- --------
<S> <C> <C> <C>
As reported......................................... $7,403 $1.05 $1.02
Pro forma........................................... 7,067 1.00 0.97
</TABLE>
Pro forma basic and diluted earnings per share for 1996 have been restated
to conform with the provisions of SFAS No. 128 (see Note 3).
The fair value of each option grant is estimated on the date of grant using
the Black Sholes option pricing model with the following weighted average
assumptions used for grants for each respective year as of December 31:
<TABLE>
<CAPTION>
1997 1996
------- --------
<S> <C> <C>
Dividend yield............................................ 2.00% 3.00%
Expected volatility....................................... 29.00% 27.00%
Risk-free interest rate................................... 5.60% 6.40%
Expected lives............................................ 9 YEARS 10 Years
</TABLE>
- --------------------------------------------------------------------------------
39
<PAGE>
FIRST BELL BANCORP, INC. 1997 ANNUAL REPORT
- --------------------------------------------------------------------------------
The following summarizes the activity in the Stock Option Plan for the year
ended December 31:
<TABLE>
<CAPTION>
1997 1996
------- --------
<S> <C> <C>
Options outstanding, beginning of year.................... 361,037 --
Options granted........................................... -- 361,037
Equitable right adjustment................................ 89,113 --
Options exercised......................................... -- --
Options forfeited......................................... (12,862) --
------- --------
Options outstanding, end of year.......................... 437,288 361,037
======= ========
Weighted average exercise price, end of year.............. $10.70 $13.38
======= ========
Options exercisable, end of year.......................... 90,030 --
======= ========
Options available for grant, end of year.................. 422,337 498,588
======= ========
Weighted-average fair value of options granted during the
year..................................................... $10.25 $4.70
======= ========
Remaining contractual life................................ 9 YEARS 10 Years
</TABLE>
The exercise price of all options was reduced from $13.375 to $10.70 during
1997 as a result of the return of capital distribution made on December 16,
1996 (see Note 2). As a result, the Company was required to issue addi-
tional options to the existing participants in an amount equal to the dif-
ference between the value of the options in each participant's account be-
fore the reduction in the exercise price, and the value of the options in
each participant's account after the reduction in the exercise price. All
options granted in 1997 are as a result of this equitable right adjustment.
Approximately one-fifth of the stock option shares may be exercised after
the end of each year, and no option will be exercisable after ten years
from the date of grant. Terminated employees forfeit any non-vested op-
tions.
Master Stock Compensation Plan--The Association has a Master Stock Compen-
sation Plan ("MRP") that was approved by Shareholders on April 29, 1996.
Awards under this plan have been granted to certain officers, directors and
management personnel of the Association. Under the MRP, a committee of the
Board of Directors of the Association grants shares of common stock to em-
ployees and directors.
The following summarizes activity in the MRP for the year ended December
31:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Awards outstanding, beginning of year...................... 180,260 --
Awards granted............................................. 1,500 183,760
Awards forfeited........................................... (16,280) (3,500)
Awards vested.............................................. (36,052) --
------- -------
Awards outstanding, end of year............................ 129,428 180,260
======= =======
Total MRP shares, end of year.............................. 307,798 343,850
======= =======
</TABLE>
Shares vest under the current awards at 20% per year, commencing one year
from the date of grant subject to the attainment of certain performance
goals. The cost of unearned shares related to these awards, included as a
separate component of shareholders' equity, aggregated $4,290,000 and
$4,792,000 at December 31, 1997 and 1996, respectively. Compensation cost
is recorded over the five year period as shares are earned based on the av-
erage fair market value of stock during the fiscal year. The expense for
the year ended December 31, 1997 and 1996 was $518,000 and $510,000, re-
spectively. Terminated employees forfeit any non-vested awards.
- --------------------------------------------------------------------------------
40
<PAGE>
- --------------------------------------------------------------------------------
17.COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Association originates loan commit-
ments. Loan commitments generally have fixed expiration dates or other ter-
mination clauses and may require payment of a fee. The Association evalu-
ates each customer's credit worthiness on a case-by-case basis. The amount
of collateral deemed necessary by the Association is based on management's
credit evaluation and the Association's underwriting guidelines for the
particular loan. The total commitments outstanding at December 31 are sum-
marized as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
NOTIONAL NOTIONAL NOTIONAL NOTIONAL
AMOUNT RATE AMOUNT RATE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
3--5 year adjustable rate mortgages...... $ 737 6.38% $ -- --%
15 year fixed rate mortgages............. 437 7.13 825 7.25
30 year fixed rate mortgages............. 4,044 7.38 5,342 7.50
Construction mortgages................... 12,687 7.38 11,120 7.46
------- -------
$17,905 $17,287
======= =======
</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.
Credit related financial instruments have off-balance sheet credit risk be-
cause only origination fees (if any) are recognized in the balance sheet
(as "other liabilities") for these instruments until the commitments are
fulfilled or expire. The credit risk amounts are equal to the notional
amounts of the contracts, assuming that all counterparties fail completely
to meet their obligations and the collateral or other security is of no
value.
- --------------------------------------------------------------------------------
41
<PAGE>
FIRST BELL BANCORP, INC. 1997 ANNUAL REPORT
- --------------------------------------------------------------------------------
18.FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair values of the Company's financial instruments as of December 31
are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Assets:
Cash and noninterest-bearing deposits.. $ 2,580 $ 2,580 $ 2,534 $ 2,534
Interest-bearing deposits............. 21,943 21,943 23,872 23,872
Federal Funds sold.................... 1,550 1,550 72,875 72,875
Investment securities held-to-
maturity............................. 9,973 10,485 14,964 15,429
Investment securities available-for-
sale................................. 15,902 15,902 -- --
Mortgage-backed securities available-
for-sale............................. 31,885 31,885 -- --
Conventional loans.................... 578,487 581,058 529,866 518,842
Federal Home Loan Bank stock.......... 5,148 5,148 3,999 3,999
Liabilities:
Passbook, club, money market, NOW and
other accounts....................... $114,851 $114,851 $111,147 $111,147
Certificate accounts.................. 380,204 382,976 372,794 377,536
Borrowings............................ 90,000 90,000 70,000 70,000
</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 Held-to-Maturity, Investment Securities Available-
for-Sale and Mortgage-backed Securities Available-for-Sale--Fair values
for these securities are based on quoted market prices or dealer quotes.
If a quoted market price is not available, fair value is estimated using
quoted market prices for similar securities.
c. Conventional Loans--For conventional mortgages, fair value is estimated
by discounting estimated future cash flows using the current rates at
which similar loans would be made to borrowers with similar credit rat-
ings and for the same remaining maturities.
d. Passbook, Club, Money Market, NOW and Other Accounts--The fair value of
these accounts is the amount payable on demand, or the carrying amount
at the reporting date.
e. Certificate Accounts--The fair value of fixed-maturity certificates of
deposit is estimated by discounting future cash flows using the rates
currently offered for deposits of similar remaining maturities.
f. Borrowings--The fair value of borrowings that have an adjustable rate
which reprices quarterly is estimated as the carrying amount.
g. Off-balance Sheet Commitments to Extend Credit--The fair value of off-
balance sheet commitments to extend credit is estimated to equal the
outstanding commitment amount. Management does not believe it is mean-
ingful to provide an estimate of fair value that differs from the out-
standing commitment amount as a result of the uncertainties involved in
attempting to assess the likelihood and timing of the commitment being
drawn upon, coupled with the lack of an established market and a wide
diversity of fee structures.
- --------------------------------------------------------------------------------
42
<PAGE>
- --------------------------------------------------------------------------------
19.FDIC SPECIAL ASSESSMENT
On September 30, 1996, the President signed into law the Deposit Insurance
Funds Act of 1996 (the "Funds Act") which, among other things, imposed a
special one-time assessment on SAIF member institutions, including the As-
sociation, to recapitalize the SAIF. As required by the Funds Act, the FDIC
imposed a special assessment of 65.7 basis points on SAIF assessable depos-
its held as of March 31, 1995, payable November 27, 1996. The Association
recorded a pre-tax charge of $2.5 million as a result of the FDIC special
assessment during the year ended December 31, 1996.
The Funds Act also spreads the obligation for payment of the Financing Cor-
poration ("FICO") bonds across all SAIF and Bank Insurance Fund ("BIF")
members. Beginning on January 1, 1997, BIF deposits are assessed for FICO
payments at a rate of 20% of the rate assessed on SAIF deposits. Based on
current estimates by the FDIC, BIF deposits are assessed a FICO payment of
1.3 basis points, while SAIF deposits pay an estimated 6.5 basis points on
the FICO bonds. Full pro rata sharing of the FICO payments between BIF and
SAIF members will occur on the earlier of January 1, 2000 or the date the
BIF and SAIF are merged. The Funds Act specifies that the BIF and SAIF will
be merged on January 1, 1999 provided no savings associations remain as of
that time.
As a result of the Funds Act, the FDIC recently proposed to lower SAIF as-
sessments to a range of 0 to 27 basis points effective January 1, 1997, a
range comparable to that of BIF members. However, SAIF members will con-
tinue to make the higher FICO payments described above. Management cannot
predict the level of FDIC insurance assessments on an on-going basis,
whether the savings association charter will be eliminated, or whether the
BIF and SAIF will eventually be merged.
20.NEW ACCOUNTING PRONOUNCEMENT NOT YET ADOPTED
Reporting Comprehensive Income--In June 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income." This statement establishes standards for
the reporting and display of comprehensive income and its components (reve-
nues, expenses, gains, and losses) in a full set of general-purpose finan-
cial statements. The provisions of this statement are effective for fiscal
years beginning after December 15, 1997. Management is in the process of
evaluating the impact of this statement on the consolidated financial
statements.
- --------------------------------------------------------------------------------
43
<PAGE>
FIRST BELL BANCORP, INC. 1997 ANNUAL REPORT
- --------------------------------------------------------------------------------
21.PARENT COMPANY
The following are condensed financial statements for First Bell as of and
for the year or period ended December 31, 1997, 1996 and 1995 (in thou-
sands):
BALANCE SHEETS
<TABLE>
<CAPTION>
1997 1996
ASSETS -------- --------
<S> <C> <C>
CASH AND INTEREST-BEARING DEPOSITS...................... $ 10 $ 9
FEDERAL FUNDS SOLD...................................... 1,550 2,875
INVESTMENT IN AND ADVANCES TO BELL FEDERAL.............. 71,808 79,451
LOAN RECEIVABLE--ESOP................................... 4,493 4,569
OTHER ASSETS............................................ 195 625
-------- --------
Total assets.......................................... $ 78,056 $ 87,529
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LOAN PAYABLE TO BELL FEDERAL............................ $ 4,323 $ --
ACCRUED INTEREST........................................ 14 --
ACCRUED INCOME TAXES.................................... 80 58
OTHER LIABILITIES....................................... 773 1,038
-------- --------
Total liabilities..................................... 5,190 1,096
STOCKHOLDERS' EQUITY:
Preferred stock ($.01 par value; 2,000,000 shares
authorized; no shares issued)......................... -- --
Common stock ($.01 par value; 20,000,000 shares
authorized; 8,596,250 issued
and 6,510,625 and 7,758,150 outstanding).............. 86 86
Additional paid-in capital............................. 61,371 61,063
Unearned ESOP shares................................... (4,217) (4,454)
Unearned MRP shares.................................... (4,290) (4,792)
Treasury stock, at cost................................ (32,077) (11,684)
Retained earnings...................................... 51,993 46,214
-------- --------
Total stockholders' equity............................ 72,866 86,433
-------- --------
Total liabilities and stockholders' equity............ $ 78,056 $ 87,529
======== ========
</TABLE>
- --------------------------------------------------------------------------------
44
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED
-------------- DECEMBER 31,
1997 1996 1995
------ ------ ------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest bearing deposits...................... $ 39 $ 89 $ --
Federal funds sold............................. 77 1,391 1,045
Interest on ESOP loan receivable............... 386 551 310
------ ------ ------
Total interest income........................ 502 2,031 1,355
------ ------ ------
INTEREST EXPENSE................................ 300 -- --
------ ------ ------
NET INTEREST INCOME............................. 202 2,031 1,355
GENERAL AND ADMINISTRATIVE EXPENSES............. 213 231 --
------ ------ ------
(LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES. (11) 1,800 1,355
------ ------ ------
(BENEFIT) PROVISION FOR INCOME TAXES:
Current:
Federal....................................... (18) 601 425
State......................................... 41 41 104
------ ------ ------
Total provision for income taxes............. 23 642 529
------ ------ ------
(LOSS) INCOME BEFORE EQUITY IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARY......................... (34) 1,158 826
Equity in undistributed earnings of Bell
Federal...................................... 7,609 6,245 3,293
------ ------ ------
NET INCOME...................................... $7,575 $7,403 $4,119
====== ====== ======
</TABLE>
- --------------------------------------------------------------------------------
45
<PAGE>
FIRST BELL BANCORP, INC. 1997 ANNUAL REPORT
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED
------------------ DECEMBER 31
1997 1996 1995
-------- -------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................. $ 7,575 $ 7,403 $ 4,119
Adjustments to reconcile net income to net
cash
provided by operating activities:
Equity in undistributed earnings of Bell
Federal................................. (7,609) (6,245) (3,293)
Increase or decrease in assets and
liabilities:
Accrued income taxes.................... 22 (46) 104
Accrued interest........................ 14 -- --
Other assets............................ 430 (533) (22)
Other liabilities....................... (127) 1,038 --
Dividends payable....................... (138) (713) --
-------- -------- --------
Net cash provided by operating
activities............................ 167 904 908
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in Federal Funds... (1,325) 33,150 (36,025)
Principal paydowns on ESOP loan receivable. 76 2,067 241
ESOP loan receivable....................... -- -- (6,877)
Dividend from Bell Federal................. 16,000 -- --
Investment in and advances to Bell Federal. 3,087 3,016 (34,894)
-------- -------- --------
Net cash provided by (used in)
investing activities.................. 17,838 38,233 (77,555)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid............................. (1,935) (1,984) --
Return of capital.......................... -- (20,684) --
Purchase of treasury stock................. (20,393) (11,684) --
Purchase of MRP shares..................... -- (4,792) --
Loan payable to Bell Federal............... 4,400 -- --
Principal payment on loan payable.......... (76) -- --
Net proceeds from sale of stock............ -- -- 76,663
-------- -------- --------
Net cash (used in) provided by
financing activities.................. (18,004) (39,144) 76,773
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................ 1 (7) 16
CASH, BEGINNING OF YEAR..................... 9 16 --
-------- -------- --------
CASH, END OF YEAR........................... $ 10 $ 9 $ 16
======== ======== ========
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Income taxes.............................. $ 93 $ 688 $ 425
Interest.................................. 286 -- --
Non-cash transactions:
Increase in additional paid-in capital--
ESOP and MRP
share allocations........................ 308 203 70
Accumulated equity in Bell Federal at time
of conversion
(see Note 2)............................. -- -- 40,923
</TABLE>
- --------------------------------------------------------------------------------
46
<PAGE>
- --------------------------------------------------------------------------------
22.QUARTERLY EARNINGS SUMMARY (UNAUDITED)
Quarterly earnings for the years ended December 31, 1997 and 1996 are as
follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1997
-----------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
INTEREST AND DIVIDEND INCOME...... $12,073 $12,533 $12,600 $12,020
INTEREST EXPENSE.................. 7,639 8,323 8,523 7,844
------- ------- ------- -------
NET INTEREST INCOME.............. 4,434 4,210 4,077 4,176
PROVISION FOR (RECOVERY OF) LOAN
LOSSES........................... 20 30 -- (5)
------- ------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR (RECOVERY OF) LOAN
LOSSES.......................... 4,414 4,180 4,077 4,181
OTHER INCOME...................... 130 410 118 171
OTHER EXPENSES.................... 1,172 1,299 1,260 1,329
------- ------- ------- -------
INCOME BEFORE PROVISION FOR INCOME
TAXES............................ 3,372 3,291 2,935 3,023
PROVISION FOR INCOME TAXES........ 1,376 1,377 1,089 1,204
------- ------- ------- -------
NET INCOME........................ $ 1,996 $ 1,914 $ 1,846 $ 1,819
======= ======= ======= =======
BASIC EARNINGS PER SHARE (2)...... $ 0.30 $ 0.34 $ 0.33 $ 0.33
======= ======= ======= =======
DILUTED EARNINGS PER SHARE........ $ 0.29 $ 0.32 $ 0.31 $ 0.31
======= ======= ======= =======
</TABLE>
<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
====== ======= ======= =======
BASIC EARNINGS PER SHARE.......... $ 0.27 $ 0.32 $ 0.16 $ 0.30
====== ======= ======= =======
DILUTED EARNINGS PER SHARE........ $ 0.27 $ 0.31 $ 0.16 $ 0.28
====== ======= ======= =======
</TABLE>
- -------
(1) The quarter ended September 30, 1996 includes a one-time pre-tax charge of
$2.5 million for recapitalizing the SAIF.
(2) Quarterly per share amounts do not add to the total for the year ended De-
cember 31, 1997, due to rounding.
23.SUBSEQUENT EVENTS
On February 18, 1998, $10.0 million of investment securities available for
sale was called by the Federal Home Loan Mortgage Corporation. No gain or
loss resulted from this transaction. On February 24, 1998, the remaining
mortgage-backed securities available for sale were sold. Net proceeds of
$30.5 million were received which resulted in a gain of $97,000. A portion
of the proceeds from these transactions will be used to purchase approxi-
mately $16.3 million in investment securities available for sale with the
remaining proceeds to be used to maintain additional liquidity.
* * * * * *
- --------------------------------------------------------------------------------
47
<PAGE>
FIRST BELL BANCORP, INC. 1997 ANNUAL REPORT
First Bell Bancorp, Inc.
- --------------------------------------------------------------------------------
Executive Management
Albert H. Eckert, II Robert C. Baierl
President and Chief Executive Secretary
Officer
Robert Murcko
Jeffrey M. Hinds Assistant Secretary
Executive Vice President and
Chief Financial Officer
William S. McMinn
Treasurer
David F. Figgins
Vice President
Directors
Albert H. Eckert, II Jeffrey M. Hinds
President and Chief Executive Executive Vice President and
Officer Chief Financial Officer
First Bell Bancorp, Inc. and First Bell Bancorp, Inc. and
Bell Federal Savings and Loan Bell Federal Savings and Loan
Association of Bellevue Association of Bellevue
David F. Figgins Theodore R. Dixon
Retired President President
Trafalgar House Construction, Dixon Agency
Ltd.
Jack W. Schweiger
Thomas J. Jackson, Jr. President
Attorney-at-Law Schweiger Homes
Robert C. Baierl Peter E. Reinert
President Partner
Wright Office Furniture, Inc. Godbold, Downing, Sheahan &
Battaglia
William S. McMinn
Senior Vice President
Aon Risk Services, Inc. of Pennsylvania
- --------------------------------------------------------------------------------
48
<PAGE>
Exhibit 23.0
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors and Stockholders of
First Bell Bancorp, Inc.:
We consent to the incorporation by reference in Registration Statement No.
333-27443 of First Bell Bancorp, Inc. on Form S-8 of our report dated January
23, 1998 (February 24, 1998 as to Note 23), incorporated by reference in this
Annual Report on Form 10-K of First Bell Bancorp, Inc. for the year ended
December 31, 1997.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
March 30, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FORM 10-Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997 DEC-31-1997
<CASH> 2,254 2,205 2,218 2,580
<INT-BEARING-DEPOSITS> 13,098 25,993 26,663 21,943
<FED-FUNDS-SOLD> 27,700 1,600 825 1,550
<TRADING-ASSETS> 0 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 85,546 91,456 60,356 0
<INVESTMENTS-CARRYING> 14,966 9,969 9,971 9,973
<INVESTMENTS-MARKET> 15,233 10,303 10,417 10,553
<LOANS> 552,289 568,475 566,634 580,109
<ALLOWANCE> 685 715 715 715
<TOTAL-ASSETS> 709,011 714,366 681,215 675,684
<DEPOSITS> 497,199 510,228 506,469 495,055
<SHORT-TERM> 20,000 8,000 86,000 0
<LIABILITIES-OTHER> 19,517 25,964 523,453 2,024
<LONG-TERM> 100,000 100,000 0 0
0 0 0 0
0 0 0 0
<COMMON> 86 86 86 86
<OTHER-SE> 72,209 70,088 71,676 72,897
<TOTAL-LIABILITIES-AND-EQUITY> 709,011 714,366 681,215 675,684
<INTEREST-LOAN> 9,983 20,425 30,880 41,464
<INTEREST-INVEST> 2,090 4,181 6,326 7,413
<INTEREST-OTHER> 0 0 0 349
<INTEREST-TOTAL> 12,073 24,606 37,206 49,226
<INTEREST-DEPOSIT> 6,422 13,094 20,007 26,686
<INTEREST-EXPENSE> 1,217 15,962 24,485 5,643
<INTEREST-INCOME-NET> 4,434 8,644 12,721 16,897
<LOAN-LOSSES> 20 50 50 45
<SECURITIES-GAINS> 0 0 0 0
<EXPENSE-OTHER> 1,172 2,471 3,731 5,060
<INCOME-PRETAX> 3,372 6,663 9,598 12,621
<INCOME-PRE-EXTRAORDINARY> 0 0 0 12,621
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 1,996 3,910 5,756 7,575
<EPS-PRIMARY> .30 .64 .97 1.29
<EPS-DILUTED> .29 .61 .92 1.23
<YIELD-ACTUAL> 2.56 2.39 2.43 2.45
<LOANS-NON> 412 391 540 634
<LOANS-PAST> 0 0 0 0
<LOANS-TROUBLED> 0 0 0 0
<LOANS-PROBLEM> 0 0 0 0
<ALLOWANCE-OPEN> 655 685 715 665
<CHARGE-OFFS> 0 0 0 0
<RECOVERIES> 0 0 0 5
<ALLOWANCE-CLOSE> 685 30 715 715
<ALLOWANCE-DOMESTIC> 685 0 715 715
<ALLOWANCE-FOREIGN> 0 0 0 0
<ALLOWANCE-UNALLOCATED> 685 715 0 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This scdedule contains summary information extracted from the Form 10-Q and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1995 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> MAR-31-1996 JUN-30-1996 SEP-30-1996 DEC-31-1996
<CASH> 2,145 3,539 2,253 2,534
<INT-BEARING-DEPOSITS> 22,510 4,844 5,355 23,872
<FED-FUNDS-SOLD> 46,550 30,125 24,100 72,875
<TRADING-ASSETS> 0 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 0 0 0 0
<INVESTMENTS-CARRYING> 19,959 19,959 14,962 14,964
<INVESTMENTS-MARKET> 20,168 20,968 15,241 15,429
<LOANS> 440,113 500,224 518,537 531,480
<ALLOWANCE> 605 635 665 665
<TOTAL-ASSETS> 542,600 570,649 576,981 656,183
<DEPOSITS> 409,991 433,651 454,957 483,941
<SHORT-TERM> 0 0 0 0
<LIABILITIES-OTHER> 18,337 20,733 15,662 2,255
<LONG-TERM> 0 0 0 70,000
0 0 0 0
0 0 0 0
<COMMON> 86 86 86 86
<OTHER-SE> 114,186 116,179 106,276 86,347
<TOTAL-LIABILITIES-AND-EQUITY> 542,600 570,649 576,981 656,183
<INTEREST-LOAN> 8,245 17,410 27,119 36,798
<INTEREST-INVEST> 1,305 2,295 2,960 3,970
<INTEREST-OTHER> 48 111 176 239
<INTEREST-TOTAL> 9,598 19,916 30,255 41,007
<INTEREST-DEPOSIT> 4,932 10,112 15,736 21,859
<INTEREST-EXPENSE> 4,932 10,112 15,736 191
<INTEREST-INCOME-NET> 4,666 9,704 14,519 22,050
<LOAN-LOSSES> 30 60 90 90
<SECURITIES-GAINS> 0 0 0 0
<EXPENSE-OTHER> 1,438 2,813 6,734 8,177
<INCOME-PRETAX> 3,402 7,243 8,760 11,888
<INCOME-PRE-EXTRAORDINARY> 3,402 7,243 8,760 11,888
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 2,111 4,406 5,504 7,402
<EPS-PRIMARY> .27 .59 .75 1.05
<EPS-DILUTED> .27 .58 .74 1.02
<YIELD-ACTUAL> 0<F1> 0 0<F1> 3.38
<LOANS-NON> 441 474 582 400
<LOANS-PAST> 0<F1> 0 0<F1> 0
<LOANS-TROUBLED> 0<F1> 0 0<F1> 0
<LOANS-PROBLEM> 0<F1> 0 0<F1> 0
<ALLOWANCE-OPEN> 575 605 635 575
<CHARGE-OFFS> 0<F1> 0 0<F1> 0
<RECOVERIES> 0<F1> 0 0<F1> 0
<ALLOWANCE-CLOSE> 605 635 665 665
<ALLOWANCE-DOMESTIC> 605 635 665 665
<ALLOWANCE-FOREIGN> 0 0 0 0
<ALLOWANCE-UNALLOCATED> 0<F1> 0 0<F1> 0
<FN>
<F1>This information is not disclosed in the Form 10-Q.
</FN>
</TABLE>
